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Economics: Art or Science?

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1Arctic-Stranger
Jan 7, 2009, 4:26pm Top

This morning on Day to Day there was a story on an article in Foreign Affairs where five economists saw what others did not; the coming crash.

In the story, Drake Bennett, who edited the piece for Foreign Policy, said economics was an art, not a science. (You can find the story online here.)

When I took economics in college and graduate school, I felt that there was something very artificial about it. The theories had nice charts and graphs, but did they REALLY represent reality? If it is a science, then why is it there is so little agreement over such basic issues in the field? (Imagine if scientists were still debating whether matter was ether or molecules!)

I heard Arthur Laffer speak at a tribule to Buckley or Friedman, or someone like that, and he ended his talk by quoting his mentor (Hayakawa?) who said, "The model is everything."

BS.

2codyed
Jan 7, 2009, 4:30pm Top

Arctic-Stranger: closet Misesian?

3codyed
Jan 7, 2009, 4:42pm Top

One advantage physics has over economics is that in phsyics the objects under study do not have agency, they do not think, and they do not consciously act. When an economist is tasked with putting together a theory to explain a phenomenon, he has to work with many variables, most of which are not entirely obvious to the researcher. Because human beings think and act and respond to incentives, it becomes a difficult job in developing a system which can explain various human phenomena on a consistent basis.

4codyed
Jan 7, 2009, 4:49pm Top

But that doesn't mean everything in economics is entirely useless. Whatever your gripes about the discipline, you cannot wish away the law of supply and demand; the law of diminishing marginal utility; or the idea of opportunity costs. If we could, communism would be possible.

5KromesTomes
Jan 7, 2009, 4:50pm Top

I took a fair amount of economics courses in college and, IMHO, I'd say economics is a science in much the same way psychiatry is.

6Carnophile
Jan 7, 2009, 4:56pm Top

7Carnophile
Edited: Jan 7, 2009, 5:16pm Top

>3 codyed:
Well said!
Electrons don't change their behavior when you change their policy environment.

That said, I'm casting my lot in with...

Part science, part art.

It is scientific if by “scientific” you mean “empirical.” There is a lot of empirical work; it's ~ half the field. But, NB, we can’t do controlled experiments (except in the most simplified and artificial of ways).

It's art to the extent that modelling choices are not (all) science. Since we're never going to understand the interactions of 6 billion people in complete detail, we're left with simplified modelling. It's forced upon us. If you were an economist (you = anyone who reads this) you'd have to use vastly simplified models too. If I’m wrong about this, by all means, post the true model here and get the Nobel prize.

Here’s the art of modelling: Knowing what details you can get away with ignoring, and knowing what you have to include. Definitely not a science, alas. But also, the arty aspect is one of the things that make it fun.

This is topic-dependent. E.g., in a model used for short-run topics/questions you can generally ignore population growth. Not so in models you intend to use to tackle long-run topics/questions. Etc.

Drilled into all my students’ heads, first week of class:

What is an appropriate simplfying assumption depends on the questions you’re asking.

Regarding the “BS” thing, Arctic, I’ll bet you’re expecting me to take umbrage. Well, maybe a little. However: We have a saying a saying in the field: “All models are false.” Which of course they are, if you take them literally. It’s our way of trying to maintain epistemological humility.

If this is so long that it made your eyes glaze over, just re-read what Cody wrote in #3.

8Arctic-Stranger
Jan 7, 2009, 7:35pm Top

I found #3 quite rational, and not BS. I did not want to imply that economics was therefore worthless. Afterall the man who said it was an art had profiled some major economists.

But, and this is a real question, not a smartass remark, what is it good for?

9jlelliott
Jan 7, 2009, 8:03pm Top

Economics is a science in that it uses experiential data to try to explain and predict behavioral phenomena. It cannot use the full range of scientific approaches (you cannot really experiment on humans or national economies) and so is limited in many ways (as is psychiatry, anthropology, and many other scientific fields of inquiry). These fields aren’t pure science, but they are performed in the context of a scientific world views. It seems to me that some areas of economics are quite lucid and reproducible (supply and demand economics, the effect of business organizations such as monopolies and oligarchies, and the effect of government interventions such as tariffs and price floors) while some are clearly beyond explanation (stock market behavior, etc). I would say that is an effect of complexity and novelty, rather than an inability of a scientific viewpoint to say anything useful on those more difficult subjects.

I think we tend to call something an "art" when we don't quite know what we are doing but still have to do it (hello, medicine), so in that sense economics is an “art” when practical necessity requires us to make policy concerning economic phenomena that are not currently well understood. There is a reality behind the behavior of economic systems that can be elucidated, predictable or no, so it can be studied from a scientific perspective.

10enevada
Jan 7, 2009, 8:07pm Top

I would argue (off the cuff and with no authority whatsoever) that it is neither art (not much originating creative value) nor science (not simple empirical reduction), but a discipline, theoretical with abstract value in its explanatory and predictive observations of human nature.

An application of philosophy within a defined, and measurable field of human behavior.

11Carnophile
Jan 7, 2009, 8:37pm Top

If you look in the comments at the NPR link there's this:

"it's misleading at best to suggest that economists missed the crisis because they were all studying obscure theory or speed dating."

It's true: When most people think of economists they think of speed dating.

Economists: Major playahs on the scene.

12Carnophile
Jan 7, 2009, 8:37pm Top

Though it IS true that economists do it with models.

13codyed
Jan 7, 2009, 8:52pm Top

I hear that mathematicians do it smooth and continuous.

14enevada
Jan 7, 2009, 9:03pm Top

#11: That explains Alan Greenspan.

Oh and this guy's theory:

Economists are all about charts and statistics. Often we’ll attach arrows to the results. The bottom line for us is whether the latest numbers are moving:

(1) Up?

(2) Down? Or

(3) Sideways?

And don’t tell me that economists aren’t sexy, because if you think about it, workers in the sex trade have exactly the same three major concerns − up, down or sideways?

I don’t even know what that means. My wife, the writer, told me to say it.

I refer to the foregoing as a mathematical proof that economists are sexy. And no, I do not think that such a statement is oxymoronic.


http://www.reedconstructiondata.com/alex-carrick/post/a-mathematical-proof-that-...

15geneg
Jan 7, 2009, 9:35pm Top

Republican economics is as scientific as Republican science: not very.

If ideology trumps reality what's the point of study. Just like Lysenko, make it all conform to the ideology and if it goes wrong it's not because the ideology is wrong, it's that the components of the economy are not sufficiently ideologically rigorous.

I've heard people on that bastion of left wing BS, NPR, warning that this housing bubble was going to cause major problems for three years or more now. This wasn't a secret, nor should it have come as a surprise.

The problem is there is no room for this kind of economic problem in the models the government was working from and the MSM was reporting against. Why don't the Republicans look over their economic ideology and find the part that addresses how to fix massive economic failure caused by, er, ah, . . . the same model? Oh well, I guess that explains why the Republicans have offered no solutions, their model doesn't recognize the possibility of this problem arising, so they don't have any way to approach either the nature of the problem or a solution. Oh, my!

Economics is like every other human endeavor, it's chaotic. Until we can understand the weather, we will never be able to come close to accurately modeling something like an economy, no matter how many Laffer's show us their curves.

Educated guesswork and some old fashioned common sense is a place to start.

16vq5p9
Jan 7, 2009, 10:32pm Top

#12 All models lie

17codyed
Jan 7, 2009, 10:38pm Top

All models lie.
Kristy Brinkley is a model.
Therefore, Kristy Brinkley lies.

This is a horrible revelation.

18Carnophile
Jan 7, 2009, 10:46pm Top

>14 enevada:, 15: Economists are beautiful but deadly.

I'm pondering Arctic's question, What is it good for? Hmmm...

19Carnophile
Jan 7, 2009, 10:58pm Top

>15 geneg:
I've heard people on that bastion of left wing BS, NPR, warning that this housing bubble was going to cause major problems for three years or more now. This wasn't a secret, nor should it have come as a surprise.

Dude, tons of people from all over the political spectrum warned about a bubble. Cody provided a link to a Ron Paul warning from 2002 about this.

If ideology trumps reality what's the point of study. Just like Lysenko, make it all conform to the ideology and if it goes wrong it's not because the ideology is wrong, it's that the components of the economy are not sufficiently ideologically rigorous.

But Gene, if we were to jettison ideology we’d have to take our boots off the necks of the proletariat. Then how could we afford our top hats, cigars, and monocles?

To be serious:
Laypeople think that most economic debates are political because those are the only ones that laypeople care about enough to pay attention to. Most of what appears in the professional journals, what we talk about at conferences, etc. is not political. Some laypeople then reason, “If I don’t pay attention to it then it must not exist, ergo, non-political economics doesn’t exist.”

For example, do you care whether output is best modelled as a first-order or second-order autoregressive process? No. I do, but you don’t. HEY, WAKE UP AND GET YOUR FACE OFF THE KEYBOARD! See what I mean?

20Carnophile
Jan 7, 2009, 11:02pm Top

I like posts 9 and 10. Except that I'm not sure I follow you, E, on econ being an application of philosophy.

21jlelliott
Jan 7, 2009, 11:19pm Top

Well science is a philosophy, although that probably isn't what was meant in that post. I think of economics as a scientific (or at least scientific-ish) field because it works within the framework of scientific philosophy (the world is real, it operates based on specific rules, understanding those rules allows for prediction of phenomena, etc).

22enevada
Jan 8, 2009, 8:56am Top

I should have said, philosophical – meaning here, more inquiry driven then outcome based. And, thinking on this I realize that the binary either/or: art or science? Doesn’t work well in this case. (What is it with Arctic: pro/con; rain/shine; religion: good? Bad?; Fairbanks: Hot/ Cold…) I’m dropping art from the question, because for me art must have a preponderance of creative origination, which is absent from science (more technical in thought and practical in application), and less significant in philosophy (inquiry based and theoretical). So, in the continuum between philosophy and science – where does economics fall? It will depend on your own personal orientation – for me, it would do better to consider economics as closer to the philosophical end of things, and to see its benefit as a system of thought. However, I can anticipate the argument that economics is based on observation and concerned with laws of behavior and finance – making it more scientific in nature. (hey, and if the laws are completely fabricated, “made-up” as a layman such as myself who say – it would get points on creative origination as well…an art) .

Never, ever ask a philosopher a yes or no question.

23StormRaven
Jan 8, 2009, 10:14am Top

"I've heard people on that bastion of left wing BS, NPR, warning that this housing bubble was going to cause major problems for three years or more now. This wasn't a secret, nor should it have come as a surprise."

The problem with asserting that someone or another "predicted" the downturn is that if you predict a downturn long enough, eventually (and inevitably) you will be proven right. Predicting a downturn for three years isn't a very good prognostication.

"The problem is there is no room for this kind of economic problem in the models the government was working from and the MSM was reporting against."

Part of the problem with government making economic predictions is that people vary their behaviour based upon those predictions. When government officials say gloomy things about the economy, it can help make those gloomy predictions come true simply because the statements were made. If, say, Alan Greenspan says "hey, markets are going to fall", the statement itself helps cause markets to fall. Hence, government officials avoid saying this sort of thing whenever possible.

"Why don't the Republicans look over their economic ideology and find the part that addresses how to fix massive economic failure caused by, er, ah, . . . the same model? Oh well, I guess that explains why the Republicans have offered no solutions, their model doesn't recognize the possibility of this problem arising, so they don't have any way to approach either the nature of the problem or a solution. Oh, my!"

Huh? I don't think any Republican who has paid any attention to economic matters believes that their model "doesn't recognize the possibility of this problem arising". Most believe that the business cycle is part and parcel of the free market ideology, and hence a downturn is inevitable. The solution is, quite simply, something that people don't want - let businesses fail or shed jobs, and readjust until they can start growing again. While economically sound, that course is probably politically unfeasable.

24readafew
Jan 8, 2009, 11:00am Top

Well part of Economics problems is self fulfilling and self nullifying abilities. Predicting an imminent crash/market jump can cause one or increase it. Predicting long term good or bad can flatten it out and make it a non issue. So on levels where the predictive ability is used causes a moving target. This makes it appear the Economist is full of sh**. Also when successful in preventing bad economic problems people start thinking b***s*** none of the bad things predicted for 10 years have happened this won't either...

"Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so."
Douglas Adams.

25enrique_molinero
Jan 8, 2009, 11:08am Top

>19 Carnophile: Auto-regressive models are boring though, once you remove the auto-regressive factors there's simply not enough interesting stuff happening usually.

26Carnophile
Jan 8, 2009, 11:19am Top

>24 readafew: Indeed. As an example, when Greenspan made the "irrational exuberance" remark, stock markets tanked for a couple of days.

On the other hand, there can certainly be self-nullifying prophecies, like "IBM stock will yield a 200% return over the next month." This belief will make its price rise, so the rate of return you get from buying it will end up being lower than 200%.

This is another problem with any social science, that our hypotheses can't say "People will do X." They must in the form "If people believe A then they will do X, but if people believe B then they will do Y." Empirically testing these would require a mind-reading machine, which is another reason Econ cannot be empirical in the sense in which, e.g., Physics is empirical.

27enevada
Jan 8, 2009, 11:33am Top

Speaking of up, down, or sideways, check out this guy's charts (oh, his office is a beach. Sweet.)

http://www.optimist123.com/optimist/2009/01/deflation-inflation-and-money-from-t...

28theoria
Jan 8, 2009, 12:04pm Top

It's not a coincidence that GW Bush mentions Nikolai Kondratiev in each of his exit interviews. The first president with an MBA is all over the long waves.

29Carnophile
Edited: Jan 9, 2009, 1:02pm Top

>22 enevada: for me art must have a preponderance of creative origination...

A few months back someone (jmc?) said, "Economists get paid to make shit up.”

Edit: No it was Gene.

>25 enrique_molinero: Auto-regressive models are boring though
Ha! This post is a good example of my point. Some people think they’re, like, wicked fascinating.

30enrique_molinero
Edited: Jan 8, 2009, 12:17pm Top

>29 Carnophile: I think most people simply don't know enough about auto-regressive models to consider them specifically boring, they consider the whole field boring.

And yes, I had a class in Time Series Analysis, though I don't think we used that text. We used Forecasting, Time Series, and Regression.

31enevada
Jan 8, 2009, 3:04pm Top

#19: Some laypeople then reason, “If I don’t pay attention to it then it must not exist, ergo, non-political economics doesn’t exist.”

Lay people are trying to stay awake, honest. Why, just in this week’s NYT Sunday Magazine there’s an article on risk models, VaR – value at risk, a mathematical model that measure the boundaries of risk, and somehow converts it to a number – I won’t pretend to understand it, but it is interesting to read about the professionals who use the models not as a looking-glass or crystal ball, but as one of many tools in analysis.

Two years ago, VaR worked for Goldman Sachs the way it once worked for Dennis Weatherstone — it gave the firm a signal that allowed it to make a judgment about risk. It wasn’t the only signal, but it helped. It wasn’t just the math that helped Goldman sidestep the early decline of mortgage-backed instruments. But it wasn’t just judgment either. It was both. The problem on Wall Street at the end of the housing bubble is that all judgment was cast aside. The math alone was never going to be enough.

Link here: http://www.nytimes.com/2009/01/04/magazine/04risk-t.html

32codyed
Jan 8, 2009, 3:27pm Top

But, and this is a real question, not a smartass remark, what is it good for?

Economics, like any other social science, seeks to explain some aspects of the social world. And as with every other science, economics comes with a tool set which can be applied to an analysis to better understand that world. Sometimes using those tools is appropriate, and in other times, it is not.

If the population of a town increases, ceteris paribus, the demand for all goods and services increases. Homes are built, pizza restaurants expand, etc., but that doesn't tell you anything about the power dynamic between newcomers and the natives. To better understand that phenomenon, a sociological tool set is in order.

33Arctic-Stranger
Jan 8, 2009, 3:55pm Top

# 22

A) I got you posting on Pro and Con.

B) Whenever I pose an either/or, I am really looking for the third option.

34enevada
Jan 8, 2009, 4:01pm Top

#33:

A. Just as I suspected, you are a closet Trinitarian.

B. I won’t tell the Quakers.

35Arctic-Stranger
Jan 8, 2009, 4:10pm Top

Oh, that doesn't, they already know. I am proof of their diversity.

36geneg
Edited: Jan 9, 2009, 12:49pm Top

>23 StormRaven:

a) Those folks who've been predicting this economic disaster for three years, predicted pretty much what has happened as if there was more information available for prediction than was accepted by those managing the economy. Where have we seen that before? It stems from the ideological requirement to adjust the facts to fit. It's a habit with Republicans. BushCo has said several times that no one saw this coming. I disagree.

b) You make the point that economics is essentially an unknowable chaotic system. I don't mean it shouldn't be studied. It's just that we aren't as far along the arc of understanding as we might wish to believe (see a). Economics is a form of behavioral whack-a-mole, as is every system that emerges from widespread human activity.

c) I don't think any model that allows for massive economic catastrophe, punishing both the innocent and the guilty, as a corrective for irresponsible action by a few is a very good model to follow. Especially when we've seen the results of that model before. Some conservatives laud the construction of our government because it decentralizes power, because humans can't be trusted. What's wrong with constructing an economic system based on the same principle?

Maybe we could use some Chinese justice for some of those people. Since many conservatives believe capital punishment is a good deterrent mayhap a few heads on pikes decorating the entrances to Wall Street would provide sufficient warning to those who would act irresponsibly.

37sabor
Jan 9, 2009, 12:49pm Top

art=)

38Carnophile
Jan 9, 2009, 12:50pm Top

You've suggested heads on pikes so many times, Gene, that I'm starting to suspect that you've got a stake (no pun intended) in the spike business. Isn't it time for some dicslosure? C'mon, fess up your investments.

Economics is a form of behavioral whack-a-mole.
Love this.

39geneg
Jan 9, 2009, 12:53pm Top

I know, I've got to come up with something new. You know, I've said pretty much everything I have to say on most subjects before.

40jjwilson61
Jan 9, 2009, 5:18pm Top

The current economic system seems to reward risk to the point that after 5 - 10 years the risk-taking companies can buy out the prudent ones so that when the risks finally come due the whole economy collapses. Can we tweak the system to take care of this systemic flaw?

41jmcgarve
Edited: Jan 10, 2009, 12:15am Top

41: Economics is about 20% science and about 80% ideology. There is nothing artistic about a field that uses terms like "frictional unemployment" and "dollarization". So many of the statements of economics seem intended to justify or condemn the role of various players in the system: financiers, speculators, entrepreneurs, the unemployed, government regulators, and so on. Arthur Laffer is an iconic example of an ideologue "economist". His predictions are always nonsense, but they are very tied to his political beliefs and to Reaganomics, the predominant economic ideology of the last 30 years. Milton Friedman was another such example.

Economics is to a great extent about mass psychological attributes like trust and confidence. If most people trust the banks, they deposit their money, but if not, a run on the banks ensues. If most people are confident they will have a job, they borrow and spend, but if they are doubtful, they borrow less and spend less -- with the result that some of them get laid off. The exact timing of mass psychological shifts is tough to predict.

However, these mass psychological attributes are not entirely arbitrary. When there is a bubble, so that prices rise out of speculative expectation instead of in proportion to the growth in actual consumption of the item, the bubble will eventually burst. If the speculation is highly leveraged, the bubble will burst violently. If a government finances its operations by printing money, there will be horrendous inflation. If interest rates rise, investment and consumer borrowing will decline and growth will slow. These are all economic statements with a lot of evidence to support them, so we have to credit economics with some scientific content.

42Carnophile
Jan 10, 2009, 8:43am Top

I'm going on a day trip today so can't respond to that right now, but there is oh so very much to beat up. Get on your bullet-proof vest, beeyatch!

43Carnophile
Edited: Jan 11, 2009, 5:42pm Top

So what do most economists do all day? Jmc wrote, Economics is about 20% science and about 80% ideology.

I had written in post 19,
Laypeople think that most economic debates are political because those are the only ones that laypeople care about enough to pay attention to. Most of what appears in the professional journals, what we talk about at conferences, etc. is not political. Some laypeople then reason, “If I don’t pay attention to it then it must not exist, ergo, non-political economics doesn’t exist.”

Then jmc wrote a post that illustrated my point better than I ever could. Your remarks about Laffer and Friedman are more of the same.

I’m not sure why I’m responding to a layperson who is telling me what my colleagues and I do. Maybe it’s because I kind of admire the sheer cheekiness involved. Or maybe it’s because this is a good “teachable moment,” as they say, about what the Econ actually do. Lord knows I’m tired of people asking me what the stock market is going to do tomorrow, as if that’s economists’ principal interest.

(As God is my witness, the odd conjunction of “principal” and “interest” in a passage about economics was not planned. Anyway...)

If you don’t believe me about what intra-Econ chatter involves I guess there’s nothing I can do to convince you. As for what appears in the journals:

Here is a journal ranking, and here are the tables of contents of the top ten journals’ most recent issues and/or list of forthcoming papers. I’m using the left-most ranking on p.23: The one that has the most important Economics journals as judged by economists themsleves. There are other journal rankings but top-ten lists don’t contain much variation.

You will notice most of it isn’t on political topics at all. The most political-ish of these is the American Economic Review, which has become oddly more “populist” or “topical” in the last few years. (In the current issue, the most overtly political paper is the first, “Land and Power” (click through to the abstract) which could be interpreted as bashing “right-wingers.”) The least political, not surprisingly, is Econometrica.

American Economic Review current issue table of contents: http://www.aeaweb.org/issue.php?journal=AER&volume=98&issue=5

Quarterly Journal of Economics, current issue table of contents: http://www.mitpressjournals.org/toc/qjec/123/4

Econometrica list of forthcoming papers: http://www.econometricsociety.org/manus.asp and current issue table of contents: http://www3.interscience.wiley.com/journal/118482539/home?CRETRY=1&SRETRY=0

(My favorite: “Semiparametric Power Envelopes for Tests of the Unit Root Hypothesis.” Jmc reads this, mutters, Goddam right-wingers.)

(Butthead reads it, laughs, Huh huh. “Unit.”)

Journal of Political Economy, current issue table of contents: http://www.journals.uchicago.edu/toc/jpe/current

Review of Economic Studies current issue TOC: http://www.restud.com/toc.asp?vid=75&iid=4&oc=&s=-9999

The Journal of Monetary Economics current TOC: http://www.sciencedirect.com/science/journal/03043932

Review of Economics and Statistics current TOC: http://www.mitpressjournals.org/toc/rest/90/4

Journal of Economic Perspectives current TOC: http://www.aeaweb.org/issue.php?journal=JEP&volume=22&issue=4

Journal of Econometrics current TOC: http://www.sciencedirect.com/science/journal/03044076

Journal of Economic Theory current issue table of contents: http://www.sciencedirect.com/science/journal/00220531

Note some papers that may seem political to the superficial reader are not. Eg, the above JET issue has a paper entitled “Partisan politics and election failure with ignorant voters.” This is about partisan politics but is not itself partisan politics, as clicking the paper title to view the abstract will confirm.

44Carnophile
Jan 11, 2009, 5:44pm Top

There is nothing artistic about a field that uses terms like "frictional unemployment" and "dollarization".

What’s wrong with “frictional unemployment” and “dollarization”?

45codyed
Jan 11, 2009, 6:27pm Top

Lord knows I’m tired of people asking me what the stock market is going to do tomorrow, as if that’s economists’ principal interest.

Amen!

46jmcgarve
Jan 11, 2009, 6:31pm Top

>43 Carnophile: I will grant that some few economics papers are ideology free. These are ones that are entirely mathematical. An example, from the Econometrica list above is "Testing for Stochastic Monotonicity". However, science makes claims about the real world. I am saying that whenever economics makes claims about the real world, those claims are based largely (i.e. about 80%) on ideology. It is difficult to give evidence for this based on the list of journals cited, but only because most of the papers themselves are not available except to the subscriber.

47StormRaven
Jan 12, 2009, 11:27am Top

"Those folks who've been predicting this economic disaster for three years, predicted pretty much what has happened as if there was more information available for prediction than was accepted by those managing the economy. Where have we seen that before? It stems from the ideological requirement to adjust the facts to fit. It's a habit with Republicans. BushCo has said several times that no one saw this coming. I disagree."

Yes, people predicted the downturn. Many just as reliable people predicted downturns in 2008, 2007, 2006, 2005, 2004, 2003, 2002, ad infinitium. If you look for a downturn prediction, you can find someone, somewhere predicting one pretty much at all times. Eventually, someone will be correct.

The reason for this is pretty much the same reason that weathermen overpredict winter storms. if they predict a storm, and none happens, then everyone pretty much forgets by the end of the week. If they predict good weather, and there is a huge snowstorm, they are the guys who didn't warn anyone. If they predict a snowstorm and one happens, then they can crow about being "right" for years (and do, many local news stations will say "we correctly predicted the big storm of '07, so rely on us for your weather information" or something like that, conveniently forgetting the six other storms they predicted that never happened).

The problem with NPR predicting an economic downturn is that they didn't have a dog in the fight so to speak. The people who have to make decisions with actual money didn't foresee a downturn - they kept inveting their money. It is easy to come up with economic predictions and pontificate about them on the radio. Those are mostly meaningless though. The real question is "what are you doing with actual money" - and the people investing actual money (the people who are actually managing the economy), didn't foresee the downturn.

"You make the point that economics is essentially an unknowable chaotic system. I don't mean it shouldn't be studied. It's just that we aren't as far along the arc of understanding as we might wish to believe (see a). Economics is a form of behavioral whack-a-mole, as is every system that emerges from widespread human activity."

No, I make the point that predictions, when issued by someone with authority, have a tendency to change the market simply because of their existence. Imagine if the weatherman could change the likely weather because he predicted rain, or snow, or sleet. That is the situation that political figures find themselves in. Republican leaders (I note, for the record, that no Democratic leaders made any downturn predictions either) know that if they say "hey, the economy is going to go down soon" that statement, in and of itself, will help drive it down. If they remain upbeat, then there is a chance that their upbeat nature will result in the downturn being averted.

"I don't think any model that allows for massive economic catastrophe, punishing both the innocent and the guilty, as a corrective for irresponsible action by a few is a very good model to follow. Especially when we've seen the results of that model before. Some conservatives laud the construction of our government because it decentralizes power, because humans can't be trusted. What's wrong with constructing an economic system based on the same principle?"

I'm not sure if an economic downturn is "punishment". It is merely an economy adjusting, and the real reason to let an economy go through a downturn is to allow for it to change to accomodate evolving conditions. An economy that doesn't suffer any down phases is one that is going to have extended troubles when the troubles come, as dead wood will have built up to a serious degree (see Japan for a case in point). Credit scoring is done for a reason, evading credit scoring limitations by issuing sub-prime adjustable rate mortgages (a policy heavily encouraged by both parties) allows for the build up of debtor dead wood - debtors being allowed to borrow money and buy homes that they had no business buying to begin with, and which only gave them the illusion of homeownership that reality has cruelly stripped away.

In an ideal economic world in which the workings of the market were paramount, we'd let the overextended creditors lose everything, and the banks that lent them money foolishly fail. But that would have political consequences no one wants, so that's not what is going to happen. Instead, we take the good part of the free market policy (the economic upturn) and try to avoid the bad part (the downturn). I think this will have negative consequences in the long term. we should let some businesses fail now, or we will all pay for propping them up later.

48jjwilson61
Jan 12, 2009, 11:48am Top

Good grief, "political consequences". The consequences aren't merely political, they are personal. People losing their jobs, the homes, families broken up. An "ideal" economic world isn't so ideal when massive suffering is guaranteed to happen every few years. I think a few laws and regulations to help ease the harshness of pure capitalism and calm the fluctuations of the market is well worth the possible loss of a little efficiency.

49StormRaven
Edited: Jan 12, 2009, 12:11pm Top

"Good grief, "political consequences". The consequences aren't merely political, they are personal. People losing their jobs, the homes, families broken up. An "ideal" economic world isn't so ideal when massive suffering is guaranteed to happen every few years. I think a few laws and regulations to help ease the harshness of pure capitalism and calm the fluctuations of the market is well worth the possible loss of a little efficiency."

If they weren't political, then the consequences wouldn't matter one whit to legislators.

And the "massive" suffering is the adjustment of the economy. If we didn't allow for the economy to shift, then we would all be enjoying the standard of living our great-grandparents enjoyed at the turn of the century in 1900. The market turns down when its structure needs to change, and companies need to change or fail. A static economy is a dying economy.

The problem with regulation, in many cases, is that the regulation either is aimed at the wrong thing, is used as a tool of political agendas, or is part of the problem. The sub-prime problem is a case in point - it is the result of a confluence of regulations that had loopholes, coupled with politically driven policies pushed by government, plus some regulations that encouraged the lending of money to poor credit risks so they could be homeowners and "borrow their way out of poverty".

50Carnophile
Jan 12, 2009, 2:59pm Top

>46 jmcgarve:

Let's discuss the empirical economics literature after you're read some.

51jjwilson61
Jan 12, 2009, 3:14pm Top

Can you point to any that a non-subscriber can read?

52codyed
Edited: Jan 12, 2009, 3:21pm Top

If you have online access to your library's homepage, then there is a good chance you have access to a multitude of databases which store back issues of those journals Carnophile referenced.

53Carnophile
Jan 12, 2009, 4:36pm Top

Anyone who hasn't already read some shouldn't be asserting generalizations about it.

"Some" = enough to knowledgeably generalize.

54jjwilson61
Jan 12, 2009, 5:20pm Top

But you yourself said that reading them puts you to sleep. So how can anyone post here if they're sleeping?

55Carnophile
Jan 12, 2009, 6:49pm Top

When did I say that?
But hmm, to post or to sleep?

56jmcgarve
Jan 12, 2009, 9:35pm Top

>50 Carnophile: I have read a good bit of economics, although I am certainly a layman. Also, Codyed, most of the journals Carnophile cites are inaccessible via my library's database. One can typically get only as far as the abstract. But, be that as it may. Some articles are accessible via the internet, as for example, this one: http://cep.lse.ac.uk/pubs/download/dp0839.pdf. This article, like most academic journal articles, is not so accessible to the lay reader though, because of the many references to work that is not read by lay people.

Here, I can imagine Carnivore saying, Exactly! Leave understanding of our religion to the priests! The rest of you are not admitted to our mysteries! Well, we might want to come back to this journal article, but lets take a very accessible example. Here:

http://en.wikipedia.org/wiki/Great_depression
http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

is a summary of analyses of the economic causes of the Great Depression. There is no consensus. There are claims that Roosevelt's policies made it better, and other claims that he made it worse. Associated with almost every viewpoint is an ideological position. The theories of the Austrian school correspond to libertarianism. The Keynesian school corresponds to liberalism. Many monetarists are also conservatives, and so on. Clearly, economics is 80% ideology when it comes to explaining this extremely important event. Similar enormous differences show up when economists make claims about the effects of minimum wage laws, or school choice, or the economic consequences of fighting global warming, or just about ANY policy issue or even explanatory claim about empirical phenomena.

So economics is at the same stage as geology, when geologists could not agree whether the earth was 6000 or 6000000 years old, and when ideological concerns, such as biblical literalism, drove the discussion.

57Carnophile
Jan 13, 2009, 6:58pm Top

Some = enough to generalize knowledgeably.

58Carnophile
Jan 13, 2009, 7:15pm Top

I can imagine Carnivore saying, Exactly! Leave understanding of our religion to the priests! The rest of you are not admitted to our mysteries!

All interested people are welcome to contribute. Seriously. That’s my position, anyway.

However, that doesn’t mean I have to concede anything to uninformed opinions.

As to Great Depression, etc:

- Believe it or not, it and other issues like the effects of the min wage are not 80% of economics. Those topics are a small minority of economics. They are just 80% of what politically committed non-economists pay attention to. You just think they’re the bulk of it because of your filters. I’ll refer you to #19.

- There is a large amount of agreement on these matters which doesn’t get any attention among the laity precisely because controversy is more interesting to the laity. E.g., every economist agrees, a far as I have ever heard, that the Fed’s contractionary policy moves circa 1937 were very ill-advised and contributed to the lengthening of the GD.

- No one talks about Keynesianism versus monetarism anymore in the profession. That’s a debate from 40 years ago. I cannot remember the last time I read the word “monetarist” in a journal. It does pop up occassinally, but not in the context of the monetarist-Keynesian debates of the 1960s.

- A lot of what you said amounts to picking extremely political topics and then proudly announcing that there is some disagreement along political lines. Which there is - NOT 80% of it, oy - but selectin political topics is hardly a random sample. As I said, even here there is a lot more agreement than filters down to the street.

Another example - I saw a poll years ago that said that 97% of economists thought free trade is preferable to protectionism. Of course, when the talking head TV shows have a debate they have one economist from the 97% and one from the other 3%. This is fine, but it does give non-economists a skewed notion of the extent of controversy - no doubt many viewers walk away from such debates with the impression that the split is 50-50.

Here is something that is closer to a random sample:

I reached to the desk behind me and pulled out the first journal my hand touched. It’s the Journal of Money, Credit, and Banking, December 2007 issue. Obviously this is random in that I just grabbed at random, but not random in that it’s all articles from one issue of one journal. (A truly random sample would be better drawn from the top 50 or 100 journals (which is what I wanted to do above but no one here has the time or inclination, I’m sure. Including me.)) This journal publishes both theory and empirical work. I scanned the TOC; here are the ones that are obviously empirical from their titles alone. Drink some coffee before perusing:

Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data

A Test of the Law of One Price in Retail Banking

Yesterday’s Bad Times are Today’s Good Old Times: Retail Price Changes are more Frequent Today than in the 1890s. (The title of this one has me on the edge of my seat.)

Structural Error Correction Models: A System Method for Linear Rational Expectations Models and an Application to an Exchange Rate Model. (This has me out of my seat and thrusting my fist into the air. Say it loud and say it proud, brother!)

This is what most Econ (who are empirically inclined) read and produce. I know it puts the average layperson’s head on the desk, but that’s kind of the point. Because it’s not political your scanning subroutines don’t notice it. The theory stuff is the same, believe me.

59codyed
Jan 13, 2009, 8:20pm Top

Another example - I saw a poll years ago that said that 97% of economists thought free trade is preferable to protectionism.

I believe you can find a similar poll in Bryan Caplan's The Myth of the Rational Voter.

60Carnophile
Jan 13, 2009, 8:32pm Top

Codyed - clicked through, love the cover.

Jmc - Since you seem preoccupied with Laffer, I want to tell you a little anecdote from grad school.

Second-semester PhD Macro, first day of class. Professor is presenting an outline of the models we’ll be going over that term. Writes down some topics and relevant citations. E.g., Growth: here are some key papers we’ll be reading. Monetary Econ: here are some key papers we’ll be reading, etc. He then writes down

Supply-side economics (? no model ?)

and moves on to the next topic... This constitutues the total contact with supply-side econ we had in grad school, lol.

61jmcgarve
Jan 13, 2009, 8:52pm Top

>58 Carnophile: Carnophile, I have claimed that most of the statements of economics are either mathematical statements about a model, and therefore not scientific statements about the real world, or statements about the real world that are ideologically disputed. Perhaps most of the work economists do is in the former category. Can you give examples of scientific claims from economics that are not ideologically charged? Now some of the statements may be just data points, e.g. prices were lower 100 years ago. This is more a an assertion of fact than a scientific claim. A scientific claim might be, prices were lower 100 years ago, and the rise since was mainly caused by X.

62jmcgarve
Jan 13, 2009, 9:07pm Top

BTW, as an illustration of ideology arising in economic discussions, I cite globalization and its discontents, where the "Washington Consensus" on what developing countries should do to be credit worthy, as implemented by the IMF is vehemently rejected by Stiglitz. I don't know that such debates are representative of the field of economics, but I do claim that they are important.

63Doug1943
Jan 14, 2009, 9:23am Top

An ex-wife, who is an economist, told me this in-joke, which is no doubt familiar to economists:

An economist and a mathematician are sitting in the Senior Common Room, and the mathematician complains about the burden of writing new exams every year.

The economist says, "Oh, we don't have that problem." The mathematician asks, "Why not?".

And the economist replies, "We just use the same questions over and over again."

"How can you do that," asks the mathematician. "Won't the students catch on and realize that the questions are always the same?"

"Oh," says the economist, "That wouldn't help them, because we change the answers."

64Carnophile
Jan 14, 2009, 1:59pm Top

>61 jmcgarve:

The German inter-war hyperinflation was caused by excessive money growth.
I don't think any economist disputes this, let alone disputes it for political reasons.

Generalizing, all hyperinflations are caused by excessive money growth.
(Definitions of hyperinflations vary, let's say at least 100% inflation per month for at least 6 consecutive months.)

>63 Doug1943:
Doug, if I had a dollar for every time I heard that joke I'd have...hold on... like nine dollars.

65Carnophile
Jan 14, 2009, 1:59pm Top

I will now answer the question posed in the thread title:

Economics is neither art nor science.

It is simply luv.

66enevada
Edited: Jan 16, 2009, 2:55pm Top

I haven’t much time to say more than I enjoyed an article in (the upcoming) February’s issue of Seed magazine (back issues, here: http://seedmagazine.com/magazine/) entitled, Ecology of Finance, which argues for a less sociological approach to economics in favor of more biological approach – that is, approaching economies as complex adaptive systems and applying ecosystem analysis to financial systems.

The issue is not yet available online, but your local library should have a copy – it might be worth seeking out, and certainly, to frame it in classical Artic dualism, it lands the discipline well within the field of science, and suggests ways in which an even more scientific approach could be beneficial to its predictive value.

67Arctic-Stranger
Jan 16, 2009, 3:16pm Top

Herman Daly wrote about something he called steady-state economics back the early 80s. It sounds very similar to the approach Seed is taking. The only book of his that I am familiar with is Steady-State Economics.

68Carnophile
Jan 16, 2009, 9:37pm Top

In jail, dilemma:
Should I blab for a quick gain?
If I don’t, you do...
Great Moderation:
Economy so stable!
Then comes Year ‘08.
John Nash: “I’m the King
of Antartica.” Nobel
folks do not agree.
Stock price: Random walk.
My dreams of market forecasts
Vanish like thin smoke.
Adaptive systems.
Poke them and they learn to change.
It’s like whack-a-mole!
Autoregressive?
Enrique: “Bah, that’s boring!”
Try Kalman filter?
Car makers want to
Charge much, sell many cars? Sure...
If demand slopes up.
Sad, I look at page.
Error terms not Gaussian.
Perhaps sepuku.
My eigenvalues
Are all negative at last!
System is stable!

69jmcgarve
Jan 17, 2009, 2:13am Top

>68 Carnophile: This is to convince us that some economics is indeed art? I am sure I have never seen a haiku containing both "Gaussian" and "sepuku". That achievement should definitely prove ... something.

70Carnophile
Jan 17, 2009, 9:07am Top

Funny note on the word Gaussian: Everyone just used to say "Normal." But after a while the average person got an idea of what that meant. God forbid! So then people in technical fields had to change the jargon, LOL!

71Jesse_wiedinmyer
Jan 17, 2009, 5:16pm Top

Well, there's that. And there's the fact that more and more distributions were seen that weren't Gaussian and it seemed less and less normal.

72Carnophile
Jan 17, 2009, 5:19pm Top

I prefer the more cynical explanation; it's funnier.

73Jesse_wiedinmyer
Jan 17, 2009, 5:30pm Top

True that.

74lawecon
Edited: Aug 25, 2009, 8:25pm Top

An ex-wife, who is an economist, told me this in-joke, which is no doubt familiar to economists:

An economist and a mathematician are sitting in the Senior Common Room, and the mathematician complains about the burden of writing new exams every year.

The economist says, "Oh, we don't have that problem." The mathematician asks, "Why not?".

And the economist replies, "We just use the same questions over and over again."

"How can you do that," asks the mathematician. "Won't the students catch on and realize that the questions are always the same?"

"Oh," says the economist, "That wouldn't help them, because we change the answers."
==============
Stories change. The story use to be: What is the difference between the end of first year theory exam for the Ph.D. in Economics at Chicago and MIT?

At Chicago they use different questions each year, but the right answer is always the same. At MIT they use the same question every year but the right answer is always different.

I guess you had to be there......

75Jesse_wiedinmyer
Aug 26, 2009, 5:40am Top

I believe that Economics is neither art nor science, but rather a subset of shop class.

76Carnophile
Aug 26, 2009, 12:14pm Top

Hey! Another remark like that and my colleagues and I will get our homey Bernanke to send the Fed Funds rate to 500%.

77jahn
Aug 28, 2009, 8:33am Top

Picked these up from a site that seems to be called the Midwest Conference on Student Learning in Economics, I thought some might find them appropriate to the thread:

The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking that helps its possessor to draw correct conclusions.
John Maynard Keynes

The economic way of thinking…resembles a magician’s top hat: It seems to be empty; but in practiced hands it produces a fascinating array of surprises. And once you’ve seen for yourself how it’s done, you can go back home and astonish all your friends.
Paul Heyne and Thomas Johnson

Along with others, I have tried to pry economists away from narrow assumptions about self-interest. Behavior is driven by a much richer set of values and preferences. Individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward-looking, and it is assumed to be consistent over time.
Gary Becker

The goal, always, is to understand our own world. There are a lot of good reasons to learn about economics, but the reason I have tried to stress in this book The Armchair Economist is that economics is a tool for solving mysteries, and solving mysteries is fun.
Steven Landsburg

The purpose of studying economics is to keep people from being deceived by economists.
Joan Robinson

78richardbsmith
Aug 28, 2009, 9:36am Top

The purpose of studying economics is to keep people from being deceived by economists.
Joan Robinson


I like this last one, but need to add "politicians."

79gregstevenstx
Aug 28, 2009, 1:47pm Top

Economics is a sub-field of mathematics.

80Carnophile
Aug 28, 2009, 3:50pm Top

...but with people who are horribly sloppy about "ln" versus "log."

81gregstevenstx
Aug 28, 2009, 4:10pm Top

#80 (Carnophile).

Thank you -- that made me laugh. :)

82Carnophile
Aug 28, 2009, 8:39pm Top

We're known for our sense of humor. :)

83jmcgarve
Sep 9, 2009, 3:34pm Top

>79 gregstevenstx: Economics is definitely NOT a sub-field of mathematics. We have had, for some years, neoclassical notions out there that markets are always efficient, that information is always evenly distributed, that economic behavior tends to be rational. All of these ideas are far from true. Economics overlaps psychology, in that the animal spirits of economic participants tend to drive grossly irrational results at times. Economics overlaps political science, in that participants in exchange have grossly unequal access to information, very different amounts of bargaining power, and great moral hazard in that one can reap big rewards for risks caused to others.

Let the freshwater econometricians of the Chicago school work out their theories to 9 decimal places, so long as we don't take them seriously. The theories are about an abstract economy, very different from the one we have.

84gregstevenstx
Sep 11, 2009, 11:14pm Top

#83:

I firmly believe that animal drives, anxiety and emotion must ultimately be included in mathematical models of choice, just as much as things like incomplete information and increasing marginal utility must be. But in the end, systematic non-rationality can be parameterized into a mathematical model, right? The fact that Chicago school models make gross assumptions is a flaw in their particular models; it does not follow that economic processes are non-mathematical in nature. ;-)

85Carnophile
Sep 12, 2009, 8:38am Top

It's possible to model anything mathematically, I would think.

Regarding the rationality "of the Chicago School," it is in fact the default assumption in all of modern macroeconomics. It doesn't have any particular "school" associated with it. It did in, e.g., 1973 but things gave moved on since then.

If this bothers you, jmc, you might be relieved to know that the most popular model used for analyzing mmonetary policy right now is something called the New Keynesian Phillips Curve model. I hope this makes you feel better.

Things like irrationality, incomplete information, etc., also apply to government regualtors who would be made the nostrum for problems with markets. Silly. Irrationality, etc., are human problems, not problems of any particular institutional arrangements.

Modern models of learning often incorporate learning on the part of the private sector and the government's policy authorities, neither of whom knows the economy's structure. This seems like a good approach, since it's the situation we're actually in.

86Carnophile
Sep 12, 2009, 8:43am Top

...great moral hazard in that one can reap big rewards for risks caused to others.

The Federal Open Market Committee has 12 voting members. They could, as they have done in the past, screw up an economy composed of hundreds of millions of other people. (Great Depression, Great Inflation). They try to do a good job, but they're only human: Cf. irrationality, incomplete information, etc.

87codyed
Sep 12, 2009, 12:47pm Top

I used to have the following quote by Ludwig von Mises on my profile page which sums up your point, Carny.

"If one rejects laissez faire on account of mans fallibility and moral weakness, one must for the same reasons also reject every kind of government action." - Ludwig von Mises

A person does not magically become rational or become endowed with perfect information at the point at which he or she becomes a regulator or common bureaucrat.

88Carnophile
Sep 12, 2009, 12:50pm Top

Exactly. We need to hunt down all the lefties in the world, tranq them, and tatoo that quote to the insides of their eyelids.

89gregstevenstx
Sep 12, 2009, 1:08pm Top

#87 - 88:

Well, it's a good thing, then, that fallability and weakness aren't the reasons that I think that the laissez faire free market ideology is a crock.

90codyed
Sep 12, 2009, 1:09pm Top

You're a unique butterfly. Awesome.

91gregstevenstx
Edited: Sep 12, 2009, 1:22pm Top

#90 (I'm not sure that you were referring to me and my comment; I will act on the assumption that you were, although you included no reference or quotation)

I don't think I'm that unique. I hear a broad range of objections to unfettered free market, only a few of which are rooted in the "imperfection" notion.

For example: the free market is self-correcting only after the fact.

The free-market argument why you don't need regulation in advertising: company makes false claims; customers get ripped off; customers tell all their friends; people stop buying stuff from that company; company goes out of business. See? Perfectly self-regulating.

And you might say: it is a shame that some people must get ripped off to get this correction cycle going, but that's a small price to pay for freedom... and it's still the best system we have.

But how far are you able to push it? Without regulation, by the very nature of the system, some babies have to die before the company stops putting toxins in the toys. By the very nature of the system, some countrysides have to become desolate waste holes before the company gets pressure to stop polluting.

Maybe you think that's acceptable, too. But it's a tougher argument to make that that option is better than any other possible way.

(Edited to add:)

This is an argument that has nothing to do with "imperfection". It's inherent in the way the process works.... the way it is SUPPOSED to work.

92StormRaven
Edited: Sep 12, 2009, 5:27pm Top

91: Well, no, that's not the free market argument why you don't need regulation. The free market argument notes that most economic actors want to preserve their reputation before doing something that might tarnish it. In other words, most people in the market won't sell defective products is that they know it will damage their future business. It is the repeat game hypothesis.

And when one examines the market it is usually when someone thinks their reputation is not at stake that they try to cheat: a subcontracted manufacturer in China uses substandard materials for baby toys because they aren't selling them under their own name. In situations in which one has the prospect of repeat customers, the seller is usually pretty above board.

Is it perfect? No, because the flow of information isn't perfect, and some people will try to exploit that. Similarly, regulation has similar information based limitations plus it adds at least some economic burden to ensure compliance, even for those who would otherwise have been honest dealers. It is just how you want to spread the risk and pay for it.

93Carnophile
Sep 12, 2009, 6:42pm Top

>89 gregstevenstx:
Aw, come on, Geg! Free tranqs!

94geneg
Edited: Sep 14, 2009, 12:34pm Top

Am I correct in thinking a "free Market" is a market without external constraints? How is it that intellectual property protections don't constrain the market? Patents, especially, inhibit true competition. Until this problem is addressed, discussing free markets as anything more than a curiosity, a golden dream, is impossible.

As far as economics being a human endeavor, like all human endeavors, it is a dynamic system with way too many variables to create anything more than the most rudimentary of mathematical models. Models so untrustworthy that each school of economic thinking can use them to prove the viability of their particular school. I would prefer to take a shot at humans regulating their ultimately irrational economic institutions than allow the market to sort it all out.

An unfettered free market is the same pipe dream as an unfettered freedom. They both end in the same place, with the powerful few controlling everyone else and no institutional recourse.

Barter is the only economy that preserves value (value is established at the time of the transaction) and holds down inflation (but not completely).

Are any economists investing time and energy in creating theories of barter for a worldwide economy?

Wake me up on this conversation once you've decided what, exactly, a free market is.

95Carnophile
Sep 14, 2009, 2:21pm Top

As far as economics being a human endeavor, like all human endeavors, it is a dynamic system with way too many variables to create anything more than the most rudimentary of mathematical models.

We've been through this before, Gene. There's no way to regulate something you don't understand.

Barter is the only economy that preserves value...Are any economists investing time and energy in creating theories of barter for a worldwide economy?

Tim Spalding says the price of a lifetime LT membership has gone up from mowing his lawn once to mowing his lawn five times. Damn inflation!

96oakes
Edited: Sep 14, 2009, 3:11pm Top

Let's Try Barter: the Answer to Inflation--and the Tax Collector by Charles Morrow Wilson, with an Introduction by the great Karl Hess. Hess essentially subsisted on barter for a number of years.

97Carnophile
Edited: Sep 14, 2009, 4:47pm Top

According to federal tax law, barter doesn't get you out of paying taxes on the transactions.

Edit: Googling "barter website" turns up 13,300 hits.

98geneg
Edited: Sep 14, 2009, 5:00pm Top

Barter can and does work well in unsophisticated areas of economies, can it work efficiently in a complex worldwide economy?

Carny, "According to federal tax law, barter doesn't get you out of paying taxes on the transactions."

Well the thirty years ago the top tax rate was over 80%. since then it has changed. I would expect that figuring out how to finance government would be a part of creating a sophisticated barter economy.

Money as a token of value is just too easy, but is it really a good thing?

99Carnophile
Edited: Sep 14, 2009, 4:57pm Top

Are any economists investing time and energy in creating theories of barter for a worldwide economy?

Money is Memory

In principle, sufficiently good computational record-keeping could replace money, if by "money" you mean "circulating physical cash." NB: This is pure theory.

100Carnophile
Sep 14, 2009, 4:59pm Top

Barter can and does work well in unsophisticated areas of economies, can it work efficiently in a complex worldwide economy?

Realistically? Not a chance, no.

101geneg
Sep 14, 2009, 5:34pm Top

Pricing in terms of money, regardless of whether it is cash, plastic, or some other form of confidence, is all the same to me. The problem is the substitution of confidence for value. (I know confidence is generally applied to credit issues, but in this case I mean confidence in the monetary system to represent value). A barter economy is probably safe from the kind of stuff we're going through now and seems to be typical of market economies: bubbles and busts.

Are there enough chickens in the world for Mr. Tyson to purchase "Guernica"?

I agree with your conclusion, Carny, that barter would not wok on a worldwide basis, which is a shame since it is money that creates economic problems, what with money having no real value at all. I have a 10,000,000 Lira note my Dad gave me when he came back from a Med cruise in the early fifties. If the note itself, intrinsically, was worth that much then, it would be worth as much today. But it's not worth the paper it's printed on.

Money is the problem. It breaks the strong value relationship of the time, effort and resources required to obtain the payment and the object being purchased.

I need to think (good luck with that!) more about money as a source of problems for humanity. I'm sure whatever I conclude has already been laid out and discussed ad nauseum by economists. Just because money is easy does not make it right, or beneficial. Coal is easy.

Greathouse's 2nd General Law states that all innovation contains by necessity the seeds of its own destruction. Over time solutions to problems cause their own sets of problems. Being an innovation, money carries within itself its own destruction. How and when this occurs is up in the air, although I think we have seen some previews over the last year.

102Carnophile
Sep 14, 2009, 5:37pm Top

Money as a token of value is just too easy, but is it really a good thing?

The glory of it and the craziness of it are that it's purely symbolic.

This allows us to conserve resources, e.g., using gold for dental fillings or whatever instead of money, while we use numbers in computers for money.

But yes, it also means that vast swaths of wealth can disappear because the herd wakes up one day, decides this is Stampede Day, and freaks out.

Here's the thing, though. If we were to ask whether token money would ever exist without being backed by government, I think the answer is no. There is certainly very good reason to think this, based on history.

If we moved away from that, we'd still have occasional stock market crashes, I suspect...but a lot fewer.

103Jesse_wiedinmyer
Sep 14, 2009, 7:46pm Top

In principle, sufficiently good computational record-keeping could replace money, if by "money" you mean "circulating physical cash." NB: This is pure theory.

Uh, doesn't it pretty much already?

104Carnophile
Sep 14, 2009, 8:47pm Top

Heh. I know what you're saying. But in Kocherlakota's paper it's a different idea (IIRC; it's been like 10 yrs since I read it). There is, as it were, a huge computer that doesn't store bank account numbers, but is a Big-Brother-like record of what you're done in the past. If you're a barber and you were a good boy and gave Mr. Smith a haircut, then you are entitled to claim a lawn-mowing from Mr. Jones.

105Jesse_wiedinmyer
Sep 14, 2009, 8:52pm Top

Gotcha. I could have sworn that L1 (or whatever the heck they call it) accounts for some absymal proportion of money already.

106Carnophile
Sep 16, 2009, 5:57pm Top

M1. Per the Saint Louis Fed, circulating cash is $850 billion, half of M1 ($1.7 trillion) and 1/10 of M2 ($8.5 trillion). For comparison, GDP is now a little over $14 trillion.

107geneg
Edited: Oct 6, 2009, 5:43pm Top

I didn't want to create a new thread and this one has economics in its name, so here goes:

The Bush administration's efforts to deal with the subprime mortgage lending mess as it was building (or not).

108lawecon
Oct 12, 2009, 12:01am Top

For example: the free market is self-correcting only after the fact.

======================

And regulation is self-correcting before the fact? Really? I guess I failed to take account of the school of benevolent and disinterested omniscence from which regulators graduate. ;-)

109geneg
Oct 12, 2009, 10:49am Top

They graduate from many of the same schools that teach the principles of the benevolent and disinterested omniscience of the free market.

110geneg
Edited: Oct 12, 2009, 11:39am Top

Here's another look at the value of the Financial sector to our economy. More on the benevolent and disinterested omniscience of markets.

111readafew
Oct 12, 2009, 12:31pm Top

If I didn't know better Gene I'd have swore you wrote that article.

112geneg
Oct 12, 2009, 1:10pm Top

That's what I thought when I read it.

I'm not as far out in the gigglywigs as some here would like to believe.

Maybe Robert Creamer reads LT.

113StormRaven
Edited: Oct 12, 2009, 1:45pm Top

112: No, you are. Its just that Creamer is out there with you. His repeated mantra that the financial sector "produces nothing" is simply stupidity on display.

114geneg
Oct 12, 2009, 6:36pm Top

What have they produced besides money from money? I'm afraid there is a major state of denial going on here.

115StormRaven
Edited: Oct 12, 2009, 9:15pm Top

114: What they produce is the flow of money to where it needs to be to become productive. Asserting that the financial sector "produces nothing" is simply a denial of reality.

Ask yourself: do railroads produce anything? How about airlines? Or trucking companies.

116lawecon
Oct 20, 2009, 11:11pm Top

What have they produced besides money from money?

===========================
Which proves that you are the best Economist of the
fourth century B.C.E.

Cool, I never thought that I'd meet someone who predated
the Scholastics.

117modalursine
Oct 20, 2009, 11:35pm Top

Everybody here needs to read "The Myth of the Rational Voter" by Bryan Caplan.

His basic thesis is that voters are systematically biased, but along the way, he stops to consider the following question:

Do economist's opinions differ from those of non economists because the economists know more, or because economists are themselves systematically biased.

There are two commonly cited sources of bias that would apply to economists:
1. They are rich, or at least comfortable, and therefore have opinions reflecting their social position.
2. They are ideologues subscribing to a particular world view (conservative? leftist? whatever)

He develops a statistical technique to compare the opinions of the general public, of economists, and an artificial construct "the enlightenened public". The enlightened public has the opinions the general public would have, had only the general public the advantage of an economics PhD. The technique for calculating the opinion of the "enlightened public" is fairly straightforward but alas, too windy to expose here along with all the rest. Read the book or ask me separately if you're actually that interested, and I'll put it into a different thread.

Lo and behold, the enlightened public opinion tends to agree with economists's opinions, showing that the difference between the ordinary public and economists cannot be explained (no more than 20% of the difference can be explained) by bias, leading him NOT to reject the "common sense" default assumption that when an expert and a non expert disagree, its more likely that the expert is correct and the non expert not.

The actual number support the contention that economists know more than non economists. THe method is not foolproof of course, but it does lend numerical objective evidence based arguments that yes, Virginia, economists do know something about their subject.

It pains me to say all that, because I'm a natural born
skeptic and would love to have found out that they (economists) are all a bunch of fakirs. Sorry about that.

118mikevail
Oct 21, 2009, 12:19am Top

117:
This is from a 1973 column by Mike Royko, a Chicago newspaperman for many years, "One of the worst things about an economic crisis is that we are forced to turn to the professional economists for enlightenment.
But it is easier to read a physician's prescription than to understand an economist. And to make things worse, no two economists ever agree. If they sense an agreement, one of them quickly shifts position. They realize that if they agreed, it could drive down the market value of both of them."
The crises change but the talking heads stay the same. And even the brightest economists usually suffer from "Cassandra Syndrome"

119Jesse_wiedinmyer
Oct 21, 2009, 7:50am Top

and an artificial construct "the enlightenened public". The enlightened public has the opinions the general public would have, had only the general public the advantage of an economics PhD.

So their fictional "enlightened public" is one composed of only Economists. No wonder their "the enlightened public opinion tends to agree with economists's opinions". You don't make it into the enlightened republic unless you're an economist.

120Carnophile
Oct 21, 2009, 8:07am Top

You don't make it into the enlightened republic unless you're an economist.


Sounds ideal!

121modalursine
Oct 21, 2009, 12:38pm Top

ref #118,119,120

Its fun to say "for every expert, there's an equal and opposite expert". Its a trick I learned early in life and in fact its a main stay of my friend Sextus' method of Skepticism. (See "Sextus Empiricus" )

But, like so many beautiful theories killed by ugly facts, it turns out that despite disagreement around the edges, there is quite a bit of agreement among economists of every stripe. They all agree with each other, and disagree with the general public, for example, that the cost of foreign aid is a negligible part of the US budget. They agree that "too much" immigration is not a big problem for the US (they disagree with the general public on that one too).
The do agree with the general public that the quality of education is a problem for the US economy.

Caplan shows some 32 questions relevant to economic policy where there's pretty broad agreement among economists, left, right, and center (as measured by a survey of PhD economists) It also turns out, perhaps surprisingly, that the consensus among economists is not uniformly liberal OR conservative but tends to agree with conservatives on some issues, liberals on others, and to come out in aggregate somewhere slightly to the left of center, but only slightly.

The trick when trying to explain the difference between the opinions of "experts" and "non experts" is to find out what percentage of the difference can be accounted for by known or guessable biases.

One approach is to ask people objective questions with known correct answers along with questioning them about their opinions and questions relevant to sussing out their biases. For simplicity, suppose we ask whether they agree, on a scale of 1->10 enevada: on some proposition AND we ask them some basic information questions such as "how many senators does each state get?" or "What are the names of your Senators?" and so on. We also ask about income class and whether they generally prefer Republicans or Democrats (and other such "ideology" question)

Now if we suspect that there's a rich/poor class bias
where people's opinions are mostly governed by their economic class, then we can lump the respondents into these groups:
Richer people with high knowlege,
Richer people with low knowlege,
Poorer people with high knowlege,
Poorer people with low knowledge.

Then suppose that instead of using the actual answers that richer and poorer people of low knowledge actually gave, we substitute the answers that high knowledge people in the respective wealth categories gave; i.e. make believe that all the poorer people answered the opinion poll the same way that the high knowledge poorer people did, and that the low knowledge richer people also answered the opinion questions the way that richer high knowledge people did. The result is how the population as a whole would have answered had they all been high knowledge.

In the same way, we can compensate for ideological bias or any other "known" bias. Of course, there may be biases we havent thought about and compensated for, so the method, as I've said elsewhere, is not foolproof.

We call that the "enlightened public opiniion"

122Carnophile
Edited: Oct 21, 2009, 1:12pm Top

...the consensus among economists is not uniformly liberal OR conservative but tends to agree with conservatives on some issues, liberals on others, and to come out in aggregate somewhere slightly to the left of center, but only slightly.

Which is why it’s funny that people to the left of the center, both in the world at large and in this very Pro & Con group, often try to dismiss economics as right-wing ideology or whatever. I predict that now that you’ve said the foregoing, this will come to a screeching halt in this forum and we’ll get a lot of paens to the glory of economics.

OTOH, maybe not, because there is another possible take on this. Caplan:
Economists and the public hold radically different beliefs about the economy. Compared to the experts, laymen are much more skeptical of markets, especially international and labor markets... When laymen see business conspiracies, economists see supply-and-demand....since the typical economist is actually a moderate Democrat, controlling for party identification and ideology makes the lay-expert belief gap get a little bigger. Economists think that markets work well not because of their extreme right-wing ideology, but despite their mild left-wing ideology.

123Carnophile
Oct 21, 2009, 1:26pm Top

PS: Never trust the "experts." Listen to them, but don't trust them.

124codyed
Oct 21, 2009, 1:45pm Top

But I trusted you, Carny. What am I supposed to do now?

125geneg
Oct 21, 2009, 2:01pm Top

I don't think I've read any comments suggesting economics is a right wing ideology. However, there is a right wing ideology with an economic component. Of course, a right wing ideologue might tend to confuse their ideology of economics with economics itself, just as a left wing ideologue might do the same.

Libertarian economics appears to me to have a very large ideological component. Some here seem almost desperate at times to show how sensible their nonsensical economics really is.

Of course, when an ideology fails it's never because the ideology was wrong-headed, but that it was never implemented completely and the resultant impurities cause problems. That ideological purity is an impossibility enters not into the picture. Ideological purity requires a party of one. Witness the current collapse of the Republican Party.

126StormRaven
Oct 21, 2009, 2:02pm Top

125: The collapsing Republican Party that is likely going to win the governorship of Virginia and plausibly of New Jersey as well. But don't let facts get in your way.

127Carnophile
Edited: Oct 21, 2009, 5:06pm Top

>124 codyed:

One word, Cody: plastics Scientology.

As a serious example, the predominance of Keynesianism among macroeconomists in the 1960s. Lots of laypeople made very good criticisms of that orthodoxy. Later, the orthodoxy itself shifted in ways that to a large extent embraced ideas that had been made by that doctorate-less rabble.

128geneg
Oct 22, 2009, 10:03am Top

And you see where that shift has gotten us. How many trillions is it going to take to save us from our multi-trillion dollar debt brought on by the ideas of the doctorate-less rabble?

The Republicans are a regional party now. Virginia is part of the region in which they still have some following. New Jersey, from what I understand, is fed up with Corzine. I don't think if he loses it will be much of an affirmation of Republican Party principles (just say no), as much as a personal rejection of Corzine.

129StormRaven
Oct 22, 2009, 10:03am Top

128: Rationalize it all you want.

130Carnophile
Oct 22, 2009, 11:40am Top

>128 geneg:
Keynes did not have a position on the Community Reinvestment Act one way or another, having died about three decades before it was passed.

131Jesse_wiedinmyer
Nov 9, 2009, 10:49pm Top

Here's one take on the thread topic.

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