More generally, this would mean that higher demand means higher prices.
I didn't use this as an argument because it's in fact too complicated for a discussion in a military/security policy forum. The reason are the Giffen goods.
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More generally, this would mean that higher demand means higher prices.
I didn't use this as an argument because it's in fact too complicated for a discussion in a military/security policy forum. The reason are the Giffen goods.
Higher demand with constant supply, to pick nits. Giffen goods would be an outlier to the opposite conclusion: that increased prices reduce demand.
Most of the general rules have exceptions, but these are typically explainable and to some extent predictable.
Much of the observed erratic nature of economic science is not a consequence of deficiencies in the tools, but rather of the way the tools are applied: as with many other disciplines (notably history) if you torture the data enough they will tell you whatever you want to hear. Because the tools of economics are used as a basis for decisions that have immediate impacts on all manner of vested interests, there's a huge incentive to torture the data, something a chemist or physicist doesn't have to deal with.
One of the great challenges of democracy, whether established or emerging, is the difficulty of developing and implementing sound long-term economic policies - often incomprehensible to the electorate and unpopular in the short run - without getting thrown out of office. Any realistic plan to "fix the economy" is going to make a lot of people hate whoever implements the plan.
Dayuhan,
Maybe you can explain why there is no leading theory in economics unlike, for instance, evolution or plate tectonics. There are several competing schools and none of them seem to have a lock on predictive accuracy.
The reason is mostly the limited data sets for econometric analysis (squeezing the value of certain variables out of data sets). Take economic crisis as an example. Major economic models (such as used in central banks) can have in excess of 2,000 variables, but they still lack the data input for crisis situations because there's not enough data to discern the values of many variables.
It's rarely possible to observe a specific variable directly because it's so difficult to set up clean experiments. Instead, economists need to use huge datasets to find the value through empirical analysis (and this requires huge datasets from similar situations).
Consequently, such models fare poorly in regard to simulation of crisis situations.
Many other times there's not so much several competing theories as several adding theories. There are about seven theories about the optimal currency area, each one about one aspect of the topic (some aspects favour bigger, others favour smaller common currency areas). An economist needs to know all or almost all of these, for missing one may lead to entirely wrong conclusions.
There's furthermore the problem that economic theory is a very wide field. Two nobel prize winners can discuss a single topic and disagree (happens actually quite often, see Krugman vs. Stieglitz). Afterwards, it's usually easy to point out why one has argued one way and the other one a different way: Their background (research on certain fields) usually leads to a bias in such discussions (the contributions from different research fields are often competing and it takes a neutral synthesis and good econometric data to find a complete picture).
John Kenneth Galbraith(father of James Galbraith) had the last predictive model that described what was happening in the 1970's condensed version is this......you have 3 choices Inflation, Deflation or Wage and Price Control.
Incidentally James Galbraith's latest book "The Predator State" supports a lot of what Presley is saying, in fact he has given several speeches on the failure of economics. It is largely due to Criminal Political Influence.
From an interview in 1999: "But I don't make predictions. I long ago discovered that my wrong predictions are wonderfully remembered, and my right ones are quickly forgotten. So I rely on the history of capitalism."
Galbraith eschewed modeling even before he soured on forecasting, so at best the only thing he's ever done is "explained" things that happens. Even with the trappings of math, economists are essentially historians flipping coins.
I agree with a number of Galbraith's conclusions regarding the state of the field, but very little about why economics is a failure. Fundamentally, I have no reason to believe economics could have ever succeeded--corrupt machinations or not. Certainly, it will never succeed with the mathematical toolkit economists presently bring to bear.Quote:
Incidentally James Galbraith's latest book "The Predator State" supports a lot of what Presley is saying, in fact he has given several speeches on the failure of economics. It is largely due to Criminal Political Influence.
You are right and James would agree with you. If you go to the back of the book I recommended you will see that James recommends that future economics rest on 3 Pillars, to use the jargon of the day. And they are Planning,Engineering,and Basic Scientific research. No Econometric Math toolkit required.
None of that will inform governments whether counter-cyclical economic policy is a good thing or just how large and dominating corporations can be allowed to become before they create unacceptable trusts.
Governments also need advice about the design of the tax system. Econometric studies are very useful for understanding and balancing the side-effects of taxation.
Interesting question... are theories like plate tectonics or evolution considered "leading" by geologists or biologists, or are they seen as such by those outside the profession because they are accessible and (in their elementary versions) relatively comprehensible? I'm not sure why economics doesn't have one, but I'm also not sure why it should.
Certainly there's a lack of predictive accuracy in economics, but that's true of many disciplines as well, particularly when you take them past the undergrad level and apply them to real world conditions. A geologist can tell you where earthquakes are likely to occur, but not when they will occur or how severe they will be. A meteorologist can tell me roughly how many typhoons are likely to emerge from the north Pacific, and can predict a general course for any given storm, but there's a wide margin of variance and they can't tell me how much rain a given storm is going to drop or where exactly it will go. We know the weather forecast is uncertain, but we don't ignore it.
I'm not an economist by trade and I've plenty of criticisms of the trade, excessive reliance on mathematical models and excessive disregard for non-quantifiable factors being prominent among them. At the same time, I recognize that they do provide a very useful and very important set of tools... wouldn't want to approach a complicated job with only those tools, but I wouldn't want to leave them behind either.
Worshiping economists and slavishly obeying their every word would be a huge mistake. Dismissing them and ignoring everything they say would be an equally huge mistake.
A great deal of what passes for economic discourse in the popular realm is contaminated with ideology and vested interest to a point that renders it meaningless.
I wouldn't bet any money on a popular revolt happening in the US any time soon. I'd likely bet against it, were I inclined toward betting.
Econometric studies are useful for understanding and balancing the economic side-effects of taxation, and other policy decisions. These decisions also have non-economic side effects that must be considered, one reason why econometric studies, while important, cannot be the sole basis for policy decisions.
The tool for this is called preferences; people need to somehow express their preferences for/against the side effects in monetary terms and then economists have the tools to factor them in. Everybody can make a gut decision about the severity of side effects, but economists are the professionals who at least attempt to do this empirically.
They're kinda waiting for progress of philosophy and psychology here because these areas of research so far fail to be helpful enough.
Nevertheless; an example: Economists know three kinds of "best" tax systems. The "first best" requires so much information that only god could do it. The "second-best" is still impractical. The "third best" is what economists seek; it's at least meant to minimise the net damage of externalities.
Some taxes have huge side effects (income tax was estimated at up to 30% additional costs for the society in an American study during the 90's), while others have only negligible side effects (such as coffee tax, a tax that requires almost no effort because at one stage coffee is in a bottleneck and very easily taxed).
The idea is to balance the taxes so that the side effects in % are roughly the same.
This needs to be seen in context of pigou taxes and political intentions (such as fairness), of course.
Dayuhan,
Plate tectonics, as a theory, is well enough established that almost all geologists subscribe to it. Same with evolution and biologists. Economics, on the other hand, seems to be a neverending series of fads. There isn't a dominant theoretical framework that most economists subscribe to, although many economists are strongly partisan regarding whatever theory they personally subscribe to (Keynes, Chicago, Austrian, etc.).
This is a problem for two reasons. First, the track record for any of these theories in terms of predictive ability is pretty poor. Secondly, policymakers and the general public are constantly getting conflicting advice about what to do to about economic problems by proponents of the various schools. Who is right? Who should be listened to?
I should add that this problem isn't just about prediction - it's also about understanding what's already happened. There isn't even agreement on historical cause and effect between proponents of the various economic theories.
The differences between the economic science "schools" are not that stark. Instead, the difference is often merely about the value of some key variables - and that uncertainty is the result of difficult observation of said variables in limited datasets.
It's like geologists agreeing on tectonics, but not being sure about the drift speed or even drift direction.
The key difference between Keynesians and others is for example almost entirely about the value of a single multiplication variable'; is it larger than one or not? Studies yielded conflicting results.
http://en.wikipedia.org/wiki/Spendin...timated_values
The different economic schools are not so much incompatible in their formulas as in their assumptions.
People don't always express their preferences in monetary terms. Sometimes they express them by voting the bastards out of office, or by hanging the bastards from lamp-posts. Economists may not be able to factor those reactions into an equation, but the bastards - those who make policy - have to.
True, but once you get past the broad guidelines there's a fair bit of contention within those professions as well, though it's a good deal less public and receives a lot less attention, since the subject matter has a lot less immediate impact on daily life. When the subject is money, there's a lot more scrutiny and the inaccuracies and uncertainties get noticed a whole lot more.
To use an example already cited, most economists would agree on the basic framework of the relationship between supply and demand. Take it to specific real-word cases with unique contextual details, and there will be a lot less agreement. I suspect that this is true in other disciplines as well: biologists may agree on the broad framework of evolution, but get down to the specifics of how it works and where it's going and the agreement will evaporate... not that many people will notice.
Economists are still the ones working on how to measure preferences. The difficulties could be overcome if psychology (and for some problems also philosophy) make the required advances.
So far, much can be understood with what has been measured already.
The time-value preference rate (sorry, don't know the exact translation) is for example known: It's the base interest rate. All other (real) interest rates can be explained with additional factors - and one who understands the theory of interest rates isn't prone to fall prey to typical interest-related market failures any more.
Likewise, most economic problems are not only explainable, but also predictable (save for their exact timing). People just don't want to listen to dry theory - and cognitive dissonance is a powerful opponent to theory anyway.
In the end, it's not so much a failure of economic science that crisis happens and isn't accurately predicted, but a lack of understanding of economic science by laymen (not the least because of the use of poor sources and lack of patience).
There is a reason why some countries are in a circle of boom-crash-boom-crash with 8-11 year wavelength while others do not produce any real boom or any real crash, save for flimsy copies of booms invented elsewhere (such as the dotcom boom): Economic science has a different influence in different countries.
Some countries have actually implemented all economic science advances of the 19th century already and are working on adapting 1960's economic science advances into their society. Meanwhile, other countries still think they can somehow cheat their way around the backside of the coins.
Not really. Galbraith is convinced that econometrics will ultimately fail because of nebulous unpredictability in human affairs. I'm convinced econometrics fails because Galbraith and the like seem to content to tackle their field with barely the math an undergrad might pick up in his first two years.
I don't see how anyone can tackle the last two pillars without math. A qualitative science isn't a very useful one.Quote:
If you go to the back of the book I recommended you will see that James recommends that future economics rest on 3 Pillars, to use the jargon of the day. And they are Planning,Engineering,and Basic Scientific research. No Econometric Math toolkit required.
I always thought transparency and systematicity were the defining criteria for science, not whether or not the result was deemed useful. FWIW, philologists managed to formulate the concepts of genetic relationship and the phoneme using almost exclusively methods we would now call qualitative.