If a house has a good thermostat, we should observe a strong negative correlation between the amount of oil burned in the furnace (M), and the outside temperature (V). But we should observe no correlation between the amount of oil burned in the furnace (M) and the inside temperature (P). And we should observe no correlation between the outside temperature (V) and the inside temperature (P).
An econometrician, observing the data, concludes that the amount of oil burned had no effect on the inside temperature. Neither did the outside temperature. The only effect of burning oil seemed to be that it reduced the outside temperature. An increase in M will cause a decline in V, and have no effect on P.
A second econometrician, observing the same data, concludes that causality runs in the opposite direction. The only effect of an increase in outside temperature is to reduce the amount of oil burned. An increase in V will cause a decline in M, and have no effect on P.
But both agree that M and V are irrelevant for P. They switch off the furnace, and stop wasting their money on oil.
That's interesting, I've never heard of Milton Friedman's thermostat, but there is a procedure called "The test for the controlled variable" intended to find if a system is controlling one variable or another, invented by W.T. Powers sometime in the fifties, I think. You make a hypothesis about what is the controlled variable, then you apply a disturbance. If the variable stays relatively undisturbed, the correlation between the disturbance and the controlled variable will be nearly zero.
> But both agree that M and V are irrelevant for P. They switch off the furnace, and stop wasting their money on oil
If they have the power to switch off the furnace, an econometric construction is underpowered. The problem in economics is you often cannot switch off the furnace. You're forced to just watch it wondering.
Moonlighting as economics researchers, or even considering themselves as the superiors of economic researchers is possible, and can’t be excluded as a possibility. Hence why I said technically.
Just like priests and counselors in the courts of ancient kings, modern economists are masters of telling those with power and wealth what they want to hear. And beautifully wrapped, in the trappings of moral legitimacy and learned wisdom.
Sure, economists actually know some basics - just as the ancient priest knew that a cartload of grain burned as an offering to his god would not be available to feed the poor. But it ain't enough that you'd want to trust anything they say.
(Vs. - ask any competent engineer about the sort of control inputs which are needed to maintain smooth-ish operation of a half-decent system (be it an airplane in flight, sewage treatment plant, blast furnace, whatever) which is actually understood. And compare to (say) the Federal Reserve's handling of the economy in recent decades.)
> ask any competent engineer about the sort of control inputs which are needed to maintain smooth-ish operation of a half-decent system
The Taylor Rule system of inflation control actually works extremely well. Being a system with one input and one output variable, classical control theory can be easily applied. But - very importantly - this kind of control system is not immune to external shocks (someone trying to push over your inverted pendulum), has a huge phase lag (months to years), and also does not take into account other side effects (unemployment!). Which is why the Russian invasion of Ukraine triggered a worldwide transient (impulse response) inflation.
It's important to distinguish between the US and Europe, when talking about this.
From a US perspective, the impact of Russia's invasion of Ukraine on energy prices (and hence inflation) was relatively muted.
For Europe, on the other hand, the impact was incredibly large.
Additionally, Ukraine supplied huge amounts of grain to EU farmers for livestock, which put a double impact onto food prices in the year following.
Finally, the money printing during Covid was wildly different in terms of distributional impacts between the US and Europe, so it's relatively unhelpful to talk about global impacts.
> other side effects (unemployment!)
It was startling to see discussion of interest rates that talked about how increasing unemployment brought down inflation - almost as if it was a good thing to increase unemployment...
Sometimes people think of these abstract models of human systems as if the system itself is the important thing, not the humans that make it up. Like considering social systems as 'Darwinian' without considering that 'survival of the fittest' implies 'death of the unfit'.
> Taylor Rule system of inflation control actually works extremely well
What are you basing this on? The Taylor Rule was suggested as a toy model--that's why a_pi and a_y were set to the magic value of 0.5 without further thought given to it. Its own author abandoned it as computers became advanced enough to run more complicated models.
>Just like priests and counselors in the courts of ancient kings, modern economists are masters of telling those with power and wealth what they want to hear.
There's a reason economists get paid more than all of the other social sciences.
If you want to piss off an economist, suggest that they might be a rational utility maximizing agent in a market where there is a high demand for misleading information.
To maximize neural efficiency (and minimize embarrassing leaks) ~99% of economists should believe the gospel which they preach. While being quietly open to sudden changes in their theology, whenever reality yet again proves their creed disastrously wrong. Said changes, of course, are strictly a matter for their ~1% "Most Senior and Revered" priesthood to decide.
Sure, but most theories are wrong and it can take a lifetime to find out beyond a doubt when the only worthwhile measure is 20/20 hindsight.
So give them a break, somebody has to commit their life (and substantial mathematical ability) to completely wrong theories, and it's a whole lot more of a sustainable career if they can develop some kind of a following to accompany them along in their journey.
I was shocked when I learned the current economic models don't even account for energy inputs. Supposedly if you decide all energy inputs suddenly stop, GDP is predicted to drop on the order of 5-10% instead of, say, cease to exist
I don't think most typical GDP models are designed for situations were large parts of the population will die. Models are also likely not to be designed to accurately reflect the result of a large nuclear war, for example.
Typical models will account for energy price and elasticity, though, and if you want models for more catastrophic situations then those exist, but it's a different type of modelling.
The problem with economic models is that they remove almost all parameters except a few. But the removed parameters account for like 90% of the outcome.
That's the only way you can create models of something as complex as society. It's way more complex and chaotic than weather and still economists think they can predict months and years into the future.
For smaller economies modelling some months into the future is actually pretty decently possible. Of course, there could always be big events throwing everything in a new state.
That study kind of proves that economics is not a science. Not even the "true" value they want to compare their forecast with is correct. It's also just an estimate. Complete nonsense.
"To assess the quality of the forecasts, they are
compared with the actual GDP figures. Since GDP is
normally revised several times, it is necessary to
decide which figure to take as the outcome. Following the literature, we use the first available estimate
for real GDP growth. In our case, this is the annual
average calculated by the State Secretariat for Economic Affairs (seco) in March of each year on the
basis of its quarterly estimates.2"
The main problem is that GDP can and is defined in so many different ways and massaged and changed to anyones liking.
Same with inflation. It's hard to measure correctly in the first place and becomes even more useless as it is defined differently at every occasion or when it does not match whatever one tries to achieve.
>I don't think most typical GDP models are designed for situations were large parts of the population will die.
This was once an essential consideration in historical times, but never the main thing on the bargaining table even then.
Now it would be the extreme case, but the current system is still designed to handle it.
No differently than when large parts of the population (but not rising to the level beyond a voting minority) are systematically excluded from future ongoing prosperity by periodic debasement and/or devaluation of their labor, and the currency or medium of exchange, credit, and accounting that goes with it.
Never to be heard from again, since they are no longer a part of the economic system like they were the day before.
The current system isn't designed for a shutdown of all energy supplies or quickly losing larger parts of the population. What portions and where of the population are not part of the economic system?
Over the last few years, millions of Americans if not tens of millions who had been on the margins of economic stability, have now been inflated across the divide over onto the slope of economic uncertainty.
It can be a subtle difference since neither one is a very good position to be in.
But it's a slippery slope and those that can get back to where they were will be a result of overcoming a downward force that was not a factor just a few years ago.
And those that do will still not be in a very good position to be in.
For the rest, fuggedaboudit.
I get your point though.
I would say a few million more consumers becoming much further drained doesn't have anywhere near the chilling effect on Wall Street that you would get from a total energy shutdown or losing the same millions in a mass die-off, true. It's just a step in that direction but I do think the same faulty equations would be clung to, long after their unrealistic calculations have compounded beyond recovery. And surprise people at how soon a downward spiral could occur without any sign of immediate threat, since there's no system in place to give any warning until downward momentum has become dominant enough to be well-registered. When it's more likely to already be too late.
With energy the closest thing in memory may be the way oil drilling was cut in half at the end of 1981. That's nothing like a total shutdown but it was significant. It was an emergency, if they hadn't crashed the price, alternative energy would be 40 years ahead of where it is now. Turned out only to be a speed bump for Wall Street and here we are.
This is the real critique of the labor theory of value: Smith and Ricardo regarded nature as effectively infinite and the economy only being powered by people doing things.
Sitting in the ground the coal has no value, when people dig it up and put it in a steam engine it goes from 0 value to the value of whatever got produced.
Where did the coal in the ground come from? Don't know! How much is there? Probably a lot. What happens to the acrid smoke from the steam engine? Goes somewhere else.
EDIT: because I know someone is going to insist that the value of coal in the ground is accounted for in mineral rights: there were none in Smith and Ricardo's day.
> Smith and Ricardo regarded nature as effectively infinite
Clearly Smith was aware of constraints in nature:
A mine of any kind may be said to be either fertile or barren, according as the quantity of mineral which can be brought from it by a certain quantity of labour is greater or less than what can be brought by an equal quantity from the greater part of other mines of the same kind.
> the current economic models don't even account for energy inputs
What are you basing this on?
In power and military planning, one absolutely models the effects of power loss. This is sort of like saying physics is broken because our cosmological models don't account for the telescope breaking.
The economic models are concerned with accurately modelling the impact of normal/expected events/variations. The event you propose is not one worth modelling (being impossible).
Similarly, I was shocked to learn that models of aeroplanes don't even account for the possibility of the plane being blown up mid-flight by a stray anti-air missile.
It seems aerospace engineers are just like priests and counselors in the courts of ancient kings.....
Which aerospace engineering models don't account for those? The intentionally simplified ones, which are mostly used for civilian stuff? Note that about 0.00001% of civilian aircraft are negatively impacted by stray anti-aircraft missiles.
Or the more complex models, typical for military use? Reality: Accounting for damage from weapons, when appropriate, is a really big thing in aerospace engineering. And has been for 80+ years.
Vs. 100% of modern economies have been very negatively impacted by sudden cut-offs of energy supplies (due to coal miners' strikes, naval blockades, the OPEC oil embargo of 1973, etc., etc.).
The core of the analogy made was that economic models rarely account for basically any variables that all other reality-based models have to live on.
Yeah your analogy highlights the silliness of designing for EVERY particular catalyst for failure. But it’d be a better comparison if you were saying it’d be more like if plane builders never considered the possibility at all that they might encounter bad air, an adversarial’s airspace, or engine failure.
But plane builders do a whole lot more in terms of “what if bad thing x happened” than priests, politicians, and economists, maybe not JUST due to the direct, unambiguous impact of failure.
People expect supply and demand to show its effects immediately, whereas it takes years in some markets due to things like sticky prices in things like wages or overwhelming demand relative to supply and hence underestimating the amount of additional supply needed.
I see a whole lot of confirmation bias and circular reasoning in that statement, which makes supply and demand sound an awful lot like phlogistons, the luminiferous ether, epicycles, and other famous fudge factors that millennia of humans have used to maintain their neither testable or falsifiable worldviews. Swap out just a few phrases and we’re at insufficient faith being why the Messiah didn’t return as predicted.
So to be clear, S&D is a statement about market prices at equilibrium, i.e. the steady state. Parent pointed out that transient effects matter. Not sure how you got from that to circular reasoning.
To paraphrase, “if you don’t see the immediate effects of S&D, wait for the eventual effects of S&D”… this can only be said by someone who already believes S&D is reliably reproducible.
This is no more circular than the observation that an RC circuit has a settling time. If you want a reliable instant reproduction of S&D, they exist. In college I had a lecture where the students were given a role (producer or consumer) and a budget, and the price indeed converged as predicted (despite my best efforts to set up a cartel of producers). Just don't expect the US economy to cooperate and provide a controlled lab setting.
But why simplify it into a simple supply and demand curve when at the end it means nothing because you did not include all the other important factors?
I took EE in college. Circuits are laughably more complicated than a linear circuits class might lead you to believe.
Other engineers are taught the drag equation. It technically includes "all the other important factors" but only because they stuff it all into the drag coefficient.
Back to EE. In fields and waves you are shown how light is a wave. They don't take the opportunity to jump into a full unit on QM.
For pedagogical reasons people teach foundational concepts first. In this thread there seem to be many people who are unaware of what actual economists do, what they are capable of, but are quite confident they have it all wrong.
The root causes are still supply and demand. The time lag is not going to change that, it just changes how forward looking you need to be (or how much lower your expectations of hitting your target should be).
I think that's selection bias. There's loads of economists studying all sorts of things and the vast majority are nowhere near the halls of power. And a lot that are listened to are selected for saying politically palatable things despite their lack of credibility. Probably the most influential economist of the last 50 years is Art Laffer and it's because he can draw nice charts validating tax cuts are a good idea. He has almost no academic credentials behind this.
The problem is that the system in the case of the economy is composed of billions of humans, not machines. The economy is much more complex, which makes it harder to understand and forecast where it’s going. That doesn’t mean one is right or wrong. It just means there are limits to our knowledge.
And yet the electrical engineers have (considering) very little trouble keeping huge national and international electrical power grids stable. Despite billions of self-interested humans using electrical power with zero-ish regard for that stability.
Admittedly, it does help that those with the real power, whom the EE's ultimately serve, want stable electrical power grids. Vs. the folks who the economists serve want wealth, power, legitimacy, status, excuses for blatantly self-serving official behavior, ...and plausible deniability, when things keep miserably going wrong from the PoV of the 99.9%.
> just as the ancient priest knew that a cartload of grain burned as an offering to his god would not be available to feed the poor
Did any culture do this? The Greeks famously burned bones wrapped in fat for their gods, and there is a myth explaining how the gods had to be tricked into accepting the inedible part of the animal.
Chinese food sacrifices are placed in a position of honor for a while, after which they are taken away and eaten.
The gods don't actually want any food, so practices will evolve -- really quickly -- in the direction of not giving them any, or at least not making the gifts permanent.
Another point of view would be that those with power and wealth only listen to experts who tell them what they want to hear. If I’m already convinced A is good I can just ignore experts saying otherwise, then justify doing A because my experts said so.
That isn't helpful though, we need to understand some ideas of economics to make good decisions for innovation and maximising human potential.
Read "Why Nations Fail" for example - all nations are struggling with different parts of that: entrenched interests pushing for over-regulation to stop competition in the EU, NIMBY interests through-out the West blocking housing investments and free trade / movement in the housing market (planning permission, fees, rent controls, etc.), conservative landowners / aristocrats deliberately keeping their population poor and controlled whilst they live in luxury in developing countries.
> And compare to (say) the Federal Reserve's handling of the economy in recent decades.
Can you elaborate on this point?
It seems to me like the federal reserve has done a fine job with the tools/mission they have. Their goal is to manage growth and keep inflation within some reasonable bounds and they seem to be doing that ok. They don't have the power to build more housing, change zoning laws, or dictate how the government responds to a global pandemic.
"The thing is, you’ve been listening to the wrong expert. You need to listen to the right expert. And you need to know what an expert is going to advise you before he advises you."
Economics has an ideological assumption that equilibriums exist and that “markets” will tend towards them. Although this has some predictive capacity in a class of specific cases, it fails to explain observed phenomena in our world.
* Rise of social media. Classical economics would predict, that through low barriers to entry, there should be a nearly unlimited variety of social media platforms to choose from. In reality a few platforms dominate. Classical economics fails to account for network effects.
* Technological innovation. Classical economics treats technological innovation as a Deus ex Machima proofing into existence from nowhere. It has no predictive capacity over what and how people choose to develop new technology, such as the personal computer, networking, and smartphones.
* California energy crisis. After energy deregulation Enron, correctly realized, that if they shutdown one electricity generation plant, the demand for electricity would be so high, the profit margins on the remaining plants would overcome the profits lost from shutting the one plant down. Although this caused people to lose power, it made Enron substantial profits. Classical economics would predict that the higher demand would stimulate more production through higher prices. Classical economics does not account for long feedback loops.
As a result, we have entire subfields of economics devoted to the things that classical economics cannot deal with, such as Behavioral economics, or environmental economics. At a certain point this feels like the Ptolemaic model trying to make geocentrism work in the face of new astrological observations by making planets rotate within spheres in their orbits. By the time you get to 9 embedded spheres, each rotating within each other, you have to say the earth is not the center of the solar system and go with a different model.
Regarding social media, there are rather a lot of social media platforms: FB-Instagram-WhatsApp, TikTok, Reddit, Snapchat, LinkedIn, StackOverflow, plus platforms like the neighborhood app whose name I can't remember. A new social media platform can get rapid adoption, too, like TikTok. So I'm not sure that the barriers to entry are actually all that high, even with the network effect. The barrier to entry to building New FB is pretty high even without the network effect (knowledge, code, and worldwide servers to maintain a high reliability, always-available worldwide app, along with the sales/marketing to support the ad revenue). But even in an industry with obviously low barriers, soft drinks, nobody makes New Coke, you make a drink with a different flavor. (Even Coke could get New Coke to work!)
California energy crisis. . . . Classical economics would predict that the higher demand would stimulate more production through higher prices.
But since retail prices were capped, there no market method to stimulate more production, of which even unlimited demand could not stimulate construction due to regulatory delays.
> Economics has an ideological assumption that equilibriums exist and that “markets” will tend towards them
No? You're describing DSGEs [1]. They're useful because they're solvable. But the word stochastic is right there in the name.
> Classical economics would predict that the higher demand would stimulate more production through higher prices
No, it would call out market failure due to insufficient producer heterogeneity. This is like complaining about the equation for a line because a vertical line is causing a divide by zero error: you're out of scope.
> Efficiency is important, but we valorize it over other ends. Many subscribe ... to the stronger version that says that economists should focus on efficiency and leave equity to others, to politicians or administrators. But the others regularly fail to materialize, so that when efficiency comes with upward redistribution ... our recommendations become little more than a license for plunder.
I would say: the others do not only fail to materialize, they often point back at economists. If a politician wants to raise taxes, wellfare, or nurses' salaries, the opposing arguments are more often than not economic in nature, and rely on the invisible hand.
It does not follow that economists should take the place of politicians, though. Instead, they should be much more honest, open and direct about their claims, and also point out alternatives. They should, so to speak, grow a conscience.
Indeed. Politicians point back at economists, and economists usually answer "oh, it's fine, just deregulate everything and manna will trickle down from the heavens eventually". It would do them good to be a bit less full of themselves.
> this notion of Keynesian vs. Austrian and what have you is proof
This is like taking the existence of Darwinian and Lamarkian evolution as proof that biology is not a science. You're quoting caricatures of old ideas.
Given how economics (and science) are used in politics, not sure that would work. Usually economics are used to support an already made decision - then suppressing cherry picking is practically close to impossible.
I mean, I have a strong prior that while this may be true, it's also a mix shift effect, in that the countries with independent central banks also have better rule of law, better education systems and were richer than other countries before they introduced independent central banks.
> If a politician wants to raise taxes, wellfare, or nurses' salaries, the opposing arguments are more often than not economic in nature, and rely on the invisible hand.
Interestingly, the arguments for increasing salaries also rest on the invisible hand-like assumptions that higher wages make workers better/happier.
If you want to see arguments on these topics without much or any market based arguments I’d recommend looking into Soviet, Nazi or Maoist writings.
It’s the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. There’s a reason people will always call it something shorter; personally I don’t trust myself to spell Riksbank properly (I keep wanting to put a j in there like it’s Dutch or something), and the media have zero incentive to report on it as something like a “Riksbank Prize” because no one will pay attention.
just in case anyone think this is serious, the literal translation is of course "National bank" (Riks refering to Riket / "Reich" in German, meaning the nation).
Being as an article was just posted talking about an Economics Nobel Prize in its title, the comment seems certainly needed, and if it is not novel, then its repetition would seem necessary.
The problem isn't so much that economists don't know what they're doing. There are many questions which economists can answer quite clearly.
The problem is that economics has become the center of the entire operation of society, and is used inappropriately or where it is just irrelevant.
It should be self-evident that this is wrong; people don't care so much about being rich, as being richer than those around them. Far from being rational actors, human desires are easily manipulated. People who do not have anything to offer the market can't just 'cease trading', just as workers generally can't choose not to participate in the labor 'market'. Etc.
We need to operate society for the good of humanity, not for the benefit of 'the market' and 'profits'.
> We need to operate society for the good of humanity, not for the benefit of 'the market' and 'profits'.
Good of humanity is a hard to achieve/track goal, so we traded that in for an easier to track metric called GDP without realizing and caring how severely and violently the backlash from Goodharts law will screw us over. All you see today is a result of that.
One structural problem with macroeconomics as a discipline is that if you really understand reality better than prevailing macroeconomic theory, you have many better opportunities than being a theorist or commentator. And the value of these opportunities depend on you not disclosing your insights.
Eg trading, investing, entrepreneurship, working as an in-house economist bound by NDAs.
Most of it seems pretty good, but I'm not sure what to make of this one:
"It has also been plausibly argued that the Great Migration of millions of African Americans from the rural South to the factories in the North would not have happened if factory owners had been able to hire the European migrants they preferred."
In context, this is more than just an observation of potential cause and effect; the whole paragraph is about revising his previously-advocated policy positions: he used to think immigration was good, but he now sees a correlation between equality and low immigration. So what policy did he advocate re racist hiring policies at factories before, and what has it been changed to? Is he saying he used to be opposed to letting Detroit factory owners hire only whites, but now he thinks they should have been allowed to, because the Great Migration was a bad thing? Or is he saying he used to support letting Detroit factory owners hire only whites, but now he opposes it because the Great Migration was a good thing?
EDIT: OK, I think he was actually saying something else: the Great Migration happened in part because factories needed black workers; they wouldn't have hired black workers if immigration from Europe had been as open as it had been previously. So the Great Migration was good, and that good was partially caused by a clamp-down on migration.
He's saying that if borders at the time had been more open to immigration from Europe, the European workers could have displaced black workers who migrated internally (within the US that is).
I should not think he ever supported 'letting Detroit factory owners hire only whites', but rather he's saying that his previous position that immigration (from abroad) has little or no disadvantages to domestic workers did not take into account this example and he has adjusted his position accordingly.
That an economist, even one of great stature such as himself, would have been blind to endemic racism within the power structures of society is, well, the point of his article.
Just because it was good for the blacks who migrated north, doesn't mean it was good overall for the entire world. Or even for most blacks honestly. Maybe we would have seen bigger change in the south if the driven people didn't leave but instead stayed and fought the oppression. It's hard to argue good or bad when we don't have a control group...
Economics is more a branch of arts or humanities than a branch of science. Sadly many economists take that as a negative and over compensate with ever more elaborate nonsense.
I might be old-fashioned but I think being able to read a simple supply and demand curve is still worth the time spent learning it.
You can deduce (obviously not with 100% accuracy, obviously) the effects taxes, subsidies, shortages and surpluses will have on the price, supply and demand.
But I think most importantly, it gives you another tool for analysis of a situation. To be used along with all the other tools you're familiar with
Supply and demand aren’t observable though. Only their intersections, price and quantity, are observable.
Honest question: if we don’t know the shape of the curves, if we can’t observe them, and if they shift around according to unknown dynamics, what good are they?
People have a bunch of instincts honed by millions of years in small tribes. Those instincts appear to be calibrated around resources being vaguely fixed and depend on the tribe's foraging luck.
The supply-demand curve logic is an excellent argument to point out to people that, based on some basic and obvious axioms, their intuitions are dead wrong. They are justified with just that observation.
Take, eg, a crisis. Price caps in a crisis are a terrible idea that are about to make the situation much worse. There was a shortage, now there will be a bigger shortage. That seems to be unintunitive to most people but anyone who has had some basic supply-demand curve training can be talked out of imposing caps.
I'm not disagreeing with the point you are making but I do find it would be helpful if people referenced actual examples of these things happening in real world scenarios rather than thinking that a simple model is sufficient?
In my experience, which is not nothing, if you try that you'll end up in endless conversations where people go with some variant of "well it worked there, but it won't work here!".
Economists have been idly trying to figure out a way to pitch the idea that wages are a price and therefore subject to supply and demand model for decades. No luck so far; it is difficult to get a man to understand something when that thing is his salary.
Also, it is more interesting to try and find places where supply-demand doesn't work and then figure out why not. Usually the answer is regulation that creates shortages or overproduction.
If you want a specific example; masks in COVID. There were price caps that guarantee we'll be caught short of masks the next time a respiratory crisis rolls around. It isn't like Bill Gates didn't see it coming, if there was money to be made he'd have a strategic mask reserve ready to go for the next one. But no. Price caps. There was even an article about a US mask producer who was refusing to expand production because he knew how it'd play out, unless my memory deceives me [0].
[0] EDIT Found the article - https://www.wired.com/story/surreal-frenzy-inside-us-biggest... . Bowen doesn't mention price caps, but you can see he is no stranger at all to how that sort of medical crisis plays out. He'd be the sort of person in a great place to make decisions about what sort of surge capacity to have on hand and how to plan for it and he is mainly responding to basic price signals. I still suspect that he'd be sensitive to the eminent domain risks under crisis conditions.
Price controls are bad in textbook economics but they can actually work well in certain circumstances. See Weber’s “How China Escaped Shock Therapy” and Galbraith’s “The Theory of Price Control.” This is the problem with supply and demand as the master theory of everything, it leads people to be overconfident theorists and ignore evidence.
What a good example of how bad economic modeling is for real world applications.
If there is a crisis for a critical good, the only solution that works is to throw the market out altogether and create a temporary planned system of rationing. If five people are on a desert island with five watermelons, allowing the billionaire to eat all five because she has more money is not going to help. Similarly, if a nation can't produce or import enough food (e.g. in war time), you not only cap prices on food, you ration all the available food to try to make sure no one starves to death even if everyone is left hungry (or in even worse crises, allow people who wouldn't survive anyway to starve so that those that have a chance can get some rations).
In reality, even for much milder crises, finding extra supply if prices are allowed to rise indefinitely happens rarely. Letting prices rise to any value is typically just a way to make sure the existing suppliers become filthy rich, it rarely does anything else.
Of course, there are limits. If the government capped smartphone prices at 1$, we wouldn't actually get 1$ smartphones, we'd see the supply plummet to 0.
Supply curves are very observable. They are in fact about the only concrete thing you can get in economics. The demand curve on the other hand? That thing is borderline made up magic.
But the reality is the inputs need to be known to make the curves. Supply curve is 'easy' as you know what it takes to build X number of items. So you can make that curve easily. The hard part is the other curve. How do you know I can sell X of an item. Is there demand there? 'utility' 'happiness' and other things like that make up that curve. But how do you measure those inputs? If you have been around awhile you probably have a good idea where your curve is by seeing it in action, but the inputs for it you are usually guessing. But starting out? Not really. What really bakes someone's noodle is the supply curve can affect the demand curve.
You want to get as close to MR=MC as you can. But that is not always achievable. As you point out the curves move around. But that is on you as a business owner to make sure your prices are in line with your demand.
Sometimes we can get quite close to getting the curves (could always be different tomorrow, some measurement and modelling issues etc.), but they are not always as inaccessible as you make them out to be. For example:https://www.nber.org/papers/w22627 ; (financial) markets with a CLOB also give a somewhat direct view on at least parts of the curve.
In some situations I agree you can get a rough and ready sense of one curve or other. Certain types of auctions, and order books for financial markets are examples (though I think your link is broken!).
Even with order books though, they just provide point-in-time snapshots. It’s well-known that buyers will get a better fill than what’s shown in the book if they break their order up over time: that’s why it’s normally to trade VWAP.
These are definitely the exception rather than the rule. I work for a financial services firm and I can confidently say we have no idea what would happen to demand if we cut our fees.
I agree that things are often ephemeral to some extent.
I'd say modelling trading impact and trying to optimise around it is actually quite intense modelling of supply and demand at times.
But have you actually tried to establish elasticity and run experiments to that end?
In all my time in industry, I have mostly not seen efforts to do that, but when people did that it actually was quite successful in increasing revenue.
The purpose of knowledge is to give you enough confidence to invest/participate in a market.
The trouble with tools is so few offer any predictive power at all. You just get drowned in data and options. They're all so heavily dependent on context (the important variables often difficult to identify) and survivorship bias that I think their main use is to reassure us to stay on the ride.
I started to heavily pay attention to economics about 15 years ago. I thought economists had a decent grasp on things, given the massive complexity of it all. Going through the pandemic and post-pandemic era, I can only conclude that economists and their ilk have no idea what they are doing. Nobody is getting anything near correct anymore. I don't really care anymore to try to predict things, and I don't really care what other people predict, because while there is a small chance the guess correctly, it is only a guess. Instead, I just read and watch mostly factual information to just pay attention as it plays out. So now I'll read Freightwaves or Wolf Street or mining.com just to see what is actually happening, and care less about any commentary that isn't explanatory.
The author never mentions the straw that broke the camels back. They talk a little bit about AI but not enough to make it seem like that’s what changed their mind. They talk some about immigration, free trade, social justice but not really at length. I wonder what changed their mind.
There is a major problem with economics: only Economists care about economics, while all media cares to use economics as propaganda, and that is it's effective purpose in our society, not economics and the study thereof, but to use as a conforming society utility.
Mass media caters to the popular demand, so what you see is likely a mirror of average lay interest in the economics (or, broader, in any knowledge about how the world works). For example, if a person believes that government is ought to get him, he will only read and watch the information that fits his belief, because chasing other opinions will just emotionally ruin his breakfast or a coffee break.
Media is the entertainment, not the university where you go to change your world view.
The reason some peope try to use media for non-entertainment is because other forms of knowledge lag months and years behind the present moment - so we have to extract knowledge from the entertainment. You can see it even on HN, where opinionated and anecdotal articles are regularly submitted and get to the top. There is no way to filter out accurately reported data from the entertainment pieces which were upvoted because they are relateable and fun.
There is no Nobel Prize in Economics. 67 years after the Nobel Prizes were given out, the bank that Alfred Nobel entrusted his estate to started handing out prizes to Milton Friedman, Fredrick Hayek and so forth. Even the bank doesn't call it a Nobel Prize, it calls it the Bank Prize in Nobel's memory.
Prizes are given to people like Fleming for discovering penicillin, then over a half century later it's accolades are diverted to these fabulists.
A great article about how economics, economists, and econospeak are political tools used to mean anything at anytime, including opposite things at the same time (Australian political examples):
I can't believe that this person didn't have these doubts the whole time and just kept towing the party line because it was easy and popular. Now in their winter years, there's feeling of remorse. This sort of self serving reflection is nothing more than trying to have the cake and eat it too.
Economic theorists have done so much damage to real people. They don't know what's going on and they don't act in good faith.
> ..Economists, who have prospered mightily over the past half century, might fairly be accused of having a vested interest in capitalism as it currently operates.
> Without an analysis of power, it is hard to understand inequality or much else in modern capitalism.
> After economists on the left bought into the Chicago School’s deference to markets—“we are all Friedmanites now”—social justice became subservient to markets
> ..We have largely stopped thinking about ethics and about what constitutes human well-being. We often equate well-being with money or consumption
> currently approved methods, randomized controlled trials, differences in differences, or regression discontinuity designs, have the effect of focusing attention on local effects, and away from potentially important but slow-acting mechanisms that operate with long and variable lags
> today large corporations have too much power over working conditions, wages, and decisions in Washington, where unions currently have little say compared with corporate lobbyists.
> Economists’ enthusiasm for technical change as the instrument of universal enrichment is no longer tenable (if it ever was).
> [I] am even skeptical of the claim..that globalization was responsible for the vast reduction in global poverty.. I also no longer defend the idea that the harm done to working Americans by globalization was a reasonable price to pay for global poverty reduction
> [I] am even skeptical of the claim..that globalization was responsible for the vast reduction in global poverty.. I also no longer defend the idea that the harm done to working Americans by globalization was a reasonable price to pay for global poverty reduction
But that "harm" was coming regardless. The rest of the world had rebuilt after WW2 and is going to compete.
Now those working Americans can enjoy cheaper goods from globalisation and everyone becomes richer.
Protectionism just keeps everyone poorer in the long run. It only makes sense when you need to build or maintain specific local industry due to geopolitical concerns or to improve the general level of education and productivity - like in China in building their own Tech industry.
Something which happened post 2009 was the economists, especially krugman's major failed predictions, was that we do not live in a free market.
The entire 'gamestop' thing was about proving this and they utterly destroyed a few brokerages. ESG is basically dead at this point.
There's a political movement which has failed, it's crescendo was in 1989 but is strong even today. It's the movement which is destroying South Korea and Japan. Some of Europe, especially Canada.
We're watching the last bit of their existence in politics. They will soon migrate to being a religion where they belong.
Its not that the economists dont know what they are doing, they have a martyr political movement ready to burn everything down as they stop existing and this makes economics quite hard when you dont account for this.
Luckily, it appears that Canada will be the beacon of freedom in the future.
> The entire 'gamestop' thing was about proving this and they utterly destroyed a few brokerages. ESG is basically dead at this point.
This is incoherent; people getting memed into buying a dying retailer and losing money in the process proves nothing, and ESG is now pretty deeply ingrained as it becomes impossible to ignore the side effects of not caring.
>According to financial analytics firm S3, GameStop's peak short interest was 141.8% of its float on Jan. 4.
So what was discovered was that the system was rigged. It should literally not possible to do this. So you buy in and those shorts eventually have to buy your stock from you and you get to decide how much $ they owe you. Aka infinite money.
turns out it was a problem unique to the USA markets. The government enabled this, the government broke the free market. But why? Who did this? People needed to investigate.
>nd ESG is now pretty deeply ingrained as it becomes impossible to ignore the side effects of not caring.
Turns out this ending of the free market was done in the name of ESG. So you have the government picking winners and losers intentionally.
When Russia declared war on Ukraine. ESG pretty much died. Europe pretty much signed up for decades of fossil fuels.
But this last article is incorrect. A political movement that isn't in power is not winning the war. ESG is losing the war and taking massive losses on their own. This is the huge fear of elections. If free markets are re-enabled, ESG takes even bigger losses.
I dont know if Trump winning later this year will have major impacts on this at all. As far as Im aware he isnt aware of any of this because he could have fixed it during his 4 years.
>impossible to ignore the side effects of not caring.
When you acknowledge that the free market is broken. Economists know this as fact now. It's a government manipulated market.
You can look into what those side effects really are and the political movements producing what you believe is 'impossible to ignore'
But as I said, we're in the last hurrah of a major political movement. Gen Z has rejected them and should usher in solution to political polarization and the echo chamber problems.
This political movement will shift to become a religion and that's where it will last.
Article is paywalled, but in the introductory paragraph it says "we did not collectively predict the financial crisis" - that isn't the job of an academic economist and I'd bet that most economists could see the crisis coming a mile away. It is rather obvious that any number of crisis are coming towards us at any given time. Trillions in misallocated resources are not hard to spot.
The public, politicians, and to a lesser extent the media have very little time for anyone who is pointing out the obvious negative consequences of bad economic management. There are still regular fights over the minimum wage, which shows how much of an influence economists have over the public discourse. Whatever stance someone prefers, it is near certain that the economists have figured out a consensus position.
The real issue is that when the government is doing something poorly advised, there is a lot of money floating around for economists who will give poor advice that the politicians want to hear. They're Keynsianists when the Kaynesiyan strategy is printing money. Their all believers in MMT when MMT says print money. They aren't believers when rates go up, they're generally against economics then.
A crisis is always coming if you wait long enough, but how far off is it, and how severe will it be? Where's the bottom of the crisis and when does the recovery start, etc? Economists only ever justify history. They have no predictive power.
My undergraduate degree is in Economics. Here's my $0.02 on this topic:
You can divide the field of Economics into two branches, Microeconomics (the study of how prices and produced quantities are determined in an individual market, for example the market for cars) and Macroeconomics (the study of the overall economy, particularly concerned with overall price level and employment level determination).
Microeconomics can be subdivided into partial equilibrium (the "ceteris parabus" assumption, no feedback effects from related markets) and general equilibrium (incorporates feedback effects from related markets). Macroeconomics is then just general equilibrium microeconomics for all markets in an economy + the market for money (MV=PQ equation from the blog).
Most of (partial equilibrium) microeconomics was developed by a handful of engineers in the mid 1800s. The math is pretty simple, just differential calculus really, and there are only a few variables - supply is determined by marginal production costs in a production function, demand is determined by individual preferences subject to a budget constraint (income) and the presence of substitute goods.
General equilibrium microeconomics came 100 years later and required far more advanced math - the Brouwer fixed point theorem and convex set theory from topology. It was a pretty remarkable achievement. But almost immediately, mathematicians working in economics started finding problems. In a nutshell, the conditions required for an equilibrium to exist, to be unique, and to be stable were incredibly restrictive and almost certainly never met in the real world. If you want to see the math behind this, search for the Sonnenschein–Mantel–Debreu theorem (Debreu was one of the people who developed the original general equilibrium model).
Macroeconomics developed alongside microeconomics and much of it was developed before the math behind general equilibrium micro was known. Macro adds the additional complexity of markets for labor (which have several unique qualities vs the market for goods) and more importantly the existence of money (traditional micro models are all barter models). It also adds a time dimension (traditional micro models are non-dynamic equilibrium models with just a short term and long term distinction). Even the most advanced macro models today are still extremely primitive in their assumptions - money is treated simply as a token like any other good or as an advance constraint, time is treated as discrete, etc.
Note that I am talking about the core models themselves here. The presence of "market imperfections" such as externalities, monopoly (pricing) power, and asymmetric information (all of which are ubiquitous) have long been known to render the models useless even if all of the impossible to attain core assumptions were met.
TLDR: The most advanced economic models all make assumptions that are never actually satisfied in the real world and the math to try and resolve these issues is completely intractable.
Yeah, I regularly see (and attend) talks on reproducibility, repeatability, and replicability. It’s a problem in some areas, but not exactly hidden away. It is openly discussed and people are actively seeking solutions.
I would argue the most serious of disciplines ask themselves this question constantly. This is because a serious discipline will be pushing the boundary of human knowledge and that necessarily comes with a boatload of failure and uncertainty.
Its getting downvoted because its using weasel words to make a non-falsifiable statement, which is annoying rhetorically. Depending on which side you are on, you can either claim there are other fields the opponent just haven't thought of, or you can claim that a specific mentioned field isn't a "real" field (e.g. flat earthers would fit, but i don't think that is the sort of thing that is meant)
By definition, the replication crisis wouldn't apply, since it is a crisis because people in those fields are asking the question. Hence those fields would not qualify for the grandparents point.
The downvotes are because the comment is not contributing to the topic at hand.
It tries to derail the topic by saying the same applies to other unrelated things.
And then it also fails to materialize that unrelated claim by not mentioning which other fields they are referring to or giving any evidence for the claim.
It's a modern HN thing, back in the day downvoting was reserved for really obviously off topic stuff, like spam. Now people use downvoting like on reddit, as an "I'm angry and I disagree" button
That would be very difficult to say since we've never really been in an Austrian economic system. Austrians will point out that the knob twiddling done by Keynesians is a method of postponing or spreading out the pain of a recession over a large number of years. You can only do that so often before this creates a self-reinforcing mother-of-all-recessions where the accumulated debt and unhealthy investment comes crashing down.
We have pushed our debt forward to our grandchildren since 1971. This is morally repugnant and hardly humane.
Given how heterodox the Austrian school is: what would it even mean to have an Austrian economic system and how would it differ (and some Austrian ideas are part of "mainstream" economics anyway)?
> what would it even mean to have an Austrian economic system and how would it differ
It’s difficult to know exactly, but you would have an unmanaged system. No reserve bank, no stimulus, no regulation, minimum to no restraint on trade depending on how anarchist the Austrian Economist happens to be.
People could decide privately on banking regulation, but then it's quite close to a meaningless distinction between government and people as both would effectively coerce holdouts.
For stimulus the current sizes are just beyond any other organization. Could perhaps be some distributed system, but then why would it be better than delegation?
> societies tend to put some limits and controls in place.
It’s not just a tendency, societies always have limits and controls in place. The anarcho-capitalist wing of Austrian Economics would propose limits and controls too, but not centrally controlled involuntary limits and controls. There’s no real world government, nations relate to each other in a more or less anarchic manner where the limits and controls are voluntary but the consequences short of war are being sanctioned ie not being traded with. Anarcho-capitalists would probably propose a system like that for individuals. Would that require a different kind of person? Maybe, my own views certainly differ with them.
mother-of-all-recessions where the accumulated debt and unhealthy investment comes crashing down.
that happened in the U.S. was before Keynesian principles were used. It was the use of Keynesian principles that helped FDR win 3 elections.
Im not an economist so anyone with a moderate amount of training will run circles around me in a discussion about economics. So I’ll just say two more things. Your comment about Austrian economics never having been implemented reminds me of leftists who say communism has never been implemented so we can’t say communism doesn’t work. Secondly, before Keynesian economics recessions and depressions occurred much more frequently in the U.S. The data seems to clearly point to at least some level of success of Keynesian economics.
> Secondly, before Keynesian economics recessions and depressions occurred much more frequently in the U.S. The data seems to clearly point to at least some level of success of Keynesian economics.
Having some recessions and depressions are healthy. There needs to be a mechanism to punish people who persist in allocating capital in wealth-destroying ways.
The US has real problems with capital allocation. All the manufacturing capital seemed to be invested and created in Asia and there is a retirement crisis because a generation didn't prepare appropriately for old age. There isn't a way to run a counterfactual, but the US has been on the warpath to protect people from having to recognise that they keep giving their money to charlatans. That means it all gets wasted, instead of just some of it being wasted.
>a generation didn't prepare appropriately for old age
This will have a snowball effect because their children will need to support them and save less for their own retirement, then their children's children and so on.
In all fairness, it's tough for most people to save with massive recessions/depressions with mass layoffs every 10 years and near zero interest rates on savings accounts for 20+ years now. Add to that wage pressure from offshoring and things like NAFTA and 2-3% regular inflation targets.
Also, the government won't keep social security payments up with inflation and they tax it. Just more ways to keep the people down. If only we spent the $34T we now have in debt since the 80s on something less frivolous.
> There needs to be a mechanism to punish people who persist in allocating capital in wealth-destroying ways.
But the cost of recessions, especially pre-Keynsian ones, falls most heavily on workers?
> but the US has been on the warpath to protect people from having to recognise that they keep giving their money to charlatans
They keep electing them. There's a huge popular demand for charlatans backed up by the charlatan news channel. It's probably going to result in a Liz Truss level financial disaster at some point.
> But the cost of recessions, especially pre-Keynsian ones, falls most heavily on workers?
I dunno, does it? Why do you think that? Who is the cost of bad capital allocation going to fall on? I'm not expecting any millionaires to go hungry or do without in their old age, or lack housing and goods in their youth. The people eating the brunt of it are workers. They can't save money.
> Your comment about Austrian economics never having been implemented reminds me of leftists who say communism has never been implemented so we can’t say communism doesn’t work
Maybe, however the difference being that there are many countries and regions that have claimed to be communist for over a century but none that have claimed to be adhering to Austrian Economics.
> pretty much every country implemented Austrian economics principles
Looking at history I’m seeing pretty much every country having a government controlled and manipulated currency, mercantilist restraint of trade, guilds and unions with government enforced monopolies fixing prices, central banks, pseudo-governmental corporations, and on and on. Those are all antithetical to Austrian economic principles. Can you point me to the overwhelming historical examples you were referring to?
1870 U.S. is one example. There was restraint of international trade but that trade wasn't much and it didn't have the capacity to be much. A continental sized country at a time when transportation was still limited that used a gold standard satisfies the condition of "implemented Austrian economic principles".
They were implemented in the same way one says that communism has been tried and it failed. It wasn't true communism and it wasn't true Austrianism. Government intervention has shortened recession/depression lengths and lengthened the time between them. It's a lot better than Austrianism.
I'm not going to convince you of anything and vice versa. My comment is for anyone who happens to be reading the thread. Hopefully they will have read enough perspective on this to make a semi-informed decision.
> A continental sized country at a time when transportation was still limited that used a gold standard satisfies the condition of "implemented Austrian economic principles".
Merely having a gold standard in a nationally regulated currency where contracts in that jurisdiction must accept payment in that currency in order to be enforceable is not an implementation of Austrian economic principles.
> They were implemented in the same way one says that communism has been tried and it failed.
You say the examples of AE implementation are overwhelmingly numerous, you give one extremely dubious example of a single superficial similarity to back that up. Can you even point to a single country that claimed to be implementing Austrian Economics? I can point to any number of places that claimed to be Keynesian or Communist, and even one or two that were giving Friedman a try but no Austrians. Your comparison to Communism are nonsense.
Hard to claim to have implemented a system before a word for that system was invented. Small groups of people were wildly successful in implementing the idea of shared ownership/responsibility way before the word communism was invented.
Lots of large societies had systems of governance where the vast majority of the economic system was free of government control/safeguards and where the value of the currency was not controlled by the government. As societies grew larger/complicated and concentrated more in urban areas people became aware that government intervention was a good thing if done properly. As with all things if done badly then the intervention is not a good thing.
>Hard to claim to have implemented a system before a word for that system was invented.
You said "pretty much every country" had implemented them, and the name has been around for well over a century, it's actually one of the older active schools of Economics these days, we have hundreds of countries and many more in recent history and none of them have claimed to have implemented Austrian Economics? The comparison remains total nonsense.
I'd prefer to solve problems individually and treat economics as just that. If there are other problems in other areas of society they can be addressed, but I'm not interested in creating a study of economics that doesn't focus on the principles.
Milton Friedman's Thermostat
If a house has a good thermostat, we should observe a strong negative correlation between the amount of oil burned in the furnace (M), and the outside temperature (V). But we should observe no correlation between the amount of oil burned in the furnace (M) and the inside temperature (P). And we should observe no correlation between the outside temperature (V) and the inside temperature (P).
An econometrician, observing the data, concludes that the amount of oil burned had no effect on the inside temperature. Neither did the outside temperature. The only effect of burning oil seemed to be that it reduced the outside temperature. An increase in M will cause a decline in V, and have no effect on P.
A second econometrician, observing the same data, concludes that causality runs in the opposite direction. The only effect of an increase in outside temperature is to reduce the amount of oil burned. An increase in V will cause a decline in M, and have no effect on P.
But both agree that M and V are irrelevant for P. They switch off the furnace, and stop wasting their money on oil.
[1]https://worthwhile.typepad.com/worthwhile_canadian_initi/201...