Modern Economics

You've dodged once again, which only underscores your inability to apply a logical thought process to develop a rational response. I will not tolerate your dodging.

Is your argument invalid?

 

I'm not interested in prattle about that gibberish either. You've been set a task: How, according to labour economics, are wages determined?

I won't bother with you until you try and answer it (and that's being generous)

 

Your irrelevant questions are unimportant. You've just been shown that your last 2-3 pages of posts have consisted of nothing but comments devoid of logic and consistency.

You are unintelligent.

 

I'm not sure about that. Full blown Marxism may be easier to model than free market capitalism, but both are beyond our ability to even collect all the pertinent "initial conditions", let alone predict future events.

My question is what is the purpose of economics? Is its value historical, (figuring out what happened), optimizing today (maximizing short term gain), or predicting the future (maximizing long term gain - tempering booms, thus busts).

Or, do we continue to let those with a political agenda (all sides) use their "unerring understanding of economics" to hammer their opponents.

 

You need to go even further back and ask "what is economics?". Grossbard-Shechtman (2001, Journal of Socio-Economics) puts it in lovely lingo:

In sum, economists can be thought of as a tribe of farmers whose tools and practices evolved in a homeland with a distinctive climate and topography. In recent decades, these tribal farmers have invaded territories traditionally cultivated by other tribes. They carried their tools and their practices with them, tools and practices that were developed to cultivate the soils in their homeland, and they found they could grow certain crops better than the natives could. But they also learned new tools from talking with the natives, and when they returned to their homeland, they discovered that some of these imported tools contributed to their productivity in homegrown crops...At the present time there are no clear rules for membership in the economist tribe. Two criteria for membership are most prevalent: reliance on formal and rigorous models and emphasis on the study of market-related behavior. The first trait is not characteristic of this tribe alone, nor is it characteristic of all economists. In particular, the assumption of rational choice underlying many economic models is frequently found in other tribes as well. Emphasis on markets is more typical of economics. Even where economists study topics such as marriage, a topic traditionally researched by sociologists and other social scientists, an emphasis on marriage market analysis characterizes contributions by economists

 

Interesting tale, but it doesn't answer "what is economics".

A better description for the economist in Grossbard-Shechtman's tale is the shaman that compares yields with the tools being used, to identify the best tools.

The rub comes in when they apply that research to a new set of conditions, and yield falls. They repeat the studies and confidently move into yet another territory, only to learn that their prior two studies didn't apply. This goes on for each and ever new territory, and to a lesser degree to each field.

No matter how they try, they can't "optimize" all their holding with a single set of tools, no matter how extensive.

Physics will come up with a "theory of everything" long before economists do.

 

Because there isn't a simple answer. We can't refer to simple definitions such as 'study of scarcity'; neither can we suggest specifics such as optimisation. It becomes a broad multidisciplinary discipline with a set of tools that exhibit some similarity, but with very different focus according to the 'type' of economist you favour

 

the study of a few variables in a complex multivariable system with little defined functional relationship between any of them.
But it does keep otherwise useless individuals employed at universities, endowed heavily by the private shareholders of western central banks.

 

This is nonsense. The specifications adopted are, by definition, based on theoretical analysis (e.g. we'd of course expect wages to be a function of education and age)

You're making the other fellow look studious with this remark!

 

how neat. Only two variables.
What is the functional relationship ?

 

Just 2 of many. We'd of course also control for potential effects such as compensating differentials. You're wasting my time. Bye

 

"we'd of course also control"...................seems like you're wasting your own time.

 

What was your purpose for posting Grossbard-Shechtman's tale?

 

Can you explain why Regression analysis is invalid in economics? Why on earth would allowing adjusting for multiple variables be invalid for economics? Not sure why a statistical tool would work with one complex system (astronomy) and not another (economics).


Furthmore, can you go into more detail as to why some maths are ridiculous when applied to economics? What is wrong with calculus? How can we rigorously prove optimization without it? Should economists not model their theories? Don't you think this
1. ensures consistency
2. clarifies thinking
3. shows hidden assumptions?

My example for #3 is a lot of libertarian arguments for market are actually based on the perfect competition model. If I had not worked with this simple model or deviations from it (monopoly etc), I would probably not recognize this, ESPECIALLY if I were a laymen. The math forces people to acknowledge they are assumed perfect information for instance.

You've reference that the economy is a complex chaotic system several times. You've used this to attack economics empiricism. However, you even note in your first post, this doesn't really apply to microeconomics! Interestingly enough, that is where most of the math is used, which you also seem to appose.

 

For the record, I don't think regression analysis of economic data (or more generally, econometrics) is entirely useless - my issue is its use in the arena of public policy. Insofar as it can help predict a certain outcome (inflation, stock prices, etc) with a higher success rate than random guessing, it can be a helpful tool. It's just not a science. So when economists refer to "results" or "conclusions" in economics, I tend not to take them seriously. In hard science, reseachers have the ability to conduct repeated experiments in similar or identical conditions. The quality of data available to them upon which they can apply various statistical analyses is far superior. This is why there has never been a repeatable contradicting observation of a law in a field such as physics for example - a field in which terms like "results" and "conclusions" are appropriate due to this very reason.

Also, "lot of libertarian arguments" are not based on any model of competition. They are based on deontological ethics - specifically the nonaggression principle.

 

But that is just a subset of economics! There is a whole lot more then public policy.

Insofar as it can help predict a certain outcome (inflation, stock prices, etc) with a higher success rate than random guessing, it can be a helpful tool. It's just not a science.

I'm not sure this is always true. I'd think many biologists (depends on what type of biology, of course!) would face problems similar to economics. Studing differences among animals may be even more difficult, as at least humans are easier to relate to.

Interestingly enough, this argument is actually circular. Experience in physics tells us we can trust experience in physics. However, humans instinctively accept things like that, or we'd all be driven insane.

I meant utilitarian libertarian arguments. E.G. discrimination will decline with time, as employers face pressures to pay according to marginal productivity.

 

I don't think so. From what I have learned, it is clear that the theory of games serves as the foundation of all of economics (and ethics and political strategy, besides). Just look at the PARTS model that game theorists Brandenburger and Nalebuff use to describe the situation of the firm. This model both incorporates the insights of the Theory, while being able to explain its deficiencies, and correct them in a much more comprehensive framework.

The market, of course, is never going to be solved like checkers has been solved, or like chess may be one day. But: in both the case of applying sophisticated mathematical analyses to describe market activity, and in the elaboration of a conceptual framework that explicates why the simple quantitative modelling of the Theory is inadequate, game theory is the royal road to the doing of social science.

 

Game theory is just an improvement on the modeling of interaction. Its mere machinery. The real interest is the likes of behavioural economics where we can improve our understanding of motivation and the characteristics of different economic agents. By itself game theory is of little interest. Take MAD. Can it understand how nuclear arms races have evolved? Nope! Indeed, it only describes that the deterrence is unstable and how- with just minor changes in the game- there can be an incentive to use such weapons. We're then left with a 'so how come only the Americans have used them in WW2?' vacuum

 

My son got into Texas Holdem, but being he didn't like to gamble, he read 20 books on the theory of the game, and memorized the odds. Then he went into the casinos to play, where he learned that the other players weren't playing by the rules. Those that should have folded, didn't, then got lucky and won the hand. With a table full of people that didn't play by the rules, his expertise had enough value that he never had a losing night, but he didn't win enough to justify his time, either.

The point, is that Game Theory, like Texas Holdem, is best when people play by the rules. Texas Holdem rules are complicated, but nothing compared to Game Theory. There are certain games that work like the Prisoner's Dilemma, but in general Game Theory is twarted because people aren't logical. That isn't surprising, even those well versed in Game Theory have difficulty with the math and logic required.

Economics compares to Game Theory like tic-tac-toe compares to 3D Chess.

 

Indeed! Sums up a deliberate naivety, a form of dissonance removal, where labour relations are ignored. Using maths or econometrics isn't a problem. Deliberately ignoring how economic rent is created, however, most certainly is.

 

Well, the Prisoner's Dilemma is the prototypical result of game theory, demonstrating the deficiencies of the operation of the Hidden Hand. Moreover, game theory goes some distance in helping to explicate the logic of altruism, the great bugbear of the Theory. It was these results, that showed in a formal way the deficiencies of the Theory, that has prompted much of behavioral economics in the first place. As for the question of the precise path by which nuclear war was avoided, you need to keep in mind two things: 1) leadership's stated preferences were probably different than they actually were - that is, they did not prefer first use to no use. That consideration scrambles the Nash equilibrium which would otherwise favor war. 2) we came close to war on a number of occasions, typically because of faulty signal detection (theoretically and literally speaking). We got lucky.

Again, my point is not that game theory solves the market. But it is the sine qua non for us in understanding markets (and all other forms of strategic decision making)

 

Well, typically market competition is not solvable, in the sense of being computable. If you could achieve the Holy Grail of computing the market, you could of course make yourself extremely rich in a brief time. Now, a gambling game like Texas Holdem is a well-defined kind of competition - the variables can be managed by individual decision-makers, to ensure that their average expected payoff over a reasonable iteration of rounds of play, will be positive. Now, there might not be a whole lot of reward in that, but reduced reward here might be in tradeoff for reduced risk.

Fraud can be introduced into any form of competition. Game theory explicitly accounts for this, and discusses techniques for ferreting it out. Game theory conduces to strategic decisions which might not meet with success in any given round, but which nonetheless maximize average expected payoffs over time.

 

Nope. That describes only how interaction can lead to an inefficient choice (e.g. how an arms race develops because of problems with trust). The invisible hand is a market phenomenon, with the price mechanism being an information surrogate.

Its not too difficult to understand altruistic behaviour within standard economic models. One just needs a more advanced utility function. Game theory is then again just mechanics! See, for example, how you can develop an understanding of aspects of family life (e.g. rotten kid theorem) with traditional maximisation models.

Behavioural economics has always been at the forefront. See, for example, Keynes. Understanding the deficiencies of the model isn't dependent on game theory at all. We just need to question the 3 pillars: rational economic man, methodological individualism and equilibrium. Behavioural economists will gladly use game theory to help show problems. However, we're again just advertising that game theory is just a tool (and a mechanical one at that)

No. We just need to show the payoffs. Those payoffs of course are no different to how the game started (i.e. the arms race) and how it develops into MAD. You'd have to argue that, as soon as a first strike capability is available, all payoffs change. Terribly convenient (and only describes the limitation in the game theory approach to this issue!)
That consideration scrambles the Nash equilibrium which would otherwise favor war. 2) we came close to war on a number of occasions, typically because of faulty signal detection (theoretically and literally speaking). We got lucky.

Its an useful tool, nothing more. And, asI have indicated, there can be a tendency to apply it too much. Typically that's a temporary thing though and part of 'playing with new toys'. We saw that with maths, for example, and how economic theory has since become more reliant on non-mathematical approaches (such as institutionalism in the theory of the firm)

 

Hmmm... I clearly don't understand as well as I thought I did. Allow me, to gracefully concede.

 

No problem. Technically we're both right and, to a degree, I've dug my heels in