What's Wrong with Current Economic Models

Discussion in 'Economy' started by william the wie, Jun 4, 2010.

  1. william the wie
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    william the wie Gold Member

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    I see a lot of people whose opinions I respect quoting Keynes, Friedman, Hayek and others in posts on here in the economics forum. Just like with Newton and Galileo the errors of these men was caused by a lack of data that no one realized was needed until a new hypothesis was proposed. Since such men died or retired from active research several errors in their various models have been discovered and no one has yet fashioned a new economic model with fewer and more subtle errors. So a quick survey of some of those errors.

    Monetary policy. Friedman got his Nobel memorial by showing the harm caused by the 1927-33 deflation, while Hayek got his by showing that the deflation Friedman denounced was caused by the inflation of 1921-6. Keynes demonstrated no knowledge of how the money supply worked (he simply proposed a refutable general theory as a guide to policy and research) and more or less accepted the earlier Fisher model as right. Despite refutations by both Hayek and Friedman the Fed, Congress and most administrations are still running with the Fisher model.

    Economic man. The Adam Smith model of economic man was disproved by biologists in the 1960s and this refutation was popularized by Dawkins in "The Selfish Gene" in 1976. This spawned behavioral, neuro, evolutionary and other economic models. To give one example of many at least two different popular multigenerational spending models were spawned from the observation that all living creatures conform to a model of maximizing great-grandchildren (or equivalent in genetic income). The two popular models were developed by the late William Strauss and his still living partner Neil Howe and their model competes with the more rough and ready HS Dent jr. model.

    The Bell shaped, normal or Gaussian, distribution of economic outcomes. Since I only speak pidgin statistics I can only suggest reading lists if anyone is interested. So far as I can tell there are no normally distributed economic outcomes of significance and a lot of fighting over what models apply to what outcomes.

    The product life cycle as applied to services has taken everyone by surprise. For example the development of DARPAnet into the worldwide web was not forecast by anyone. Likewise the use of computer chips to provide information in just about everything but food and sex is still going strong.

    So what biggies did I miss?
     
    Last edited: Jun 4, 2010
  2. Oddball
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    Oddball BANNED Supporting Member

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    The problem isn't with the models in and of themselves...The problem is that there is a level of gubmint interference in markets --global, national, state and local-- that is unprecedented in human history.

    How can anyone expect any conclusive results for any model, with so many imposed-from-outside and unpredictable factors?
     
  3. Paulie
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    Paulie Platinum Member

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    I'll just say that with something like laissez faire, or anarcho-capitalism if you will, there are still plenty of unpredictable factors.

    I don't think there is any ideology that avoids that. But that is actually what makes economics so interesting. The human element will always create new game changers.

    This all being said though, nothing beats allowing human beings to learn and grow from their own trials and errors.
     
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  4. Neubarth
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    Neubarth At the Ballpark July 30th

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    Knowing what a totally inexact science Economics is, (Is it scientific at all?) I know one thing and that is that if we do have it right today, we will probably be wrong tomorrow.
     
  5. william the wie
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    william the wie Gold Member

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    Have to agree with you. Being a libertarian myself I find some of the garbage spewed by the libertarian junior league just plain silly.

    Every time for at least 3,000 years whenever Russian has lost shipping rights to the Bosphorus grain prices and farmland elsewhere has experienced a bubble that burst when shipping resumed. But free market bubbles purportedly do not exist.

    Free markets are supposed to be self correcting which must explain why the US onions futures market was abolished in the 1950s. Mandlebrot's "The (mis)Behavior of Markets" gives a brief sketch of the problem but why there was such a bull run on onions is still pretty much of a myatery.
     
  6. Toro
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    Toro Diamond Member

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    I own that book, but haven't read it yet. Another good book is Manias, Panics and Crashes.

    Usually, markets are efficiently self-correcting. But sometimes, they go bananas. And the consequences from an insane self-correcting market can be catastrophic.

    I came out of college a dogmatic free-marketer, but after spending nearly 20 years in capital markets, I observed behavior that completely contradicted many things I had read.

    For a market to be efficiently self-correcting, then people have to be rational. And usually, people are. But people are not programmed automotrons. They succumb to fear and greed. Most of the economic models of dogmatic free markets assume that people act like programmed automotrons, and all of the mathematical models I am aware of do. This is the biggest problem I see with our economic models.

    The other big problem is that most macro econometric models assume debt is netted away, i.e. it doesn't have an influence. For example, a rise in debt is concurrent with a rise in asset prices, and since asset prices are assumed to be rational, debt unto itself is not an influence in the economy, though the cost of debt may be. I think that is dead wrong.

    The best economic model IMHO understands that markets are the best forces for driving wealth creation but occasionally go off the rails. Thus, government's best role is to keep markets on the rails.
     
  7. Oddball
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    Problem with that model is the presumption that there's enough rationality in gubmint to keep the market on the rails to begin with...Were that true, it would never come off the rails.

    Then there's:
    The Road To Serfdom
     
  8. william the wie
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    william the wie Gold Member

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    Well part of the problem (but only part) is misdefining rationality. Like when "The Economist" had a piece earlier this year about the second demographic shift to larger families in northern Europe. Given that the latex condom has only been around for about a century the only real surprise is how heavily a lack of desire to have offspring has been selected against.

    Seeing the economy as a means to the end of more great grandchildren can be mind blowing which is why I subscribe to bio-rational institute, evolutionary psychology and HS Dent (all online). I am firmly convinced that the definition of rationality used in economics does not make more than 90% biological sense and a 10% irrationality defined as rational scares me. China's one child policy means that the Chinese labor force starts declining later this year but that is not part of anybody's economic model. The inverted demographic pyramid in much of the developed and increasingly the developing world is naturally going to cause major problems.
     

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