A Message for Armchair Economists

[Kevin_Kennedy]

At some point in our intellectual development, we libertarians are naturally drawn to study economics. I think this stems from the fact that we love to explore the forces which drive our world. Economics is, in a broad sense, the study of human cooperation. A solid understanding of economics enables us to see how and why our world looks and behaves as it does.

You might have started studying economics on your own, and are now thinking that it would be great to pursue further study in this field at a university. Not so fast.

A Message for Armchair Economists by Betsy Hansen

An interesting article denouncing the level of mathematics in the economics field.

 

[Epsilon Delta]

As an economics student, I wholehearedly agree. I've already decided I'm not going into economics for my Masters. It's not even a faint possibility. Even as a lowly undergrad - where Math isn't even supposed to be that big a deal in economics, it's been unbearable. Economic Statistics, that's perfectly understandable. That stuff is pretty useful for almost anything. But when the Theory classes are exclusively math classes, you know there is a problem. 90% of what's in my textbooks was absolutely irrelevant. Not because it wasn't useful or interesting, but because I wasn't tested on any of it. All I was tested on was exclusively silly little math problems. I have not been asked to write even ONE paragraph in 2 years of core-curriculum classes (the more specific classes are a different story, but then again, what I've seen in the specific classes have virtually nothing to do with anything on the core). Frankly, not what I was expecting. Thankfully I have another major [International Development Studies] and a minor [Poli Sci], and those are pretty awesome, so I'm not too miserable. Really the most useful thing I've learned is that nobody's got a fucking clue about economics; least of all economists. Which is why I quietly stay away from those topics here.

Anyway, uh, yeah, economics blows nowadays. Maybe it'll get better? = \

 

[Kevin_Kennedy]

As an economics student, I wholehearedly agree. I've already decided I'm not going into economics for my Masters. It's not even a faint possibility. Even as a lowly undergrad - where Math isn't even supposed to be that big a deal in economics, it's been unbearable. Economic Statistics, that's perfectly understandable. That stuff is pretty useful for almost anything. But when the Theory classes are exclusively math classes, you know there is a problem. 90% of what's in my textbooks was absolutely irrelevant. Not because it wasn't useful or interesting, but because I wasn't tested on any of it. All I was tested on was exclusively silly little math problems. I have not been asked to write even ONE paragraph in 2 years of core-curriculum classes (the more specific classes are a different story, but then again, what I've seen in the specific classes have virtually nothing to do with anything on the core). Frankly, not what I was expecting. Thankfully I have another major [International Development Studies] and a minor [Poli Sci], and those are pretty awesome, so I'm not too miserable. Really the most useful thing I've learned is that nobody's got a fucking clue about economics; least of all economists. Which is why I quietly stay away from those topics here.

Anyway, uh, yeah, economics blows nowadays. Maybe it'll get better? = \

Have you looked into Austrian economics?

What is Austrian Economics

Obviously you won't find many, or probably any, Austrian style courses that you can take in college but there is a vast catalog of just about anything you could want at mises.org.

 

[Toro]

To the article, I would say yes and no.

In undergrad, I majored in both economics and finance through the college of business. The econ major through business school did not require me to take econometrics, but I did take an econometrics class in MBA. Instead, I studied economic history and economic philosophy in undergrad, which I enjoyed. I have tons of books on economics that I have read out of interest, and the groundings I have in the discipline has helped me enormously in my career.

There are a couple things I would say. First, to be an economist, you have to have a basic understanding of statistical modeling. Why? So you can test what has actually happened in the past to draw conclusions around your thesis, just like any scientific discipline. There is an enormous amount of statistical data to work with. This is empiricism. If you have an idea and empirical research tells you that you are wrong, then you change you premise.

The problem I have with highly ideological schools of thought in economics, such as the Austrians and the Marxists, is that they create a worldview then fit the facts to fit their worldview. They draw conclusions first and then look at the world backwards through an ideological prism. All ideologues do this, not just in economics. It is common amongst all ideologues to dismiss out of hand empirical research that contradicts their worldview as being flawed. Thus, in economics, if an ideologue doesn't like the conclusion of the empirical research, they conveniently dismiss the empirical research and cling to their comfortable worldview.

Having said that, one must understand the limitations of the empirical research. All modeling is based on assumptions. Economists make assumptions about human behavior to fit their models. The problem is that the assumptions about human behavior are not always correct. Economists believe that humans act rationally, and the output of their decisions can be modeled according to a normal distribution curve that is prevalent throughout nature. However, people do not always act rationally, and their irrational behavior can have enormous consequences for the economy - witness the tech bubble and the housing bubble. This makes modeling worthless at points of extremes. The tails of the distribution curve get fat, and the models fall apart.

It is important to note that the idea of rationality is most strongly promoted by economists who believe in free markets. These economists believe that the human behavior is always rational, or almost always rational, which from a practical standpoint, to them is "always" rational. If people always act rationally, there is no need for government intervention. I think this is wrong. Markets are often rational, and always tend towards rationality over time, but can be very irrational in the short and intermediate-term, which can have enormous consequences in the economy. It is also important to note that most economists did not see this financial calamity coming, even though housing prices were at all-time highs and financial institutions were leveraged to insanely high levels.

I would definitely agree that the academic discipline of economics has become too arcane, with far too much emphasis on mathematics that no one outside a handful of peers will ever read. But you need the tools to understand how human behavior has reacted in the past. Economists are not particularly good at telling you what is going to happen but they are pretty good at telling you what has happened.

 

[Kevin_Kennedy]

To the article, I would say yes and no.

In undergrad, I majored in both economics and finance through the college of business. The econ major through business school did not require me to take econometrics, but I did take an econometrics class in MBA. Instead, I studied economic history and economic philosophy in undergrad, which I enjoyed. I have tons of books on economics that I have read out of interest, and the groundings I have in the discipline has helped me enormously in my career.

There are a couple things I would say. First, to be an economist, you have to have a basic understanding of statistical modeling. Why? So you can test what has actually happened in the past to draw conclusions around your thesis, just like any scientific discipline. There is an enormous amount of statistical data to work with. This is empiricism. If you have an idea and empirical research tells you that you are wrong, then you change you premise.

The problem I have with highly ideological schools of thought in economics, such as the Austrians and the Marxists, is that they create a worldview then fit the facts to fit their worldview. They draw conclusions first and then look at the world backwards through an ideological prism. All ideologues do this, not just in economics. It is common amongst all ideologues to dismiss out of hand empirical research that contradicts their worldview as being flawed. Thus, in economics, if an ideologue doesn't like the conclusion of the empirical research, they conveniently dismiss the empirical research and cling to their comfortable worldview.

Having said that, one must understand the limitations of the empirical research. All modeling is based on assumptions. Economists make assumptions about human behavior to fit their models. The problem is that the assumptions about human behavior are not always correct. Economists believe that humans act rationally, and the output of their decisions can be modeled according to a normal distribution curve that is prevalent throughout nature. However, people do not always act rationally, and their irrational behavior can have enormous consequences for the economy - witness the tech bubble and the housing bubble. This makes modeling worthless at points of extremes. The tails of the distribution curve get fat, and the models fall apart.

It is important to note that the idea of rationality is most strongly promoted by economists who believe in free markets. These economists believe that the human behavior is always rational, or almost always rational, which from a practical standpoint, to them is "always" rational. If people always act rationally, there is no need for government intervention. I think this is wrong. Markets are often rational, and always tend towards rationality over time, but can be very irrational in the short and intermediate-term, which can have enormous consequences in the economy. It is also important to note that most economists did not see this financial calamity coming, even though housing prices were at all-time highs and financial institutions were leveraged to insanely high levels.

I would definitely agree that the academic discipline of economics has become too arcane, with far too much emphasis on mathematics that no one outside a handful of peers will ever read. But you need the tools to understand how human behavior has reacted in the past. Economists are not particularly good at telling you what is going to happen but they are pretty good at telling you what has happened.

And yet the ideologues of the Austrian school did see this financial calamity coming.

 

[Toro]

And yet the ideologues of the Austrian school did see this financial calamity coming.

Yes, indeed most did. The problem is that they saw it coming 20 years ago.

The Austrian school isn't generally wrong about markets but it is incorrect in absolute terms. Plus, I think their definition of inflation is the correct one.

 

[PLYMCO_PILGRIM]

I have a BBA in Business and I too saw this coming. When the housing prices doubled I pulled all my money out of the markets and put them into 2 and 5 year savings CDs.

I was lucky to be paranoid enough about my govt not handling housing right to see we were about to have another 80's style housing started recession.

This one is different than the bad one of the 80's but still...lucky me and lucky parents of mine who can still retire on time .

Enough ego stoking here.....post on

 

[Kevin_Kennedy]

And yet the ideologues of the Austrian school did see this financial calamity coming.

Yes, indeed most did. The problem is that they saw it coming 20 years ago.

The Austrian school isn't generally wrong about markets but it is incorrect in absolute terms. Plus, I think their definition of inflation is the correct one.

I doubt they saw this specific downturn coming 20 years ago. More likely they said that the current economic policies were untenable and that it would inevitably lead to disaster. I'm not sure what you mean by absolute terms.

 

[PLYMCO_PILGRIM]

And yet the ideologues of the Austrian school did see this financial calamity coming.

Yes, indeed most did. The problem is that they saw it coming 20 years ago.

The Austrian school isn't generally wrong about markets but it is incorrect in absolute terms. Plus, I think their definition of inflation is the correct one.

I doubt they saw this specific downturn coming 20 years ago. More likely they said that the current economic policies were untenable and that it would inevitably lead to disaster. I'm not sure what you mean by absolute terms.

Same thing my economics professors told me in the early 90's.

 

[Kevin_Kennedy]

Yes, indeed most did. The problem is that they saw it coming 20 years ago.

The Austrian school isn't generally wrong about markets but it is incorrect in absolute terms. Plus, I think their definition of inflation is the correct one.

I doubt they saw this specific downturn coming 20 years ago. More likely they said that the current economic policies were untenable and that it would inevitably lead to disaster. I'm not sure what you mean by absolute terms.

Same thing my economics professors told me in the early 90's.

What's that? That the economic policies would lead to disaster?

 

[Toro]

I doubt they saw this specific downturn coming 20 years ago. More likely they said that the current economic policies were untenable and that it would inevitably lead to disaster. I'm not sure what you mean by absolute terms.

Yes, that is correct. They basically were calling this a house of cards. In the meantime, the economy has doubled and stocks have tripled. I doubt it is over but the simple fact is that the economy grew faster in the second half of the century than it did after the first half, and there has been little difference in growth regardless of the monetary system.

What I mean by "absolutely" is that they believe that the market is always the best allocator of resources. The market is generally the best allocator of resources but it is not always.

 

[PLYMCO_PILGRIM]

I doubt they saw this specific downturn coming 20 years ago. More likely they said that the current economic policies were untenable and that it would inevitably lead to disaster. I'm not sure what you mean by absolute terms.

Same thing my economics professors told me in the early 90's.

What's that? That the economic policies would lead to disaster?

More specifically our lending policies, even more specific our growing percentage of lending going to high risk people, would eventually lead to a BIG problem.

I dont think he forsaw how bad Bush and Obama and their respective congresses would be with defecit spending though....that was the icing on the cake.

 

[Kevin_Kennedy]

I doubt they saw this specific downturn coming 20 years ago. More likely they said that the current economic policies were untenable and that it would inevitably lead to disaster. I'm not sure what you mean by absolute terms.

Yes, that is correct. They basically were calling this a house of cards. In the meantime, the economy has doubled and stocks have tripled. I doubt it is over but the simple fact is that the economy grew faster in the second half of the century than it did after the first half, and there has been little difference in growth regardless of the monetary system.

What I mean by "absolutely" is that they believe that the market is always the best allocator of resources. The market is generally the best allocator of resources but it is not always.

I would say that any real economic growth has occurred despite our current policies.

I simply disagree. There is never a time that the government or any other institution could step in and make a better choice than the market itself.

 

[Kevin_Kennedy]

Same thing my economics professors told me in the early 90's.

What's that? That the economic policies would lead to disaster?

More specifically our lending policies, even more specific our growing percentage of lending going to high risk people, would eventually lead to a BIG problem.

I dont think he forsaw how bad Bush and Obama and their respective congresses would be with defecit spending though....that was the icing on the cake.

Both were certainly factors in the downturn, though the Federal Reserve is the main culprit with their low interest rate policy.

 

[PLYMCO_PILGRIM]

The fed scares me.

Its like a 4th branch of govt at the moment....no oversight, no checks, no balances.

 

[Kevin_Kennedy]

The fed scares me.

Its like a 4th branch of govt at the moment....no oversight, no checks, no balances.

Not to mention it's unconstitutional.

 

[Toro]

The fed scares me.

Its like a 4th branch of govt at the moment....no oversight, no checks, no balances.

Not to mention it's unconstitutional.

It is not unconstitutional but it is too powerful.

 

[Toro]

I simply disagree. There is never a time that the government or any other institution could step in and make a better choice than the market itself.

To make this assumption, one must assume people are always rational. They are not.

 

[Kevin_Kennedy]

The fed scares me.

Its like a 4th branch of govt at the moment....no oversight, no checks, no balances.

Not to mention it's unconstitutional.

It is not unconstitutional but it is too powerful.

Where does the Constitution allow for a central bank, and where does the Constitution say that Congress can abdicate its responsibilities to said central bank?

 

[Kevin_Kennedy]

I simply disagree. There is never a time that the government or any other institution could step in and make a better choice than the market itself.

To make this assumption, one must assume people are always rational. They are not.

I'm not sure I've ever understood this argument. It doesn't matter if people are rational. If businesses make the wrong decisions they go out of business, and there are consequences for individual people based on their wrong decisions.