Do Economists Figure out how the World Really Works?

[Kimura]

[MENTION=25159]Norman[/MENTION]

Do Economists Figure out how the World Really Works?
By Cullen Roche

Mark Thoma has a good piece on CBS money watch explaining how economists “figure out how the world really works”. It’s a good look into the thought process that leads to so many of today’s understandings in economics. In short, Thoma explains the process as follows:

Economist A creates hypothesis X.

Economist A studies historical data set to test whether hypothesis X holds up to empirical data. Economist A tests hypothesis X by inputting historical data into economist A’s model of choice.

Thoma concludes by stating:

“These complications make progress slower then [sic] it would be if economists could do their analysis in a lab. But although the progress is slow, and sometimes hard to see, there is progress nonetheless.”

We can begin to see why the progress has been so slow when we look at this process. In my view, the process more closely resembles this:

Politically biased economist A creates hypothesis X.

Politically biased economist A studies evolving and insignificant data set to test whether hypothesis X holds up to insignificant “empirical” data. Politically biased economist A tests hypothesis X by inputting flawed historical data into economist A’s model that is not based on operational understandings.

We saw this process play out a number of times over the last few years. For instance, Austrian economists often portray a politically biased view of the world which leads to a certain hypothesis. So, during 2008 we saw something like this:

Austrian economist dislikes government and intervention in markets and claims that QE will cause high inflation due to “money printing”.

Austrian economist A uses flawed concept of the quantity theory of money and misunderstanding of banking to argue that more bank reserves will lead to hyperinflation and “proves this” by arguing that “money printing” in Zimbabwe and Weimar led to hyperinflation.

The reason these predictions were wrong was because they were politically biased, not grounded in operational understandings and compared to faulty or misleading historical data. But this is what so much of economics is these days. It’s not science at all. It’s mostly just politics masquerading as science. And so here we are with this muddled mess of understandings and a policy perspective that no one can agree on and actually appears to be resulting in almost no progress. It’s a sad state of affairs if you ask me and isn’t helping anyone get any closer to understanding our reality.


Read more at Do Economists Figure out how the World Really Works? | PRAGMATIC CAPITALISM

 

[Toro]

Not really.

Edit - I'd say that about economists in general, not just Austrians.

 

[Kimura]

Not really.

Edit - I'd say that about economists in general, not just Austrians.

I tend to agree. The Austrians just make it easy.

 

[mascale]

Most of the history of Nations fails completely at arithmetic. A court may now award a $4.0 bil. divoirce settlement in Switzerland, and a Swiss bank may pay $2.5 bil. to the U. S. in back tax matters. Any court in the world will not, however, acknowledge that two plus two is an intentional act, with an intended outcome of four(?). It is not acknowledged that five times two is ten, two times two is four, and that as for one times two, it mostly makes better sense to bury it. A Greek may have noted that milenia ago. There is no Hebrew tradition, "Provide greater usury in fact to the poor, and you will live long and prosper, like in the re-runs(?)!" Arithmetic in law tends always to be legal, even when the outcomes are lethal or self-defeating.

Suppose, (A), a stupid, fear-crazed, 17th century Presbyterian. (B), It is alleged that a price is determined when demand for a product meets a price at which a supply of the product is available. (C), On that basis a "free market" price is alleged. Matters of intent are not included, even if arithmetic is alleged to be the basis of the units on which supply and demand are measured. Currencies, for example, are worthless--unless there are numbers and arithmetic. It also helps to have nuclear weapons, (see below).

So "free" means that people called, "rich" control both the supply and demand. The supply is created, which provides them with more basis to gain more arithmetic measure. They have more arithmetic measure from that, essentially providing them with more basis of "demand." The original Code of Moses might have noted, "Be fruitful, multiply, fill all the earth, and screw 'em," right from the start(?)(!). Anyone notices the usual outcome of Western Civilization events. Mostly, Courts of Law are not of that level of ability to notice very much.

Any such market is clealy "Socialist," or at best an "Oligarchy." Mostly, world courts--apparently even in Mainland China or North Korea--South Korea, Switzerland, or USA--find any "rights" of that arithmetic outcome, established law and policy.

So worldwide, it is nowhere even called "criminal."

Post Ronald Reagan, and post Bush I Term I, in fact: Anyone following the progress of the election of the first Clinton term, would have been led to the startling conclusion. "These people have the Bomb!" Even among the Swiss, the courts will take the money from the rich, and send the money off to the rich. The NBA will take money from the rich, and send it off to the rich. Rich blacks will bounce around their balls on wooden courts. Poor black children in East Africa, will die before age six months as an outcome.

There are human rights, in all that--even with basis in the Code of Moses. A Greek may have noticed that, milenia ago.

"Crow, James Crow: Shaken, Not Stirred!"
(Going forward with the "Doom Coffin." Anyone now can address, "The Final Solution Of The Presbyterian Question!" "Just where is all this money going to come from?")

 

[oldfart]

Not really.

Edit - I'd say that about economists in general, not just Austrians.

I tend to agree. The Austrians just make it easy.

To me the crux of the argument is about understanding methodology. I believe that good economic analysis (which is generally the desired output) rests on three complementary methodologies: historical analysis, data analysis, and economic theory. The mix can change from one topic to another, but generally all three are necessary. Each method also raises unique and different challenges which the general public is not aware of.

Start with historical method. I suffers from two major misunderstandings about what historians do. First, there is a difference between what happened in the past and what we have a record of in the past, and the two are often quite different things. Of necessity, good historical analysis requires a lot of guesswork to fill in gaps. Often the reader of a finished historical work regards it as a definitive finished product rather than an educated guess. We take as fact a lot of things that may not be fact at all. In the period 1800-1830, for example, America experienced a great explosion of building of transportation infrastructure, especially roads and canals (railroads came a bit later). One would easily get the impression that most of these were great accomplishments and advanced the American economy, while in fact most were failures. Many of the national roads were never completed and except for the Erie Canal, almost all canals became abject failures. A re-examination of the value of these projects, much beloved by contemporaries such as Abraham Lincoln and by historians, is long overdue, as is the question of whether America grew because of or in spite of massive public assistance in these infrastructure endeavors. Successes are trumpeted in history books while failures are usually buried.

The second issue with historical method stems from the first. We often get an impression of inevitability from history, or the flip side, an impression that events are quite random and small changes could have had enormous effects. Both may be correct, but the proof is in exploring counterfactual history, a process many people think is wild speculation. Good counterfactual history is an attempt to determine who sensitive the actual historical outcome might be to certain changes in events leading up to them. There are rules for what constitutes good and bad counterfactual history, but the public is generally oblivious to what they are. People are forever refighting the Civil War assuming than some minor event were different (for example if Hooker at Chancellorsville had been temporarily replaced by Couch when Hooker was obviously stunned by a blow to the head at a crucial moment, or if Lee had not been ill at Gettysburg). Beyond the entertainment value of these exercises is a real issue of whether history could have been much different.

Statistical analysis of data raises a different set of issues. The first is statistical validity. We try to measure certain things, but to quantify them we rely on indices or proxies which are usually much more rigorously defined than the concepts themselves. For example, does the CPI really measure inflation and does U-3 really measure unemployment? Suppose we change the definition of one of these measures, will the revised measure still be comparable to the older measure? Often we create an inertia where we continue to use statistics simply because we don't know how to meaningfully compare them to the past if we make certain changes to the definitions.

Finally economic analysis consists primarily of a number of models ("gadgets") which are obviously based on false assumptions but we regard as generally useful nonetheless. Virtually by definition any model is either too cumbersome to be of any use, or over simplified to where it doesn't work in all cases. The question is not whether the assumptions are correct, the question is how much difference does it make that a given false assumption is not correct. Classical economics rests on the false assumption that the economy is characterized by perfect competition, a clearly false assumption. But it's results are usually a useful first approximation, except for the problem that it's predictions on inflation, output, and unemployment are only valid when we are all dead.

So I would argue that there is plenty of room for using good economic analysis in examining the subject matter of economics. I just don't see any discussion getting very far without running into one of the problems I have mentioned. When that happens the discussion can either turn to ideological cant or enter the arena where economists, historians, and statisiticians argue. To do the latter requires the dirty grimy work of learning the craft. Nobody ever said it was easy.

 

[Norman]

To me the crux of the argument is about understanding methodology. I believe that good economic analysis (which is generally the desired output) rests on three complementary methodologies: historical analysis, data analysis, and economic theory. The mix can change from one topic to another, but generally all three are necessary. Each method also raises unique and different challenges which the general public is not aware of.

I don't think those 3 are sufficient for generating good economic analysis. Sounds like driving your car looking at the mirror. It's like expecting to forecast the stock market based on the market graphs. Technical analysis at it's finest.

For solid economic understanding and analysis I think it's needed to understand human behavior, psychology and culture (not sure if this would be included in the economic theory part). Using things like historical statistics is not useless, but without a solid understanding it's difficult to know what is correlation and what is casuation, what is a coincidence and what isn't...

Political involvement as was stated in the article is also a problem. A lot of economic solutions tend to involve "government this" "government that".... and all the partisan BS.

 

[Kimura]

I think any responsible/rational economist should have financial stability at the top of his/her to-do list. Things such as incentives, rent-seeking, regulation, oversight, accountability, etc all have their place in present, past and future analysis.