Tuesday, April 5, 2016

Whither Economics?


Noah Smith speculates.

Noahpinion
A new age of econ imperialism is coming
Noah Smith | Assistant Professor of Finance, Stony Brook University

Jason Smith replies.

Information Transfer Economics
Economic imperialism?
Jason Smith

Jason cites this previous blog in his reply above. If you aren't familiar with it, I suggest reading it. It's short.

He concludes with:
In my link above, there are some other things that give us more information. For example, in a d-dimensional beehive with d >> 1, nearly all the bees are near the surface, not the interior ... as long as they are not coordinated to be in the interior (say, by the queen).

When this separation holds, then economics is more like physics. When it doesn't, economics is a social science.

If the details of the complexity of bee social structure strongly mattered, it would (likely) be impossible to figure out how much honey you could get from N bees [per capita real GDP]. Now humans are more complicated than bees, but the same principle -- that the macro properties are mostly governed by the bulk properties of the available state space -- has to apply if macro is tractable. And if it's not tractable (a possibility), then it really should just be moral and historical arguments.
I think that this probably puts a finger on the nub of it. Macro models work when trends are relatively stable but break down when they become unstable, that is, especially at cyclical turning points.  But turning points are what is most interesting and needs to be known for policy formulation.

This what Keynes meant when he said that in the long run will all be dead. What good does assuming equilibrium mean when a time series involving employment can persist in pattern in which the labor market doesn't clear for an extended period. Where there is debt, waiting it out is not a option.

Another way of putting it relying on mean reversion in markets may be a good strategy for those with deep pockets but many if not most participants don't have pockets that deep and the leveraged will become insolvent.

Macro can illuminate some consistencies in the behavior of aggregates, but experienced traders know the limitations of trend following.

One issue is that humans are not like atoms; they are subject to "animal spirits" that affect expectations and result in shifting preferences, in particular liquidity preference. The other issue is the influence of money. Conventional economics assumes that money is neutral "in the long run." Again, in the long run we are all dead, or deadbeats, since most households and firms are leveraged in one way other another.

Money as the unit of account is key in economics because economic aggregates are expressed in terms of the unit of account. To the degree that money is not neutral, it influences the system endogenously. This is something that conventional economics has not come to terms with, while Paleo and Post Keynesianism do.

3 comments:

Neil Wilson said...

"Macro models work when trends are relatively stable but break down when they become unstable,"

Exactly like 'mechanical investing models' of the early millennium. And for the same reason. It's a data mining exercise.

Brian Romanchuk said...

We also have to keep in mind that economics is a big field, and not just macro, Most of the "empirical economics" Noah is excited about is not being done in macro. Whether the non-macro work is anything other than trivial or wrong is beyond me; I pay no attention to it.

Mainstream macroeconomics is just as reality-resistant as it has ever been. There's a thin veneer of empiricism ("look, complicated econometrics!") but it's still non-falsifiable, being built around dubious key assumptions.

Neil Wilson said...

Brian,

The article you linked to about macro being the modern court astrology was particular good I thought.