Saturday, March 31, 2012

KNZN — Bullish It

Here’s my take: to begin with, economics is basically bulls**t. I mean, it’s necessary bulls**t, sometimes even useful bulls**t, but I’m extremely skeptical of people who think economics is a science or that it could be a science. We have to make policy decisions (and investment decisions and personal consumption decisions etc.), and we have to have some basis for making them. We could just use intuition, and we often do, but it’s helpful to use logical thought and empirical data also, and systematic study using fields like economics can help us to clarify our intuition, our logical arguments, and our interpretation of the empirical data. The same way that bulls**t discussions that don’t make any pretense at being science can help. 
Economics is bulls**t because it relies on the premise that human beings behave in a systematic way, and they don’t. Once you have done enough research to convince yourself that they behave in a certain way, they will change and start behaving in another way. Particularly if they read your research and realize that you’re trying to manipulate them by expecting them to continue behaving the way they have. But even if they don’t read your research, they may change the way they behave just because the zeitgeist changes – cultural sunspots, if you will.
Read it at Economics and...
Bullish It
(h/t Mark Thoma)

Interesting read. Nothing much that traders haven't realized. But economists don't seem to get it in their unreasonable quest for the holy grail of economics in models that look like physics and chemistry rather than the life and social sciences. People are not like atoms, and groups are not like molecules either.

George Soros had pointed to something similar in his General Theory of Reflexivity. Human beings are reflexive in that they self-adjust based on feedback. As KNZN observes, even if an economic model could be developed, incorporation of it into collective conscious (of market participants, for example) would alter its behavioral assumptions through reflexivity.


Anonymous said...

As KNZN observes, even if an economic model could be developed, incorporation of it into collective conscious (of market participants, for example) would alter its behavioral assumptions through reflexivity.

That's a really important, Tom. I'm always surprised when I hear people say that economics failed because it didn't predict the crisis. What do people expect, that economists should make predictions and then hide them in secret envelopes without telling anybody so that after something major happens we can open the envelopes and see how many economists were right? Or maybe they should just tell the queen?

Leverage said...

This is basically what austrian economics say.

But still is somewhat challenging, because if human behaviour is chaotic & unpredictable how can you say that capitalist market economy is superior to other forms of economy. One does not follow the other, maybe at some point pure market economy will be more adaptable to the behaviour and patterns societies and individuals follow, maybe other times mixed economies will, and other command economies will. The problem is confusing chaotic & unpredictable with disoriented or goal-less, sometimes interests align, some other times they don't, etc.

For example, a good degree of command economy are utterly superior in war times or when the society is oriented towards common goals thank pure market oriented economies, etc.

So the paradox of this is that society and policy choose what form of economic model is superior depending on the circumstances they create first (and as such is a feedback loop). Because the needs and goals of individuals and societies are such malleable and dependant on environment input, there can never be a 'right' or 'wrong' economic model. Because is totally dependant on subjective states.

So, for example, while Mao's China 'may have' been a disaster for a lot of people (or Soviet Union) it may have been the most 'adaptive' thing at some point in history. Less extreme example, is the role of the USA federal government in the economy, more intrusive at sometimes and less at others, that may have been the most 'adaptive' model at a given point in time (and the contrary is also true off course).

The frustrating thing is the perception economic actors have during their live periods, in which underlying changes of the model are slow (naturally considering the size of societies and the very own evolution of each generation and individual life cycles). But relative to nature, that evolution happens at super fast speeds, orders of magnitude higher, compared to the natural counterpart. This off course, does not ease the pain of transition periods, when population suffers the most. But is good to keep in mind nevertheless.

WillORNG said...

Wouldn't putting people first instead of money mean something more like this?

john fremont said...

Very informative comment Leverage. The economic system that gets used is also influenced by the good or service being distributed. National security is mainly provided by state run institutions although private mercenary organizations are emerging again due to the changing nature of warfare. This is what our healthcare debate is about also. Are healthcare products and services distributed most effectively through state run socialist systems or through the private market? Not only that but which healthcare services? Laser eye surgery and cosmetic surgery does well as a competetive consumer driven market but emergency services or chemotherapy not so much.

Bob Roddis said...

People are not like atoms, and groups are not like molecules either.

So we're all Austrians now, eh? :)