The visible hand in economics

Archive for the ‘Methodology’ Category

So we are going to have to cut our consumption and it’s not going to make us better off. How come NewScientist’s authors seem to agree that we won’t necessarily be unhappier? Where evidence is given it tends to be in terms of happiness measures. Kate Soper (London Metropolitan University) points out that wealth doesn’t correlate with happiness over USD15,000 of income, while Andrew Simms (New Economics Foundation) makes much of the fact that people with vastly different living standards report the same level of happiness. The difficulty is that happiness isn’t the kind of measure that works for cross-country comparisons. Read the rest of this entry »

Everywhere I look I am being told that the RBNZ must slash rates into heavily stimulatory territory.  There are calls for tax cuts, infrastructure spending, further unemployment relief.  There are calls that commodity prices will collapse – but the price we pay for things won’t.  Pretty much anything that could be wrong, we’re are being told is wrong.

It is easy to get caught up in this.  All the negative news and statements that the Bank MUST cut between 150-200 basis points makes me feel like “maybe they should”.  Ultimately, you start to feel that they know things you don’t.  This type of analyst is a “fast follower”.

Now pulling back from all this talk, as an analyst I may try to be “objective”.  I may try to forget about these things, and take special notice of the “good things.  Wholesale funding pressures are falling, petrol prices have collapsed, income growth is still strong, and the labour market is still in tight territory.  A little bit of a slowdown is not a bad thing if it helps to clean up the economy.  However, this view is just as wrapped up in subjective feelings – in this case I have heavily devalued the actual evidence of difficulties in the economy, and the fact that a drastic slowdown is never completely in the data till well after the event.  Analysts that suffer in this way are facing “recession fatigue”.

Analysts must try to remember that this inherent biases exist – as by doing so they can help themselves make more objective, and more useful, statements about what is going on in the economy.  Noticing your ideological blindspot will help you to be a better analyst – so don’t hide from it, face it!  If only I knew how :P

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Frog has again attacked economics – however, this time the attack has been painted out in a more substantive manner, a manner that will allow us to actually discuss the methodology of economics and see where this critique fits in.

Frog’s claim is that:

The neoclassical economic model is failing us. It is based on some pretty poor assumptions and defies the laws and rigour of science

I find this, interesting. In order to analyse it we have to step back and ask: What is the neo-classical model? and how is it “failing us”?

I will have a first crack at saying what I think neo-classical economics is and what is going on with it. Then you guys can attack it and hopefully teach me a thing or two – as I am very interested in trying to understand “what is economics” in more detail.

Read the rest of this entry »

In the same post that Dr Doyle commented on, Andrew W linked to an article which he wanted us to discuss here (article is here).

As a critique of applied economics I accept the article (as there is definitely issues associated with the desimenation of economic tools into policy making), as a critique of economic science the article is horrendously off the mark.

One of the main issues I have with the article is the way it view economics vs physics – it is far too simplistic.  For example, the article states:

But statistical regularities should emerge in the behaviour of large populations, just as the law of ideal gases emerges from the chaotic motion of individual molecules

That is just the thing – the behaviour of individuals is not equivalent to chaotic motion (although I am sure many people would disagree :P ) because individuals make choices.  This additional element makes the whole study of macroeconomics (which I believe they are attempting the criticise) that much more difficult.

The “axioms” that the article criticises are all assumptions about this choice – factors that economists decided over 100 years ago that they would have to assume because they CANNOT observe choices in a sufficient fashion.  Of course, since then empirical and observational techniques have improved such that “the observation of the process of choice” is becoming avaliable.  As a result, these axioms will be (and in fact are being) challenged and changed.

I think it would have been good for the article to look at work on the methodology of economics before assuming that they could just pull out the critique of 17th century science and apply it directly here.

A few weeks ago a fellow named Jeffrey Doyle posted a “history of economic thought” type comment/post on the blog, which can be found here.

Beyond this he also added one additional criticism of “neo-classical economics” – the focus on “monetary flows” instead of energy.  Of course, as a criticism of economic science this is a misnomer – economic science is the study of scarcity, and “monetary flows” are merely a convientent way of representing this scarcity.  Using energy as a representation should – if the models are sufficiently specified – provide the same results.  Now, in when applying models there may be substantial differences, given what is implicitly assumed to be useful or not in different models – while this argument is important for application it is not something I can argue about, as I do not have the scarce intellectual talent to go around and apply a new set of assumptions to an underlying framework of scarcity.

However, my impression is that Dr Doyle is not criticising the individualistic methodological process in economics – he is attacking the “economic unit” used when we study scarcity, something that is constantly occurring and is a healthy part of any discipline.

Paul Romer states that the current crisis represents the gap between the Fundamentalist economist and the Realist economist (ht Economist’s View, Greg Mankiw, Econlog – as I had them all open at the same time and would have felt mean only picking one :P ). I find this characterisation a bit extreme, and definitely subjectively loaded.

Fundamentally, a better characterisation (which more fairly divides up the discipline) was provided by Mankiw, comparing the groups to scientists and engineers (we have discussed this here).

Anyway, let us put down the definitions that Romer provides, and see what we can get out of them.

Read the rest of this entry »

Hi all, For some reason I can’t post anything particularly long at the moment – as the site doesn’t like me.

As a result, none of the ideas I have for posts can be satisfactorily placed on the site. I can still comment though – its just taking a while.

If you want you can comment on this in the comments section of the post (ht Marginal Revolution, Econlog). I will try to get some posts up tonight.


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