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Economists versus the Economy

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Re: Economists versus the Economy

#81
post #46

Earlier quoted context omitted.

I'd say it was as much practical as it is ideological. Keynesian spending is inherently inflationary and creates jobs. As a member of the 1%: * Inflation is your enemy. It not only causes the value of your cash holdings to decline, it causes the value of the money you lent out to decline. * Creating jobs is your enemy. If you employ people you want as little competition for labor as possible to reduce your wage bill…

Inflation causes the value of your investments to increase, so it hurts the people who rely on cash more than people with stock portfolios

I'm not sure that is going to be true of the stock market. Many firms now have record cash holdings[0] so by buying stock you are essentially buying a slice of a pile of money. I argue the reason many firms stock price keeps going up hasn't been a rise in demand but instead a limit on supply as stock buybacks are also at record levels[1].

[0]http://mobile.nytimes.com/2016/01/24/magazine/why-are-corpor...

[1]https://hbr.org/2014/09/profits-without-prosperity

Re: Economists versus the Economy

#82
post #73
post #64

Earlier quoted context omitted.

I guess the follow up question to this is: what superior alternative do you propose we use for evaluating competing government policies?

I don't think we should ditch "utility" entirely but rather the idea people are actors that try to rationally maximize utility. One problem is of uncertainty (this was pointed out by Keynes) - people simply do not trade higher risk for higher profits, even if the mean value increases in the mathematical sense. Rather, they set a horizon of uncertainty. The other big problem is that utility is ill-defined for an indiv…

I agree.

I think at this point even the most conventional academic economist would start giving you sideways glances if you asserted that people are always rational utility maximisers. It seems that most econometric modelling takes a top-down approach; implicitly making homogenising assumptions about the models 'atoms' (e.g. individuals, firms, states, countries etc.).

I often wonder if the future of economic modelling is to be found in 'agent-based' models, where you start at the lowest level and aggregate up. This approach makes it possible to account for the effects of non-homogeneous actors and to also include 'non-rational' behaviours observed in experimental/behavioural economics.

I feel that the other issue is how beginner-level economics is taught at university. I would agree that there's no practical way to teach economics to beginners without making a bunch of simplifying assumptions and presenting a bunch of simplified models for study (e.g. a perfectly competitive market). However, I think the problem is that insufficient effort (if any) is made to emphasise that these models do not really reflect reality, and are just 'toy models' to help you develop your analytical thinking.

At best, in a real world context, understanding these models gives you an analytical framework for reasoning about whether some policy proposal is pointing in the right or wrong direction, though even that is a pretty fraught assertion.

EDIT: I figured I'd address some of the comments below regarding randomised-controlled trials, since its related to agent-based modelling / simulation. Comments below have pretty much highlighted the crux of the problem with economics and public policy (albeit without comprehending the implications): barring the rare 'natural experiment', its virtually impossible to collect 'clean' data that allows comparison of different policies. It's true that RCTs are being run in a 'public-administration' context, and the idea is gaining popularity. Most notably, the UK government has run a bunch of RCTs on various things.

But the crucial thing to note is that these RCTs are generally only run for 'low-stakes' issues. For instance, one of their RCTs involved varying the wording of their tax authority's "you haven't submitted a tax return" letter to determine what gets the highest compliance rate.

How comfortable, from an ethical standpoint, would you feel running state-by-state RCTs to determine the best government healthcare policy? Particularly given that the outcome in some states will be higher levels of preventable death and permanent disability? I've chosen healthcare here because the connection between different policies and higher or lower rates of mortality is fairly direct. But for any other government policy (of any significance), you're generally looking at the same sort of stakes. It's just that the ultimate ill-effects of a bad policy are not immediately apparent, take a long time to unfold, and often only eventuate at the margins.

Re: Economists versus the Economy

#83
post #43

> Economists claim to make precise what is vague, and are convinced that economics is superior to all other disciplines, because the objectivity of money enables it to measure historical forces exactly, rather than approximately. Economist here. Maybe some economists make this very bold, presumptive claim. But I'll be honest, money very rarely enters into the paradigm; rather resource allocation and maximizing utilit…

>resource allocation and maximizing utility are the common approach. Utility maximisation has always struck me as a horrible way to do modelling. In most cases your results must depend heavily on the form of utility function you choose. And you always have to make a choice since utility functions are unobservable.

Sure, just be sure to make assumptions known. Full rationality is a start, like linear model approximations are a good start, but eventually you do want to consider game theoretic concerns like bounded rationality, strategic behavior, etc.

Re: Economists versus the Economy

#84
post #71
post #43

> Economists claim to make precise what is vague, and are convinced that economics is superior to all other disciplines, because the objectivity of money enables it to measure historical forces exactly, rather than approximately. Economist here. Maybe some economists make this very bold, presumptive claim. But I'll be honest, money very rarely enters into the paradigm; rather resource allocation and maximizing utilit…

How easy is it to get feedback? How quickly do you see results?

Can you expand a little bit on your question? I'll answer the best I understand your question.

Being in industry with a large firm, feedback is very simple to get, I just go give a talk at an internal seminar.

Results of a model or an implementation? Repeated observations/out of sample analysis often help with validating models. Implementation depends on the project.

Re: Economists versus the Economy

#85
post #53

There's a big difference between the economic topics that get the most media attention, and areas in which the majority of economists work. I studied economics for 4 years and now work as an economist. I've never met a colleague/teacher who claimed to be able to forecast inflation/GDP growth over the next four quarters or correctly identify miss-priced assets. Some examples of the questions I have seen economists add…

There are a few professional forecasters out there. Everyone wants to read the tea leaves.

Re: Economists versus the Economy

#86
post #58

>Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. That's not really true if they're refusing to push the Keynesian levers for ideological reasons.

That's not really true if they're refusing to push the Keynesian levers for ideological reasons. snort Everyone's a Keynesian when it's time to spend but Keynes also said to pay down your debts on the upswing of the cycle, and guess what everyone didn't do?

Well, I was a teenager before the housing bubble went bust, but I'm just fine with paying higher taxes in boom times. Don't snort at me: raise my taxes! It's what I'm already voting for. Tax me and my high-tech salary. It can pay for schools and trains in my own community, it can pay down the national debt, etc. Redistribute my wealth, because I'm exceptionally well-off for my age group.

Re: Economists versus the Economy

#87
post #66

Earlier quoted context omitted.

That all sounds very clever and all, but there's still a rather important question being left unanswered here: on what basis should a government make decisions? Coin flips? Gut feelings? The phase of the moon? Let's say you're the King of the United States. One of your noblemen comes in to your palace and says 'Your majesty, I suggest we eliminate corporate taxation and replace the lost revenue with a tax on consumpt…

Coin flips are actually okay when you don't know something: Create many small experiments instead of trying the "world formula" solution. Also, create an environment where responsibility and decision making authority is as low as possible, not as high as possible - meaning where both the data and the consequences can both be found together. Oh and use "muddling through" more openly, because that's what life is about…

While I respect what you're saying, and agree to a limited extent, I don't agree with the idea that people, and society, are completely impermeable to analysis. Perhaps you truly are neutral on the question of democrats and republicans, and have no preference regarding Hillary, Trump, Sanders or Kim-Jong Un (given your view that we can only understand something through experiment and direct experience, and not through logic, reasoning and extrapolation).

However, if you do happen to have political opinions (that you think are well-reasoned), then you are engaging in this form of 'misguided analysis' that economists also engage in (albeit unknowingly). As for the 'economists' who claim to 'know the optimal answer', I guess I've just been fortunate to have never encountered one. More precisely, I've never run in to one in the various federal economic public policy organisations where I've spent the majority of my career. Where do they hang out?

And good luck designing experiments around, say, national healthcare policy that 'fail safely'. I think you'll find that an alarming number of them end up 'failing deadly'.

Re: Economists versus the Economy

#88
post #46

Earlier quoted context omitted.

I'd say it was as much practical as it is ideological. Keynesian spending is inherently inflationary and creates jobs. As a member of the 1%: * Inflation is your enemy. It not only causes the value of your cash holdings to decline, it causes the value of the money you lent out to decline. * Creating jobs is your enemy. If you employ people you want as little competition for labor as possible to reduce your wage bill…

Inflation causes the value of your investments to increase, so it hurts the people who rely on cash more than people with stock portfolios

Inflation doesn't cause the real value of investments to increase, because the real value is the nominal value relative to general prices (and inflation is increase in general prices.)

Re: Economists versus the Economy

#89
post #66

Earlier quoted context omitted.

That all sounds very clever and all, but there's still a rather important question being left unanswered here: on what basis should a government make decisions? Coin flips? Gut feelings? The phase of the moon? Let's say you're the King of the United States. One of your noblemen comes in to your palace and says 'Your majesty, I suggest we eliminate corporate taxation and replace the lost revenue with a tax on consumpt…

We live in a large nation, why not let a few states trial a program before running it nationally? Move fast and break things isn't good enough when lives and livelihoods are at risk in my opinion.

Controlled experiments (by behavioural psychologists) could probably do very well

Re: Economists versus the Economy

#90
post #66
post #65

Earlier quoted context omitted.

The fact there is no alternative doesn't mean we should use something that we know barely works. This is exactly the problem with economism

That all sounds very clever and all, but there's still a rather important question being left unanswered here: on what basis should a government make decisions? Coin flips? Gut feelings? The phase of the moon? Let's say you're the King of the United States. One of your noblemen comes in to your palace and says 'Your majesty, I suggest we eliminate corporate taxation and replace the lost revenue with a tax on consumpt…

You test it, like anything else. The problem with economics is there's not enough data! And the data we have keeps pointing out flaws in our theories
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