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How Effective Is Economic Theory?

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Re: How Effective Is Economic Theory?

#51

Post by paganel »

nerfhammer wrote: post #41
paganel wrote: post #23

Earlier quoted context omitted.

> Sure, lots about classical economic theory is really ridiculous, and the source of a lot of problems, but then you change those things and then move on. That's the thing, it has proven really, really hard to "change those things". I'm looking at the latest (still current?) economic/financial crisis. Lots of "economic theory tells us this should never happen"-things did in fact happen, and consistently so (there was…

> Lots of "economic theory tells us this should never happen"-things did in fact happen. What economic theory said which things should never happen exactly?

Argentina has just issued a 100-year bond that was over-subscribed by a factor to 4-to-1 or so. That's a country that defaulted 5 times in the last century, if I'm not mistaken. Trillions of euro-denominated deposits stood at bellow 0% for more than a year. Real wages are continuously going down even though the unemployment figures are pretty damn good. These just off the top of my head writing on my phone.

Re: How Effective Is Economic Theory?

#52

Post by jgamman »

dhfhduk wrote: post #10

Discussions like this always seem a little strange. Sure, they're important, but taken out of context they're counterproductive and even harmful. This is the problem: what is the alternative? The pet theory of a madman or sociopath? The difficult truth is that everyone has an economic theory, whether they admit it or not. The question is, whose theories do we want to pay attention to? People who spend their lives arg…

it's not the theory of economics i have problems with - it's living through the experiments.

Re: How Effective Is Economic Theory?

#53

Post by nerfhammer »

paganel wrote: post #51
nerfhammer wrote: post #41

Earlier quoted context omitted.

> Lots of "economic theory tells us this should never happen"-things did in fact happen. What economic theory said which things should never happen exactly?

Argentina has just issued a 100-year bond that was over-subscribed by a factor to 4-to-1 or so. That's a country that defaulted 5 times in the last century, if I'm not mistaken. Trillions of euro-denominated deposits stood at bellow 0% for more than a year. Real wages are continuously going down even though the unemployment figures are pretty damn good. These just off the top of my head writing on my phone.

> Argentina has just issued a 100-year bond that was over-subscribed by a factor to 4-to-1 or so.

I'm not aware of an economic theory that says mispricing should be impossible, especially for a price set in advance.

> Trillions of euro-denominated deposits stood at bellow 0% for more than a year.

As far as I can tell this is referring to the an ECB policy for deposits of other banks to the ECB. This is not a market price; the ECB is actually trying to discourage its bank deposits. No contradiction of economic theory here.

> Real wages are continuously going down even though the unemployment figures are pretty damn good.

I'm not aware of real wages going down "continuously". As far as I can tell it's remarkably flat. This, however, is closer to something that actually doesn't seem to make much sense at first glance according to economic theory.

FYI I tried googling all of these things using terms you used and mostly got dubious zerohedge articles near the top.

Re: How Effective Is Economic Theory?

#54

Post by Terr_ »

dragonwriter wrote: post #50
woodandsteel wrote: post #48

Earlier quoted context omitted.

>it was caused by MBAs who approved mortgages that should have never been approved in the first place. But the point is the economists should have seen that was happening, so we could think about the government stopping it, or at least to put the public on guard. Instead the economics profession, with a few exceptions like Dean Baker, told the world that things were going just fine. I mean, what is the point of even…

> But the point is the economists should have seen that was happening A large number of economists (in academia, public institutions, and private finance firms), all across the ideological spectrum (Austrians, Keynesians, and every other flavor) did see it happening. People didn't respond to then, probably because the existence of a bubble isn't a problem, as long as you can delude yourself to thinking you'll be able…

> A large number of economists [...] all across the ideological spectrum [...] did see it happening.

In a strange way, that's almost step down: A strong correlation between what economists say and what happens -- even a negative correlation -- suggests that theory is somehow catching up to reality.

In contrast, a weaker correlation -- even if positive -- implies that there's still a lot more problems to shake out.

Re: How Effective Is Economic Theory?

#55

Post by bobdole1234 »

lliamander wrote: post #46
GhostVII wrote: post #34

Earlier quoted context omitted.

> To not commit an entire society to a single economic theory. Which means getting rid of a lot of the centralized control mechanisms that currently require just such a commitment. Isn't that just another economic theory?

> Isn't that just another economic theory? Yes, in the same way we could formulate a medical theory that says "we don't know enough about disease to know whether our treatments are effective, so we aren't going to create a standard diagnostic manual". Prior to the last couple centuries, that would probably have been an improvement. No, in the sense that, compared to most economic theories, you can't really use this t…

I think you're completely wrong there: You're saying that we should have left medical decisions in the hands of the local purveyors?

I think most of the gains we've gotten from the advent of evidence based medicine is building the taxonomy of medicine so we could reason about it effectively. That only works in a larger sense, small groups toiling with different nomenclatures end up wasting effort.

Much the same way economics is building the taxonomy of economies so we can compare and discuss.

Economics is going to become an entirely different animal in the future as we begin to automatically collect fine grained metrics from our automated economies.

Soon we'll be in the era of evidence based economism, and we'll see a huge increase in the effectiveness of it's utilization.

Re: How Effective Is Economic Theory?

#56

Post by specialist »

maxxxxx wrote: post #42

I know the economy is much more complex than let's say physics. But at least I would like economists to backtest things that happened. For example, the large tax cuts that happened during the Reagan, Bush and probably Trump years could be tested and it could be determined if the promised increase in investment and whatever really happened. At least the economists that make it to the media don't seem to have interest…

Their policies worked out exactly as intended.

Perhaps we should distinguish Economics and Rhetoric.

Re: How Effective Is Economic Theory?

#57

Post by crdoconnor »

euyyn wrote: post #21
crdoconnor wrote: post #18

>This notion of effective theory sets a useful standard for considering economics. Economists are not without knowledge. We know that restrictions on trade tend to help narrow interests at the expense of broader prosperity. We know that there aren't any countries which rose to first world status without judicious application of tariffs, subsidies or currency manipulation.

Is that causation, or only correlation?

Causation: https://en.wikipedia.org/wiki/Infant_industry

Re: How Effective Is Economic Theory?

#58

Post by pzone »

maxxxxx wrote: post #42

I know the economy is much more complex than let's say physics. But at least I would like economists to backtest things that happened. For example, the large tax cuts that happened during the Reagan, Bush and probably Trump years could be tested and it could be determined if the promised increase in investment and whatever really happened. At least the economists that make it to the media don't seem to have interest…

Backtesting is a poor substitute for experimentation. We can't run back history and check what happens if the Bush tax cuts never happened. We certainly can't create a thousand parallel economies, implement the tax cuts in half the sample and not in the other.

Economists use historical data to calibrate models. Of course data from the Reagan years was used to are for the Bush tax cuts. But simple backtesting can never tell you with certainty wherever your theories worked out or not.

Re: How Effective Is Economic Theory?

#59

Post by pzone »

tnecniv wrote: post #44

I'd be interested in hearing someone with knowledge talk about how these models get used in practice. From an engineering perspective it seems like actually applying them would be very hard. For example, how good are parameter estimates and how do we know if they are good? If I was designing a controller for a plane, I can spend a lot of time getting good parameters for the plane model and design a controller that lo…

Economic models usually aren't used for precise, high-frequency decision-making. When you estimate an economic model, simply getting the right sign on your estimates is often enough to inform your decision. Choosing what to take as exogenous is a matter of judgment.

Would building high speed rail from NYC to Chicago be a net positive for consumer welfare? Well we can use estimates of how much people pay for various modes of transportation throughout the country, and how often they're used. We can also come up with an estimate of the cost of building the rail. The analogous effects to your feedback loop are equilibrium effects - for example if people start taking the new high speed rail then plane ticket prices will fall a bit. But it adds more uncertainty to the model, and we know that plenty of flights from NYC to Chicago are connecting flights, so probably the effects are pretty small, and we can just assume those prices stay fixed for the sake of tractability.

If you do this kind of calculation and find the rail project is a massive multi billion dollar money pit, you can confidently recommend against it despite the fact you've ignored some of the feedback effects.

Re: How Effective Is Economic Theory?

#60

Post by marcosdumay »

nostrebored wrote: post #40
marcosdumay wrote: post #37

Earlier quoted context omitted.

If the community does not take status and funding away from failed models, it ceases doing science. As a group, economists aren't letting DSGE go. There are many economists trying to do the right thing, but overall the area has a deep problem.

Do you feel the same way about climate research?

Climate researchers abandon models all the time.
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