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    it works, but mere citizens have to actually pull the trigger..., 2008-10-06 00:09:07 | Main | 17 Uighur detainees released from Guantanamo..., 2008-10-07 10:54:49

    a general theory of economics:

    Peter Dorman has published a rough sketch of where the dismal science might start if it wanted to be something more than a dismal humanity with a minor in math.

    Perhaps the simplest and most universal example will make this clear. Consider the standard supply-and-demand diagram. The professor draws this on the chalkboard, identifies the equilibrium point, and asks for questions. One student asks, are there really supply and demand curves? Where would you go to look for them? Ah, it’s not so easy, comes the reply. Yes, in principle these curves exist, but they are not directly observed in nature. You can do market research in which you ask a sample of consumers how much they would buy at various prices, and this could give you an estimate of the demand curve, but of course there would be a certain amount of error in the process. And the supply curve is even more difficult. We will see in another week that this is derived from the marginal cost schedule, but in practice firms often find this difficult to calculate with accuracy. And even worse, in another week after this we will find out that, if competition is not perfect and firms behave strategically in the market, there is no supply curve at all.

    If the answer stops here, the students will be left wondering why they are studying such a useless theory. But we know there is another way the answer might proceed. The professor could say, the supply and demand curves are only for the purpose of organizing our thoughts; they are not “real” in the way you are asking for. But we can use them to identify two other things that are real, excess supply and excess demand. We can measure them directly in the form of unsold goods or consumers who are frustrated in their attempts to make a purchase. And not only can we measure these things, we can observe the actions that buyers and sellers take under conditions of surplus or shortage.

    In this easiest of cases, it is already clear that mechanisms are more susceptible to empirical methods than models of endpoint (equilibrium) states. This observation applies with greater force as we move toward ever more-complex forms of equilibrium modelling. Fortunately, the antidote is beginning to emerge in such areas as labor market search theory and behavioral finance, which have brought concrete mechanisms back into the picture. As these fields develop, the more general models of their infancy give way to diverse findings across particular market segments, cultures and contexts. And that’s what we should expect: there is no general theory of fish either.

    I don't know how successful he is at addressing my knee-jerk reaction that it would be impossible to detangle conclusions based on prior observation from their influence on future behavior. Maybe the irrationality of the cogs rescues the idea, though, and reduces the problem to something akin to feedback in climate models. Related, he suggests that:

    there would be a much clearer distinction between the criteria governing scientific and policy work, insulating the former from some of the influence exerted by powerful economic interests and freeing the latter to adopt an ecumenical and risk-taking approach to tackling the world's problems.

    I like this. We could demote the hoard of economists running around in the real world to "clinical economists", giving them the esteem of self-help manuals and insulating to some degree research from practice, or rather, clarifying that the latter should be derivative of the first.


:: posted by buermann @ 2008-10-06 22:48:29 CST | link


    Comments:
      I firmly believe that you could replace 98% of the economists with a perl script, a simple one, and that it would perform much better than they do. What on earth are you waiting for?

      Ahem, erm, sorry to get all shouty.

    posted by Zomg @ 2008-10-06 22:53:00 | link


      while(1) {
      $economists->reset;
      while ($economists->next) {
      if ($_{panic_threshold} == 0) {
      print "IN THE LONG RUN, WE'RE ALL DEAD.";
      } elseif ($dow_delta > -10*$_{panic_threshold}) {
      print "PROSPECTS LOOKING GOOD FOR FUTURE PROSPECTS.";
      } else {
      print "HOLY SHIT WE'RE ALL GONNA DIE!!!";
      }
      }
      }

    posted by buermann @ 2008-10-06 23:58:19 | link

      Oh wait, you wanted one that would perform better. Pardon!

    posted by buermann @ 2008-10-07 00:02:37 | link

      It would be churlish of me to find any fault. Besides, I'm laughing too hard to try.

    posted by Zomg @ 2008-10-07 21:16:53 | link




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