Ask an Economist (Post #1005 and counting)

[Homie]

To be an Austrian economist, you seem to favor a lot of government intervention.
Public education, anti-trust laws, The Fed, trade restrictions in terms of north-south trade (first world to third world, e.g. Africa) etc...

Fifty, I think you would like to study economics if you went to a liberal arts school that focused more on human action and the mind in relation to economics, rather than one that focused on math, statistics and preaching the current mainstream theory.
There is a reason economics is considered a social science and not a natural science; because people are in focus.

 

[Fifty]

Fifty, I think you would like to study economics if you went to a liberal arts school that focused more on human action and the mind in relation to economics, rather than one that focused on math, statistics and preaching the current mainstream theory.
There is a reason economics is considered a social science and not a natural science; because people are in focus.

The reason it calls itself a social science is because it wants to benefit from the positive connotation with the term "science", but it is important to keep in mind that social sciences are not sciences, just like rubber ducks are not ducks.

There are, I agree, some interesting areas of economics, such as behavioral and experimental economics.

 

[Homie]

The reason it calls itself a social science is because it wants to benefit from the positive connotation with the term "science", but it is important to keep in mind that social sciences are not sciences, just like rubber ducks are not ducks.

That`s just semantics. Science today has come to mean natural science, so in that regard you are right. Like the word liberal, it has changed its meaning over time. We can stop calling it a science for all I care, I have no desire to be associated with scientists, like that is some holy, glorious thing us mortals can only dream of. I never refer to it as a science BTW, I just say economics. Or, if I have to embellish, I call it a social science and say that it is in the same category as psychology, sociology and other studies of social interaction.

 

[Perfection]

There are plenty of human focused academic disciplines that do approach humanity from a scientifhic perspective and are indeed true sciences. Linguistics and psychology being good examples. It's about the methodology that determines whether someting is a true science or not the subject of study.

 

[Homie]

There are plenty of human focused academic disciplines that do approach humanity from a scientifhic perspective and are indeed true sciences. Linguistics and psychology being good examples. It's about the methodology that determines whether someting is a true science or not the subject of study.

In day-to-day regular usage, science has come to mean natural sciences. From origin, it simply means knowledge.

 

[Mise]

That we can't really understand or control the economic system we live in. Lots of theories around, and they all fail. Economics is not a science, in fact it isn't at all separate from all other social issues, and that's why we can't tame "the economy". We can only work on issues one by one, and must always do so taking into account those "non-economic factors" that so many economists would rather ignore. What people wish, which is different from what they can do, and different from what they are doing. Who holds power and what are the goals of each main actor on our daily drama. Ultimately, what are our goals and what world we want to live in. What does "efficiency", "wealth", "justice", etc. mean to us, because they can mean many different things.
The "simple truths about economics" are one of the most powerful forms of propaganda in use. I dislike propaganda, of all kinds. Call me a militant skeptic.

And despite my frequent arguments with JH, he at least has not claimed to be one of those mathematical economists who believe they can control the economy. Still, he has too much faith in his profession.

A few questions:

1. Can you summarise your hypothesis in two lines or so, or at least be a bit more specific in your criticism of Economics. If I were to summarise it, it would sound something like this:
"All economic theories have failed; We cannot predict what the effect of an economic action (e.g. the Zimbabwean government printing money with no corresponding increase in manufacturing/agricultural/etc output) will be."

But perhaps that's unfair.

2. Following from that, are you talking specifically about macro-economics, or are you including micro-economics in this skepticism? For example, if I charge £10,623.95 for a pint of milk, how many people would you expect to buy my milk at this price?

3. In science, we don't just point out the flaws in a theory and say, "hah! your theories are bunk ", and then go home and eat cake. Instead of eating cake, we come up with new theories to replace the flaws in the old. If you're suggesting that it's impossible to come up with a new theory, you will have to provide reasons for that.

So far, it seems you're using the old, "it's really, really, really hard to predict and control the weather, so it must be impossible!" tactic (an argument that Big Oil, the Bush Administration, and Creationists use quite frequently, I might add). It's really, really, really hard to predict a lot of things. And the goal of science isn't to control things at all. We can predict the consequences of many economic actions, and there are many economic theories that work. Our model of the climate isn't complete, and there are glaring holes in it, but there are bits of it that work brilliantly, and make perfect sense. I fear you're throwing the baby out with the bathwater when you claim that we can't know anything about our economy, and that all economics is bunk.

4. How does your recent criticism of the stock market support your hypothesis, and disprove mainstream economics?

5. How can we disprove your hypothesis? What evidence is there supporting your hypothesis?

 

[DNK]

Quick question, what exactly is the average annual interest yield on the major indexes after inflation, bonds? Just trying to figure how much I will need for retirement savings each year.

 

[JerichoHill]

I'd expect that to happen, slowly, as China and India develop. But that can't alone explain the sudden rise in prices seen during the last few years. I'm not a "monetarist", but I get the impression that a lot of money was thrown at commodities in typical bubble fashion. With food and metals, at least, of which there is no shortage. Oil should be a different matter.

My impression is that demand provides the majority of the answer, but certainly there are other factors too. I haven't seen any records of money being thrown at commodities other than the late night pump n dump investor guys.

 

[JerichoHill]

Yes. Do you know anything as to why that is?

Education tends to make one more liberal. To be an economist, you kinda have to have a PhD. There is only 1 libertarian economics school around (George Mason) and even they are liberal libertarians.

What do you say when Lewis Black says: "The economy goes up, it goes down, it goes up, it goes down, it goes up, it goes down, it goes up, it goes down, NOBODY KNOWS WHY THE #&%* IT HAPPENS!!"

Lewis Black doesn't know economics. We may not know precisely why it happened, but we can get a good idea. Lewis Black knows how to get an audience to laugh.

 

[JerichoHill]

Quick question, what exactly is the average annual interest yield on the major indexes after inflation, bonds? Just trying to figure how much I will need for retirement savings each year.

Try BankRate.com, or Yahoo! Finance. I'd advise you to focus on gross returns, not inflation, if you're confining your investments to one country. Inflation kinda is determined exogenously, and its a scalar, so it affects everything equally.

A few questions:

3. In science, we don't just point out the flaws in a theory and say, "hah! your theories are bunk ", and then go home and eat cake. Instead of eating cake, we come up with new theories to replace the flaws in the old. If you're suggesting that it's impossible to come up with a new theory, you will have to provide reasons for that.

So far, it seems you're using the old, "it's really, really, really hard to predict and control the weather, so it must be impossible!" tactic (an argument that Big Oil, the Bush Administration, and Creationists use quite frequently, I might add). It's really, really, really hard to predict a lot of things. And the goal of science isn't to control things at all. We can predict the consequences of many economic actions, and there are many economic theories that work. Our model of the climate isn't complete, and there are glaring holes in it, but there are bits of it that work brilliantly, and make perfect sense. I fear you're throwing the baby out with the bathwater when you claim that we can't know anything about our economy, and that all economics is bunk.

Stands up and Applauds.

The reason it calls itself a social science is because it wants to benefit from the positive connotation with the term "science", but it is important to keep in mind that social sciences are not sciences, just like rubber ducks are not ducks.

There are, I agree, some interesting areas of economics, such as behavioral and experimental economics.

Most economists seem to want to NOT be social scientists, IMHO, but real scientists. Hence the movement towards lots of mathematics. I'm not one of those.

To be an Austrian economist, you seem to favor a lot of government intervention.
Public education, anti-trust laws, The Fed, trade restrictions in terms of north-south trade (first world to third world, e.g. Africa) etc...

Homie, Austrian just means I am suspicious of any model I am handed until I get into the bones of it. As for being a libertarian, one must recognize that government plays a key role in mitigating externalities and providing public goods. There is alot of disoute, among libertarians even, over just what is a public good. Further, I've never been in favor of trade restricitions. I have repeatedly termed Africa's plight as partially caused by own our food subsidies, distorting the market for world food.

 

[DNK]

Try BankRate.com, or Yahoo! Finance. I'd advise you to focus on gross returns, not inflation, if you're confining your investments to one country. Inflation kinda is determined exogenously, and its a scalar, so it affects everything equally.

I just want to know how much my real savings are going to be increase year over year so I can calculate how much needs to be put in.

Equation for you:
[annual real yield] * [total retirement savings at retirement] = [annual retirement income]
[total retirement savings] = sum(n 1-40) of [annual real yield]^n * [amount annual saving]

That's a rough equation, I'm sure, but you get the point. I know what I want my income to be (ballpark), but to figure it out I need to know what I can expect the average retirement plan to give me in terms of annual real yields. I'm seeing average inflation rates around 2-4% over the last 60 years, I think. What are the yields of the various indexes, portfolios, etc?

I look at bonds and they look like they barely beat inflation and actually lose money in short-term bonds. I understand they aren't risky, but 1-2% annual real yield is terrible (I think all the current treasury bonds are -3% at best considering current inflation). I'd need to put half my pre-tax (expected) salary away to afford retirement on those. If I can expect an index to outperform those on average, then I wouldn't really start allocating assets to bonds until I was much older and was looking for a more short-term and stable investments. I suppose it's a "high risk" portfolio, but that inflation will kill me on bonds for sure - they seem far riskier on any sort of long-term investment because they're a sure way to not make money.

 

[Princeps]

I'm an Austrian economist.

No you're not.

And that's a compliment.

I have repeatedly termed Africa's plight as partially caused by own our food subsidies, distorting the market for world food.

Yes, and there are many more reasons. One important reason is the lack of effective government.

 

[JerichoHill]

And that's a compliment.

Yes, and there are many more reasons. One important reason is the lack of effective government.

I'll take any compliments I can get. Being intellectual seems to be regarded as bad as being a nerd was regarded in high school. Sigh.

And on Africa, yeah, that too. But our subsidies and dumping doesn't help =).

I just want to know how much my real savings are going to be increase year over year so I can calculate how much needs to be put in.

Equation for you:
[annual real yield] * [total retirement savings at retirement] = [annual retirement income]
[total retirement savings] = sum(n 1-40) of [annual real yield]^n * [amount annual saving]

That's a rough equation, I'm sure, but you get the point. I know what I want my income to be (ballpark), but to figure it out I need to know what I can expect the average retirement plan to give me in terms of annual real yields. I'm seeing average inflation rates around 2-4% over the last 60 years, I think. What are the yields of the various indexes, portfolios, etc?

I look at bonds and they look like they barely beat inflation and actually lose money in short-term bonds. I understand they aren't risky, but 1-2% annual real yield is terrible (I think all the current treasury bonds are -3% at best considering current inflation). I'd need to put half my pre-tax (expected) salary away to afford retirement on those. If I can expect an index to outperform those on average, then I wouldn't really start allocating assets to bonds until I was much older and was looking for a more short-term and stable investments. I suppose it's a "high risk" portfolio, but that inflation will kill me on bonds for sure - they seem far riskier on any sort of long-term investment because they're a sure way to not make money.

You're young. You do not want to be invested in bonds when you're young. You're better off purchasing equity indexes (around 6-7% real return, averaged) and as you get closer to retirement, you can rebalance into municipal bonds (about 4% return, tax-free). As for calculating how much to put it, put in as much as you can. Anticipate living longer than you think. If you can save more, save more. When you get a raise or promotion, save more of your increase than you spend.

Don't live a life where you deny yourself some good times, but live frugally and think about what you buy. Even a rational economist like myself enjoys a Slurpee every now and then.

 

[innonimatu]

So far, it seems you're using the old, "it's really, really, really hard to predict and control the weather, so it must be impossible!" tactic (an argument that Big Oil, the Bush Administration, and Creationists use quite frequently, I might add). It's really, really, really hard to predict a lot of things. And the goal of science isn't to control things at all. We can predict the consequences of many economic actions, and there are many economic theories that work. Our model of the climate isn't complete, and there are glaring holes in it, but there are bits of it that work brilliantly, and make perfect sense. I fear you're throwing the baby out with the bathwater when you claim that we can't know anything about our economy, and that all economics is bunk.

I'm not defending that old economic models must be thrown away. I'm saying that economic models cannot be enshrined. Take those thinks known by the pretentious name of "Fundamental theorems of welfare economics" (or some similar and equally pretentious name). People actually believe those "theorems" are as valid as a mathematical theorem - or at least that's the idea economists attempt to give. It is true that mathematic theorems must always be based based in some set of axioms. But the axioms used for those economic theorems are absolutely divorced from observable reality. And at some points the theorems contradict their own axioms (as I've been discussing on another thread).

Public policies re justified with these economic theorems, and discussion is conditioned by the widespread belief that those theorems are correct and unquestionable. Fooling people into not questioning them is a disservice to a democratic political system.

 

[Princeps]

I'll take any compliments I can get

Even if it comes from a source of doubtful competency?



And yes, I completely agree with you on the agricultural subsidies. But they are not the only cause of africas problems. Only in the west, where one has so many government provided and guaranteed privileges, can people run down government and put all blame on government failure.

 

[JerichoHill]

Princeps,

Beggards cannot be chooser.

Inno,

One thing we CAN agree on. It's silly that the economic language uses the word "law" to describe a theory. I actually lost points on an exam once as labelled such a law a theory. It was fun to challenge that professor in class to put it on the same plane as say, the law of thermodynamics.

Economics provides someone like myself a wonderful toolkit to analyze problems. But a toolkit is useless if all it has in it are screwdrivers, capeche? Economics can never be a hard science as there is an art to knowing which economic tool to use, much like there is to knowing what tool you need to build various components of a house.

 

[Mise]

I'm not defending that old economic models must be thrown away. I'm saying that economic models cannot be enshrined. Take those thinks known by the pretentious name of "Fundamental theorems of welfare economics" (or some similar and equally pretentious name). People actually believe those "theorems" are as valid as a mathematical theorem - or at least that's the idea economists attempt to give. It is true that mathematic theorems must always be based based in some set of axioms. But the axioms used for those economic theorems are absolutely divorced from observable reality. And at some points the theorems contradict their own axioms (as I've been discussing on another thread).

Public policies re justified with these economic theorems, and discussion is conditioned by the widespread belief that those theorems are correct and unquestionable. Fooling people into not questioning them is a disservice to a democratic political system.

I agree that such theorems and results in Economics should be taken with a pinch of salt, and not be treated as objective truths. But that particular theorem is simply an over-mathematised way of saying that the free market allocates resources better than, say, a communist government, in XYZ situations.

There are a few points I'd like to make about this:

1. It's my understanding that most attention is given by economists to situations where this isn't true -- i.e. the study of market failures. And it's been said in this thread already that most economists are left of centre, and thus don't have any kind of unwavering devotion to unfettered capitalism, but prefer government intervention to iron out said market failures.

2. I don't think anyone could claim that there is no debate over whether that particular theorem is true and relevant. There are countless threads on this forum debating all the issues surrounding that, and most countries have at least one political party arguing each side.

First, there's the assumptions made by the theorem - they very rarely wholly occur in reality, but in many instances, are sufficiently valid that the theorem still holds. There are many markets in which the free market will allocate resources better than the government (or some hypothetical computer program, or whatever other resource allocator you can think of); there is evidential basis for that particular theorem.

Second, there's the intent - is efficient resource allocation actually desirable in all situations? Is the cost of optimal resource allocation (i.e. unfettered capitalism) too great?


So yes, while I agree that the theorem you posted is rather pretentious and over-mathematised, and shouldn't be taken as fact, I disagree with your assertion that it is taken as fact by most people. Even economists focus their attention on situations in which it fails miserably!

 

[El_Machinae]

Why do you think Economists lean Democrat?

Because Republicans tend to only use 1/2 of an Economics 101 textbook when describing policy. Additionally, the concept of 'public good' and 'externality' tends to get hammered in when you study economics. Finally, there's the idea that you can control everything through money.

 

[Hygro]

so if graduate economics shows that undergrad economics is not applicable

and if I am studying undergrad econ but probably won't do grad school

A) let's say I am a politician: am I learning enough to make economic decisions

B) how can I best maximize my undergrad learning experience, with undergrad style courses?

 

[Homie]

so if graduate economics shows that undergrad economics is not applicable

and if I am studying undergrad econ but probably won't do grad school

A) let's say I am a politician: am I learning enough to make economic decisions

B) how can I best maximize my undergrad learning experience, with undergrad style courses?

Making a lot of assumptions there Hygro. You make it sound like undergrad econ = A load of horsecrap, whereas grad school econ = the truth.

I don`t think that is how it works.