Ask an Economist (Post #1005 and counting)

[JerichoHill]

Undergrad economics teaches simple models and more importantly, the math tools an economist would use, and how an economist would think through a problem

Graduate level economics will not rely on simplifying assumptions.

For a strict undergraduate eduction, 2 courses of Micro, 1 Macro, 1 econometrics, 1 mathematical economics, and a economic history course or three would be a good start, because those are the classes I think teach good analytical tools

 

[Perfection]

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

I think we're getting bogged down in the semantics here. Let me try to explain.

When tossed around casually "science" does more imply natural sciences (a high school psychology course is generally not considered a "science class"), but when people talk about "true science" or a "scientific field" or "science" in a philosophical sense (which is the sense Fifty is using), it implies neither of your two definitions.

What is being implied here is (roughly speaking) the careful application of empirical evidence gathering techniques to verify claims. This is very important because without such methods one cannot figure out if ones ideas really do bear out in reality.

There are plenty of human centered fields that do use such techniques (like lingusitics), but there are those that don't and economics as a modern academic discpline is for the most part is one of them.

This is what Fifty means when he says economics is not a science.

 

[LightFang]

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.

Admittedly, that is rather how JH has been portraying it...

 

[Mise]

and how an economist would think through a problem

IMO that's the most important part of ANY undergrad course. (replace "economist" as appropriate, ofc )

 

[Hygro]

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.

In the "market failures" thread JerichoHill made a similar claim, and I wanted to see what his advice was in that context.


@JH That was my impression as well, good to learn analytical skills moreso than an applicative discipline. The courses I am required to take align closely to your rec.

 

[JerichoHill]

Admittedly, that is rather how JH has been portraying it...

If you read my posts clearly, you would know that NOT how I'm portarying it.

 

[JerichoHill]

@JH That was my impression as well, good to learn analytical skills moreso than an applicative discipline. The courses I am required to take align closely to your rec.

Exactly Hygro, economics in undergraduate form is a method of critical thinking. I just don't understand how some folks can't grasp that you don't teach complicated stuff in introductory courses. I don't recall learning Newton's laws in kindergarten...

 

[Bill3000]

Exactly Hygro, economics in undergraduate form is a method of critical thinking. I just don't understand how some folks can't grasp that you don't teach complicated stuff in introductory courses. I don't recall learning Newton's laws in kindergarten...

There's a difference between Newton's Laws, which are applicable under a huge variety of circumstances, even if they are not accurate on certain scales, and economic models/theories that are completely wrong.

 

[JerichoHill]

Bill,

I was CRITICIZING the usage of the term "laws" in economic study, by pointing out that a "law", rhetorically, means something incontrovertible. A theory does not equate to a law.

Sigh... Reading comprehension.

 

[Theige]

Economics is not a science.

Its much more important than any science

 

[Bill3000]

Bill,

I was CRITICIZING the usage of the term "laws" in economic study, by pointing out that a "law", rhetorically, means something incontrovertible. A theory does not equate to a law.

Sigh... Reading comprehension.

But that's not even what a law means in science! Laws are often weaker than theories. Granted, there are some laws that are thought to be incontrovertible, such as the law of thermodynamics as you said, but the vast majority of "laws" in science are often merely generalizations of empirical statements over a certain range. Hooke's Law is probably the classic example of this - it's an empirical statement that says that over a certain range, forces that are a function of distance can be approximated to be directly proportional to position.

So if by "law" they mean mere empirical generalizations, then in terms of physical laws, it's a good term, though it is misleading because of the layman's definition. But scientific theories are much, much more comprehensive and explanatory powerful than laws - it takes more than an equation to make a theory.

Economics is not a science.

Its much more important than any science

If it's more important than science and less rigorous, then you're screwed.

 

[JerichoHill]

Bill3000,

Can you edit your post to make it CLEAR that I'm not responsible for the 2nd quote in your last post. The way its written, it sure implies that. It's not a statement I agree with either.

On the subject of the semantics and rhetoric of the word "law", I would propose that "law" would have a weightier effect on a layperson versus a "theory" For rhetorical reasons, the usage of the term "law" in economics is improper.

 

[aneeshm]

A few questions:

a) Is the book "Financial Management" (Brigham and Ehrhardt) a good way to begin understanding the world of finance, and to get a deeper idea of what the current crisis is about? I ask because I used it as part of a course on financial and industrial management in my engineering degree, and as I NEVER get rid of books, I still have it. Also, if not this one, which book would you recommend to a relative layman like myself to get a better understanding of the financial world?

b) Could you please explain the concepts of "leverage", "deleveraging", and "unwinding of debt" to me?

c) Could you please clarify the nature of the current crisis to me? Apologies in advance if this has been asked before. As far as I understand it, the crisis isn't so much on "fundamentals" as it is on the institutions' ability to function on a day-to-day basis. That is, all these organisations relied a lot on short-term loans to carry on their routine operations, and when the founts of these loans dried up, it turns out that they couldn't carry on regular operations any more, and thus had to file for bankruptcy. It is in this context that I wish to understand the answer to the second question, by the way - what do leverage, deleveraging, and unwinding debt mean in this context?

 

[Fifty]

a) Is the book "Financial Management" (Brigham and Ehrhardt) a good way to begin understanding the world of finance, and to get a deeper idea of what the current crisis is about? I ask because I used it as part of a course on financial and industrial management in my engineering degree, and as I NEVER get rid of books, I still have it. Also, if not this one, which book would you recommend to a relative layman like myself to get a better understanding of the financial world

For the bolded part in particular, I'd highly recommend anything by Naseem Taleb, particularly either Fooled by Randomness or The Black Swan. He makes a compelling case that the plague of modern finance (and to a lesser--though still great--extent, economics) is misunderstanding of probability. Its also a great introduction to some of the great probability fallacies like survivorship bias (the bias responsible for making people like JH worship successful investors). Given your interest in stuff like evolutionary psychology, Im betting you'd like it a lot.

 

[JerichoHill]

Fifty, seriously man, why are you trolling me. You know darn well I don't worship anyone.

Aneeshm, on your third point, that was the problem for AIG.

 

[aneeshm]

Aneeshm, on your third point, that was the problem for AIG.

OK. And what was the problem for the others? Could you please also answer the other questions?

 

[Whomp]

Aneeshm--Deleveraging means that credit was way too easy to access and offer globally due to low cost of funds. This low cost to borrow brought a lot of unqualified borrowers into the market (individuals and companies). On top of it the lenders were leveraging and offering terms to simply close business that were wholly unrealistic (IE covenant light loans and 0% down payments). The other problem for lenders is they leverage their balances sheets for additional return in some cases as much as 33:1 (Bear Stearns) so a 3% decline in capital wipes out all of their capital. When credit is easy then humans reach beyond their means and now the pendulum is swinging the other way where only those who don't need credit have access to credit.

As Warren Buffet said "you don't know who is swimming naked until the tide goes out". The tide went out.


If you want to read a book that's worthwhile I also recommend "The Black Swan" as I started a thread on black swans but received a fair amount of abuse for it at the time. However, the most important book to read is "Extraordinary Popular Delusions and the Madness of Crowds". Even though the book was written by Charles Mackay in 1841 it continues to be applicable today.

Fifty--lighten up.

 

[Elrohir]

What are your opinions on the big bailouts that are being proposed right now? Good idea, bad idea? Best we can do in a bad situation? If you don't think they should happen, is there an alternative that you'd suggest? If you do think that it should go through, what controls would be a good idea to ensure that this doesn't happen again a decade or two down the road?

 

[Bill3000]

Is it possible to be poor enough to not be able to afford medication in to get medicaid while at the same time being able to afford timesharing?

 

[theskald]

I am hilariously bad with money and have no natural sense for finance or economics. My first question is, am I right to think that some people simply have a better head for this or do you think it is just a matter of having sufficient interest in the subject and working hard to develop the necessary skills, with a generous sprinkling of experience?

I ask this because my second question depends on whether a money-moron like me can learn how to handle capital. For a financially-******** college student that is just entering sophomore status and whose financial history consists of getting a job and a bank account and living paycheck-to-paycheck, would taking an introductory class in economics be helpful? Are there better options? Are there books you can recommend for someone who just wants to start building a stronger foundation for his future financial security? Like Suze Orman: is she full of crap or helpful?

I get a deer-in-the-headlights look as I try to read much of this thread, and your website, while very interesting so far, is equally baffling to me. I'd appreciate even the most basic advice.