Doom, Gloom, and Macroeconomics

[Ivanhoe]

The First Law of Economics: For every economist, there exists an equal and opposite economist.

The Second Law of Economics: They're both wrong.

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Kenneth Boulding said, “Mathematics brought rigor to Economics. Unfortunately, it also brought mortis.”

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What caused me to create this thread is something that popped up in my FB feed. Some of you know the Kramer Effect, wherein anything that stock market commentator Jim Kramer says is going to go up, inevitably goes down...

 

[Leo Niehorster]

First thing that we were told in Economics 101 was that people behave rationally — the rest of the courses were based on this principle. 🤮

[Ssnake]

It's a modelling assumption, and those models do yield useful insights. There are other models that involve transactional costs which explain why people are often satisfied with second-best results, but those models are more complex and therefore not suitable for macroeconomics 101.

The error is in your assumption that the 101 is a comprehensive overview over the whole field.

[RETAC21]

28 minutes ago, Ssnake said:

It's a modelling assumption, and those models do yield useful insights. There are other models that involve transactional costs which explain why people are often satisfied with second-best results, but those models are more complex and therefore not suitable for macroeconomics 101.

The error is in your assumption that the 101 is a comprehensive overview over the whole field.

People is perfectly comfortable doing something that objectively hurts them if it conforms to their ideology and principles in the widest sense of the terms.

Ask Argentinians.

Which is why econometrics is so bloody complicated and I had to cheat back in the day

[Ssnake]

58 minutes ago, RETAC21 said:

People is perfectly comfortable doing something that objectively hurts them if it conforms to their ideology and principles in the widest sense of the terms.

Usually, because they don't really understand what choices they make. There is, of course, also the case of the knowing and willing self-sacrifice. Usually however, people prefer to sacrifice something or someone else.

[sunday]

Also, people could act in a irrational manner, and those that act rationally could lose in the short term, and the losses could be big enough to  make the long term irrelevant. See the Dutch Tulip Mania, for instance.

Edited November 25, 2023 by sunday

[RETAC21]

58 minutes ago, sunday said:

Also, people could act in a irrational manner, and those that act rationally could lose in the short term, and the losses could be big enough to  make the long term irrelevant. See the Dutch Tulip Mania, for instance.

Which never existed...

So the issue is not that economics cannot be a science, but that the observable inputs are so random that the outputs are always going to be all over the place.

 

[RETAC21]

1 hour ago, Ssnake said:

Usually, because they don't really understand what choices they make. There is, of course, also the case of the knowing and willing self-sacrifice. Usually however, people prefer to sacrifice something or someone else.

No, even then. For example, the Argentinians trade unions have said that they are going to fight "to the death" any reform pushed forward by Milei in a country with inflation out of control, which hurts the trade unionist objectively and which, if bought under control, would benefit them more than anyone else (because the unions would still be able to have negotiating power and would be able to strong arm pay raises). 

So the rational player hypothesis is mostly applicable to microeconomics, where the variables are isolated to leave a number of outcomes that is manageable, but macroeconomics should be better understood as a study of trends, an explanation of historical events and a magical crystal ball to look up the future.

[Ssnake]

There's also the decades-old theory of Public Choice that investigates how group leaders make their decisions. Union leaders do not necessarily have the best interests of their paying members on their mind. They get rewarded with public attention and power if they latch on to ideology-driven parties.

[Ivanhoe]

4 hours ago, RETAC21 said:

So the rational player hypothesis is mostly applicable to microeconomics, where the variables are isolated to leave a number of outcomes that is manageable, but macroeconomics should be better understood as a study of trends, an explanation of historical events and a magical crystal ball to look up the future.

Any model which builds on a "all humans do X in response to Y" is inherently wrong. Short- vs long-term as mentioned, probability of rational vs emotional decisionmaking (always a safe assumption that humans will distribute along some kind of Bell curve), magnitude of Y, accuracy of the info used to generate the decision, etc. 

And always keep in mind the quotation from Karl Kristian Steincke; It is difficult to make predictions, especially about the future.

All that said, given the Kramer Effect, I'll be re-inventorying my prepper supplies this holiday season. I look forward to trading a 10lb bag of rice for a newish motorcycle or similar playtoy...

 

 

[RETAC21]

3 minutes ago, Ivanhoe said:

Any model which builds on a "all humans do X in response to Y" is inherently wrong. Short- vs long-term as mentioned, probability of rational vs emotional decisionmaking (always a safe assumption that humans will distribute along some kind of Bell curve), magnitude of Y, accuracy of the info used to generate the decision, etc. 

And always keep in mind the quotation from Karl Kristian Steincke; It is difficult to make predictions, especially about the future.

All that said, given the Kramer Effect, I'll be re-inventorying my prepper supplies this holiday season. I look forward to trading a 10lb bag of rice for a newish motorcycle or similar playtoy...

You will never see a model that guarantees that "all humans do X in response to Y", but they will have a statistical % associated to it, so most humans will. Misconstruing this is what leads to error. If you look at the Nobel prizes since 2000, you will note most are for analyzing outcomes that have already happened, there are only 2 that look forward that I can see:

Claudia Goldin “for having advanced our understanding of women’s labour market outcomes”

Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig “for research on banks and financial crises”

David Card “for his empirical contributions to labour economics”

“for their methodological contributions to the analysis of causal relationships”

Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats”

Abhijit Banerjee, Esther Duflo and Michael Kremer “for their experimental approach to alleviating global poverty”

William D. Nordhaus “for integrating climate change into long-run macroeconomic analysis”

Paul M. Romer “for integrating technological innovations into long-run macroeconomic analysis”

Richard H. Thaler “for his contributions to behavioural economics”

Oliver Hart and Bengt Holmström “for their contributions to contract theory”

Angus Deaton “for his analysis of consumption, poverty, and welfare”

Jean Tirole “for his analysis of market power and regulation”

Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller “for their empirical analysis of asset prices”

Alvin E. Roth and Lloyd S. Shapley “for the theory of stable allocations and the practice of market design”

Thomas J. Sargent and Christopher A. Sims “for their empirical research on cause and effect in the macroeconomy”

Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides “for their analysis of markets with search frictions”

Elinor Ostrom “for her analysis of economic governance, especially the commons”

Oliver E. Williamson “for his analysis of economic governance, especially the boundaries of the firm”

Paul Krugman “for his analysis of trade patterns and location of economic activity”

Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson “for having laid the foundations of mechanism design theory”

Edmund S. Phelps “for his analysis of intertemporal tradeoffs in macroeconomic policy”

Robert J. Aumann and Thomas C. Schelling “for having enhanced our understanding of conflict and cooperation through game-theory analysis”

Finn E. Kydland and Edward C. Prescott “for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles”

Robert F. Engle III “for methods of analyzing economic time series with time-varying volatility (ARCH)”

Clive W.J. Granger “for methods of analyzing economic time series with common trends (cointegration)”

Daniel Kahneman “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”

Vernon L. Smith “for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms”

George A. Akerlof, A. Michael Spence and Joseph E. Stiglitz “for their analyses of markets with asymmetric information”

James J. Heckman “for his development of theory and methods for analyzing selective samples”

Daniel L. McFadden “for his development of theory and methods for analyzing discrete choice”

[RETAC21]

Why macroeconomics gets bad name, spouting of non-sense:, see for example, Modern Monetary Theory:

 

[Rick]

A good book on this topic is "The Poverty of Nations" by Wayne Grudem and Barry Asmus.

[Rick]

There are Milton Friedman books and videos on this subject. 

[Ivanhoe]

https://www.vox.com/money/2023/11/8/23951098/economy-inflation-prices-job-market-sticker-shock

 

Quote

 

The problem isn’t inflation. It’s prices.

What goes up may not come down. Like, ever.

By Emily Stewartemily.stewart@vox.com  Updated Nov 14, 2023, 9:34am EST

 

 

https://www.gao.gov/blog/sticker-shock-grocery-store-inflation-wasnt-only-reason-food-prices-increased
 

Quote

 

Sticker Shock at the Grocery Store? Inflation Wasn’t the Only Reason Food Prices Increased

Posted on April 11, 2023

Last year, U.S. consumers saw the largest annual increase in food prices since the 1980s. While food prices generally increased about 2% in prior years, they increased about 11% from 2021 to 2022. Inflation contributed to the increase. But there were other factors—like global disruptions to the food supply chain—that may have had a greater impact. And not everyone felt this increase the same way.

 

 

 

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

’The question is,’ said Alice, ‘whether you can make words mean so many different things.’

’The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.”

[Ivanhoe]

Sanity warning; I strongly recommend no less than 3 shots of añejo tequila before viewing the following;

Note the early use of the passive voice; "while the economy was shut down." No one knows who shut the economy down, mystical forces from Narnia perhaps.

There was one intelligent thing said; Magical Money Tree.

 

[Ivanhoe]

Here's a decent takedown of MMT;