Economics is quantum

Recommended reading, economic debates, predictions and opinions.
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twa2w
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Economics is quantum

Post by twa2w » 04 Jan 2018 12:51

I found this article interesting, although I have no background in economics. I think the economists on the forum may find it interesting as will perhaps some of those with a science background like myself.
I couldn't really find an excerpt to pull out that would do the whole justice.



https://aeon.co/essays/has-the-time-com ... 3-69490573

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ghariton
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Re: Economics is quantum

Post by ghariton » 04 Jan 2018 14:01

twa2w wrote:
04 Jan 2018 12:51
I found this article interesting, although I have no background in economics. I think the economists on the forum may find it interesting as will perhaps some of those with a science background like myself.
I couldn't really find an excerpt to pull out that would do the whole justice.



https://aeon.co/essays/has-the-time-com ... 3-69490573
Thank you for the link. I hacve been reading David Orrell, off and on, for nearly forty years now, and I usually enjoy what he writes. But he does have a point of view -- he is a big fan of "complexity theory" -- and I think that colours his positions.

The first half of his article is a good critique of macroeconomics, i.e. study of the economy as a whole. It is interesting that he has a quote from Lucas, because a number of people believe it is Lucas who derailed macroeconomics, back in the 1960s and 1970s. The idea became fashionable that we needed grand macroeconomic models that were internally consistent, and that internal consistency took priority over empirical accuracy. Because the economy is so difficult to model, especially if one is using abstractions such as "the" unemployment rate, or "the" amount of money or credit, one abstracts away from a lot of details that complicvate the models and make them very difficult to build, but that are very important if the models are to be useful.

On top of that, there was not enough macroeconomic data to estimate the parameters of these grand models. "Reasonable" hypothetical values were often plugged in. (Hey, you had to make the models work somehow.)

Too often, what you had were purely theoretical models, with a smidgen of empirical evidence and the rest based on the model-builder's judgement.

Orrell would like to make new models. Unfortunately, it seems that he would like to make them even more complicated ("complexity theory" and all that). My suggestion is to give up on the grand, all-encompassing models. Instead, set up a series of partial models, each model focussing on a specific problem or issue, and using real empirical data in its solution. (The idea was popular when I was a student of economics some forty years ago, but it never caught on.)

Finally, I would suggest that Orrell is mixing up macroeconomics and microeconomics. While the current state of macroeconomics is doubtful, and indeed more than one well-established economist has denounced the thing as a fraud (perhaps a bit harsh), microeconomics is alive, well, and producing useful insights. This is the area where the bulk of economists work, but not the area which makes the headlines. After all, knowing that a 10 per cent rise in the price of widgets will likely lead to a 5 per cent drop in the quantity purchased, while very useful to an enterprise, is hardly of very wide interest. Similarly, the costs and benefits of introducing a new technology in a company tend to draw attention from a very limited audience.

George
The plural of anecdote is NOT data.

twa2w
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Re: Economics is quantum

Post by twa2w » 04 Jan 2018 15:02

Thanks for the insightful comments on the article George.

I am not an economist by any means but your microec comment re10% rise in price leading to a 5% drop in sales interesting because while that makes sense from a rational perspective, we know that often an increase in price can result in an increase in sales, or adding a lower priced model may result in an increase in sales of the existing model.
Perhaps pyschology is the biggest factor in or at the micro level. Or perhaps economic behavour can only be explained in hindsight ;-)

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ghariton
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Re: Economics is quantum

Post by ghariton » 04 Jan 2018 17:31

twa2w wrote:
04 Jan 2018 15:02
we know that often an increase in price can result in an increase in sales
Yes. Many consumers seem to believe that higher price is an indicator of higher quality. This is especially true for products which are very complex a quality is hard to judge. However, in the on-line world, there are now many reviews, comments, and ratings available, and I am told that this effect is diminishing in importance.

There is also snobbery involved, where consumers attach value to having something expensive, just because it is expensive. I remember an ad, some forty years ago, for Boodles Gin, claiming it was the most expensive gin in the world.

A careful micro-economist will recognize these effects and try to build them into his estimates, which should take into account the specifics of the case. But as academic economics has become dominated by mathematics, the non-mathematical detail has been set aside, especially in universities.
Perhaps pyschology is the biggest factor
Hence the popularity of behavioural economics, a close cousin to nehavioural finance. Kahneman and Tversky have long produced such results. But there are some interesting findings by John List of the University of Chicago, suggesting that the violations of rationality (as defined by traditional economics) usually occur in one-off situations or when inexperienced participants make decisions. When professionals are involved, the behavioural effects tend to disappear.
Or perhaps economic behavour can only be explained in hindsight ;-)
It's a lot easier to predict the past than the future.:lol:

But economics has certainly suffered from a huge lack of humility. Economists have long overstated what they can explain. As to their predictions, honesty should require them to come with confidence intervals -- but those would have to be so wide as to humiliate the profession.

George
The plural of anecdote is NOT data.

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Re: Economics is quantum

Post by twa2w » 05 Jan 2018 16:18

Well explained as usual.

What is that old saying?

If you lay all the economists in the world end to end, they still wouldn't reach a conlusion. ( or was it consensus). Could be said for a few other professions as well of course.

I once knew an economist who said he didn't have enough personality to become an accountant so he became an economist. But I noticed he wasn't short on ego either when it came to his predictions ;-)

Although he did tell me he often looked to see what the consensus predictions of his peers were and he would bet against them when investing. Did all right too as I recall.
( senior guy at e&y at one time)

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The real Adam Smith?

Post by twa2w » 16 Jan 2018 12:59

Another interesting article ( at least to this non economist) with a different interpretation. What Adam Smith actually believed.

https://aeon.co/essays/we-should-look-c ... f-69490573

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