Along similar lines, nobody "really knows" how Google search works. Sure, you have some experts who can talk about how parts of the algorithm work, you have the underlying bones of page rank, you even have SEO experts who can get you reasonably close to the top search results.
But is there a single individual on earth who knows all the ins and outs of all the minutiae of every single aspect of Google search - from search result algorithm to ingestion to crawling to artificial intelligence? Not a chance.
You don't even have to get as complicated as Google search - any reasonably complex software system with hundreds of engineers working on it will be beyond the comprehension of any human being - fully understanding that is (which also entails knowing exactly all the edge cases, all the bugs, all the unexpected results possible, etc.)
How does the economy work? Nobody knows - but that doesn't mean nothing intelligent can be said about it, or that the Fed can't make reasonable decisions on imperfect information - just like any other incredibly complex system that humans struggle to understand.
That's missing the point. Economics is treated more like thermodynamics. In thermo you have lumped parameter models (parameters like temperature and enthalpy) that are actually correct even though they dont take tiny details into account.
IMHO the problem with economics is that their simple models are not over a closed system. A supply and demand curve is fine for a specific product, but it fails if you try to use it at the macro level where other factors come into play.
I'd love to work on better models for the fed, with the data and experts they have.
> Rule 1: Think of the economy as being more like a cat than a washing machine.
> We are victims of the post-Enlightenment view that the world functions like a sophisticated machine, to be understood like a textbook engineering problem and run by wonks. In other words, like a home appliance, not like the human body. If this were so, our institutions would have no self-healing properties and would need someone to run and micromanage them, to protect their safety, because they cannot survive on their own.
> By contrast, natural or organic systems are antifragile: They need some dose of disorder in order to develop. Deprive your bones of stress and they become brittle. This denial of the antifragility of living or complex systems is the costliest mistake that we have made in modern times. Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions.
The problem with this, I think, is that it can always be used to justify volatility.
E.g. economic policy after the Great Depression has kept such an event from happening again at that scale. Was there too much volatility in the early half of the 20th century, or is the economic policy that moderated the cycles just setting us up for an extreme crash to come?
Any reduction of volatility could be argued to be a step away from antifragility, toward systems that can't survive on their own. But not all are; and even when they are, there may be other benefits that compensate for the loss.
> is the economic policy that moderated the cycles just setting us up for an extreme crash to come
It's actually not that complicated. All of the complexity of the economy ultimately boils down a very simple thing: it's a mechanism that allows people to exchange current wealth (i.e. stuff) for claims on future wealth (i.e. money). As long as everyone believes that their claims on future wealth will be redeemable at some rate they consider a fair trade, everything hums along. As soon as people stop believing this, everything falls apart.
What happened in 1929 was mainly a liquidity crisis, not an actual economic crisis, at least not at first. The underlying productivity of the American economy was unchanged before the crash and immediately after. But the inability of people to pay for things because of the Fed's unwillingness to loosen credit caused people to lose faith in the value of their claims on future wealth, and that caused an actual reduction in productivity over time. The same thing happened in reverse in the Weimar republic where the problem was effectively the exact opposite: inflation caused by government paying debts by (literally) printing money. (That was a little different because Weimar Germany wasn't very productive, having never really recovered from WWI, but that doesn't really change the basic conceptual simplicity of what happened in both cases.)
> But the inability of people to pay for things because of the Fed's unwillingness to loosen credit caused people to lose faith in the value of their claims on future wealth, and that caused an actual reduction in productivity over time.
It wasn't the claims on future wealth (i.e. money) that they lost faith in, it was their job security.
You see the stock market crash so you tighten your belt in anticipation of potentially losing your job. So does everyone else. So people don't buy things which means companies don't need workers to make them and people lose their jobs. Then people who lose their jobs don't spend money, and people see people losing their jobs and tighten their belts even more for fear they're next, and you get a deflationary spiral.
You can lay this on the Fed for not providing enough liquidity, but the real reason this happens is that the Fed is the only one allowed to do it.
Suppose you're a candlemaker in the US during a deflationary spiral. Nobody will give you dollars for your candles. However, someone might give you euros or pesos or something like that. But now you have to pay your rent. If you can pay it in pesos, you're all set. If you can't, you have to buy dollars with pesos, which bids up the price of dollars and accelerates the deflationary spiral.
The problem comes when the government privileges its own currency. If you can't easily get a bank account denominated in another currency without converting it to dollars, if you can't pay your taxes in pesos even when that was what you received from the buyer, then people still have to convert the other currency into dollars and continue the deflationary spiral.
Whereas without that government restriction, a shortage of dollars would be resolved by using something more available as the medium of exchange.
At the time of the great depression, every important currency was on a gold standard. So in an important sense there was only one currency: gold. The impossibility of increasing currency supply because of the gold standard is recognized as a major contributor to the depression.
Even when countries were on the gold standard, they still had fractional reserve banking. If a troy ounce of gold was $100 , the bank had one ounce of gold and three separate people had a $100 bill, any one of them could go to the bank and get the gold, as long as not all of them did.
It's also possible to have a gold standard without holding your reserves in gold. The bank could hold them in anything -- other metals, bonds, real estate -- and then exchange that thing for gold in the market in the event that the customer comes for it, which they only do if they lack confidence that the bank will be able to make good, which doesn't happen when the bank is holding valuable assets. And then you can create as much "money" as you need by, for example, making mortgage loans backed by real estate.
You can still get into trouble there if the value of the assets declines (see 2008 housing crash), but that's a different kind of problem than the original one with separate methods to avoid it.
> Even when countries were on the gold standard, they still had fractional reserve banking. If a troy ounce of gold was $100 , the bank had one ounce of gold and three separate people had a $100 bill, any one of them could go to the bank and get the gold, as long as not all of them did.
Fractional Reserve is easier to understand as debt than as an asset. A bank is given $1000 from a central bank. The bank can now loan that $1000 with interest for a total of $1100. The bank is allowed to loan that debt promise at a fraction reserve rate of 7-1 or 5-1 as loans to other customers. The $1100 promise can be loaned as $800 plus interest for the total loan value of $880. That can then be loaned out as $660 including interest. Then $440 can be loaned out. Then $220.
So the original $1000 from the central bank was used to create $3300 worth of debt.
Interesting ideas - any place one could learn more on how to think like this? Ie books or ? Basically How did you manage to get it to this simple statement, which seems intuitively correct when so much macro economics I’ve tried to read seem like obvious nonsense
Start from first principles and look at the economic data directly (understanding game theory is a crucial piece of this). Make sure to ignore the narratives as these tend to obscure the understanding of the fundamentals (since most people pushing various narratives about the market are driven by vested interests rather than educational interests).
Seriously though, I am actually in the process of writing a book/blog about this sort of thing (and a whole lot more). In the meantime, you can check out my old blog. See my profile for a link. When the new blog launches I'll post an announcement on the old one, so subscribe there if you want to be notified.
It already helps A LOT if you decouple your thinking from "money". If you realize that "stuff" (tangible but also tangible) is not directly impacted, and that a crash that "destroys billons of wealth" in fact does no such thing, you can start looking at the world sans "money". You will get a much better grip on reality. Of course financials impact stuff - but why? It's all the ideas and assumptions in our heads - and they can change. In fact, they changed a lot over time, and the meaning of "money" is many things.
The second big thing is to understand that ideas for individuals (firms or people), for example "costs are bad because I lose something", have a completely different meaning for the economy. Because cost is income. Cutting costs may make sense for a company, but if you cut costs in the economy people lose jobs. You will actually have to trouble yourself and look away from the money to see what the flow of money actually achieves in the real world to make a judgement. Just looking at the money is meaningless.
The third big thing is about "pensions". While putting back money into some account makes sense individually, again it has no meaning for the economy. Because "saving money" has no useful meaning on the economy scale. Everything is produced and consumed NOW. Nobody puts back stuff into warehouses to be used decades later for the retired, especially not services. So relax when there is talk about "pension crisis" on an economic scale. Sure, who gets what is important and for any one individual the financial stuff really matters because they are bound into the system, but for the economy all that matters is what people in the future will produce.
Money "saved" for pensions does not send any products or services into the future, nor is it needed for "investment" (our finance system does not need that, money can be and is created on demand for debt). It sends information into the future, which future generations may or may not use to determine how much of what they produce then they will give to you (in retirement). However, what is available overall and what the then-society will be willing to use for pensions will be up to them. It does not matter one bit (overall!) what irrelevant virtual numbers are written in some "accounts".
Another thing is debt: For an individual it's bad unless it's debt used to produce cash flow. For an economy - it does not matter (of course the details matter, if done bad it can reduce confidence and have a big bad ripple impact). "Debt is money" is not just some phrase. Debt creates money (yes yes money is very complex - much like a quantum particle, it depends on what you look at and context). The best simple example I saw was a story where a kid wrote a promise to mow a lawn (any lawn), and that promise was handed around in the neighborhood to "pay" for neighborhood favor things. If the debt - having to mow the lawn - was actually repaid by the kid this piece of "currency" would just be gone.
I'll leave it up to the reader to think about what "saving" on the economic scale really achieves, it's a fun little exercise. Again it works best if you ignore "money", or treat is as secondary - looking at its effects instead of at it.
TL;DR I recommend not going too technical. The deeper you look the less you see of the big picture. Just start thinking about stuff - ignoring money completely or see it as the completely virtual made-up control-carrot that it is - while doing walks in the park or forest.
Debt is a very specific word. Yes you can get capital by going into debt. But just "capital" can also mean it was yours to begin with. Debt means you created an obligation to somebody else, which is additional information. You have X amount of money - capital - but there is a difference if you get it by borrowing or if it was already yours.
what i meant was, that if people dont use debt as a form of capital (investment in something to get a larger return) then it is basically bad as you say because you will be under water when paying the interest..
basically, people who go into debt need to think like a capitalist, and invest it in something (thier skills, a car to get a better job somewhere, etc)
> What happened in 1929 was mainly a liquidity crisis, not an actual economic crisis, at least not at first. The underlying productivity of the American economy was unchanged before the crash and immediately a
apologies for a potentially ignorant question, but werent most economic crisis in the past (and near recent) caused by liquidity issues?
> inflation caused by government paying debts by (literally) printing money.
My understanding is that it was paying debts by buying the thing the debt was denominated in (gold?) by printing money. Which meant that as the early money printed caused some level of inflation, they then needed to print that much more to make the next payment.
> Promoting antifragility doesn’t mean that government institutions should avoid intervention altogether. In fact, a key problem with overzealous intervention is that, by depleting resources, it often results in a failure to intervene in more urgent situations, like natural disasters. So in complex systems, we should limit government (and other) interventions to important matters: The state should be there for emergency-room surgery, not nanny-style maintenance and overmedication of the patient—and it should get better at the former.
Cats get eaten by dogs/coyotes/alligators. And if they're let outside, they decimate native bird populations. Sure, the cat will "grow organically" best without outside controls, but it'll also turn feral and potentially die young.
Is there an economy shop where you can go get a new economy if this one gets run over by a car?
The better analogy is that the economy works like all the cats in the world. Then we see that cats are not at all at risk of going extinct and the number of cats in the world can go up even while some of them get eaten by coyotes.
Well what if the economy works like all the tigers in the world - very likely to go extinct in the not too distant future without careful conservation.
99.9% of species that have ever lived have gone extinct. Choosing one species that happens to be doing well at the moment (especially one that is doing well specifically because of human intervention) to use as an example doesn't indicate that species in general are robust.
Also people working on thermodynamics get to test their models a lot, and it’s noticed when their models fail. I’m not even sure supply demand curve is good for a specific product, having spent some time around consumer packaged goods analytics. Consumer behavior around frozen pizza alone is massively complicated, never mind cleaning supplies, candy, beer, or cosmetics.
For instance, lowering the price of something doesn't necessarily increase sales - it can decrease sales if say
the consumer believes it's cheaper because it's an inferior product.
So sometimes increasing the price is the way to go to increase sales.
So the price operates in weird ways; what about other things. If the product is placed next to more expensive items it could do a number of things.
For instance, it could be a decoy product and increase the sales of the adjacent item. Or perhaps the adjacent item could be a decoy product.
And what about numbers? Pricing things ending in 9s perform better. Selling things at $39 tend to do better then lower numbers like $34 or $37 because of the 9.
And then there's the packaging and placement itself. Tall or wide packaging of the same volume emote different signals and respond differently to prices - look at the great variety of how bottled water is packaged next time you're at the store.
Then there's the quantity on a shelf at any given time. Sometimes intentionally overstocking the shelves will increase sales as consumers will take more than they need, sometimes understocking will creating anxiety that the product won't be available when needed. Depends on the product, the buyer, the conditions of the market, lots of things.
Then there's the brand itself. Depending on the market you're in, a name brand can either help or hurt you. In some markets, the name brand is associated with premium pricing and poor value so it doesn't carry your product; in other markets it's just the opposite.
And then there's discounts and sales. In some stores you want to never have a sale, ever. In other stores you want to barrage your shoppers with a complicated array of perpetually churning sales.
And what about sales, there's an artificial price that gets advertised before the actual one; nobody is paying the higher price, so it can more or less be chosen arbitrarily. You can mark your bubblegum as 99.99% off from being $10,000, but then the illusion is broken.
Instead, what sales do is they give the perception of a higher price signal through the presentation of the sale without actually charging the price.
That's why when you go into clothing stores they'll say the product was $95 or whatever and what luck, through many discounts it's now only $30. Well they all sold at about $30, we know that, but the product decoy pricing itself tries to capture both worlds.
This is just honestly just a tiny bit of how demand actually works. It's a vast study.
The point is that people aren't mechanical rational automotons without any strategy or agency who respond to prices through unconscious reflexes. Nor do they have perfect information or maximize their utility value through arbitrarily complex deductions and always choose the most optimum outcome.
Things are totally messy and the classical models are about as accurate as saying "winter brings cold weather and summer brings hot". Sure, in general. But on any specific day it's non predictive.
A $10,000 pack of gum will likely perform poorly. But if you hyped the heck out of it and made it really unique, you might even sell out your inventory of that alarmingly quickly because humans are weird like that.
> That's why when you go into clothing stores they'll say the product was $95 or whatever and what luck, through many discounts it's now only $30. Well they all sold at about $30, we know that, but the product decoy pricing itself tries to capture both worlds.
isnt that called "double pricing" and illegal in some countries?
Thermodynamics is always the same. People’s tastes change all the time constantly. The same person may do something different tomorrow under the same circumstances as of today.
The real problem with predicting the economy is that models get factored in.
Suppose you come up with a way to predict the stock market. You publish it. Well, it immediately stops working, because now a bunch of Wall St. guys are using your model to try to predict what will happen, and that changes the outcome. It breaks the model.
Published economic models don't work because they affect the thing they model and you can't solve the halting problem.
I don’t think modeling can be done. Unlike thermodynamics an economy doesn’t follow reproducible natural laws. You can model some aspects but as soon as you make decisions based on the model somebody will take advantage of it and the model won’t work anymore.
An economy is way more psychology than natural science.
I think this is a common misconception about the economy and the study of economics.
Everyone who participates in the economy has some mental model of the economy. That means anyone who accepts money as payment, or takes out a loan, or opens a bank account. In their model, cash will hold its value reasonably well, interest rates won't change too dramatically, etc. There is no agnosticism when it comes to the economy, and you make decisions based on your mental model of the economy on a daily basis.
But aside from that, in physics... We treat things like, say, all electrons as being identical. However in economics the constituent actors are not identical. Worse than that, ideas in the population can start with very few proponents and chaotically spread to very many or completely die out... On terms very difficult to measure or predict and not according to any rational basis. Treating economics as a science, much like any other social science, should be looked upon much the same as treating astrology as a science: very doubiously. No matter how sophisticated the jargon or contrived the theory, it's often no better than guessing.
In many of the same ways they fail at the micro level as well, actually - demand is not controlled exclusively by price, elasticity is impossible to predict and changes with time, many goods are not substitutable in the way these models present them. There are more ways, I'm sure, but these immediately come to mind.
Is this ever claimed? Supply and demand curves intersect at the price, and so different prices will have different supply and demand curves.
> elasticity is impossible to predict and changes with time, many goods are not substitutable in the way these models present them.
The models may be inaccurate, but the inability to model at the macro level with current technology or knowledge does not indicate a failure of supply and demand curve movements being the causal factor of price changes.
As I understand there are some models in both Econ and Finance where they literally took equations from thermodynamics and just said “what if this variable represented money instead of heat”.
99% of models developed in open view in both fields are either generally wrong in practice or are "correct" insofar as they were correct at one point in history or set of circumstances, but have since been factored into the efficiency of the system and are no longer relevant. Thermodynamics is a nice analogy for a lot of effects in economics, but it's important not to stretch that analogy like butter over too much bread
Not even approximations - they use a bunch of assumptions, many of which don’t hold up over time, so they then proceed to invent new ones as to say “well these assumptions are obviously better” even though they will inevitably be falsified because they share the same conceptual origin error.
> But is there a single individual on earth who knows all the ins and outs of all the minutiae of every single aspect of Google search
Would you go as far as to wager that the top 15 engineers/architects on the project (over the years) know about 85% of the ins and outs of the system? Generally speaking at least, edge cases excluded.
I work on a video game that's approaching 20 years old. I don't think in our case that this distribution would hold, because for instance if you took our top engine programmer, he probably wouldn't know off-hand how to work with our texture pipeline. Nor our web store. Nor our customer support tools.
He'd probably be capable of figuring any of them out, but in terms of "knowledge at rest", I doubt anyone knows even a third of everything there is to know, even if we constrain ourselves only to knowledge of things within the engineering discipline.
As a SWE working on Google Search, I can tell you this is not the case for Google Search (Nobody understands anywhere close to 85% of it). The amount of different moving pieces is enormous, and most parts are constantly being changed. The best you can do is to have an understanding of which system is responsible for what, and delegating to someone who is an expert in that system when you need to dig into what it is doing.
Software (and economy) get big and complex due to emergent properties that arise from base rules. This is why, for most large projects, no one _needs_ to know the entirety and all the edge case to make modifications and improvements, you focus on base rules and build off from there. For software that would be individual components and whatever invariants you have set up. And then you you build off of these to reason at higher levels. Attempting to know the whole thing at once "and all the edge cases" is quite wasteful.
This is a really bad analogy. We can understand Google Search far, far better than the economy. Google itself is just one small part of the economy. We can test hypotheses, run concrete tests in seconds, and we have SEO experts which can reasonably reliably get you to the top in a few months. There is no equivalent for the economy. We can't run macro-scale real-world tests. Hypotheses are basically unverifiable.
The difference is your average pro can anticipate what Google search will look like tomorrow and make pretty accurate predictions.
With the economy the average pro can barely even explain stuff after they happened, let alone anticpiate what's coming next month.
Also it feels like the whole set of axioms thought of in the 19-20th centuries (stuff like interest rate / the desired amount of debt) is being questioned. It may be that the whole foundation of economics is shaky.
Such a system has many moving pieces. There is the core search algorithm itself. There are the indexing bots, and the amount of information they can produce. There is the compute infrastructure running all of this. There is the UI, with all sorts of tricks to make it ultra fast. There is the Ads integration.
There will definitely be engineers who know one such system deeply, and maybe even a few who know two or three. But it is obvious that there can't be engineers knowing all of these things deeply, engineers who would be comfortable changing the UI or modifying the compute infra or changing the search algo params or the Ads code etc
I don't believe that a successful product operates in some magical realm where the operators just don't know how it works. I'm sure it's complex but it's probably very well laid out and managed complexity.
An opaque system cannot be changed or improved upon. But yet, we see that Google Search changes every now and then with different methods of indexing and new features that bring relevant content to the top. Its evolving, which means that there are people who understand the system enough to effect change.
I have never worked in a place where anyone knew everything about how the product worked.
Google Search has been getting worse rapidly. I get more and more irrelevant ads crowding out the organic results, and more and more results that simply ignore my search terms. Nowadays I only use Google Search if I haven't found what I'm looking for by result-page-3 on DDG; and that usually doesn't help.
I think the people at Goo that want search to be "the bestest" possible, are now in the passenger seat; the driver is obviously advertising.
Wouldn't it be nice if "different methods of indexing and new features" really brought relevant content to the top? Instead, they seem to make relevant content disappear completely. Google could easily have the best search engine in the world, again, if they cared enough.
But I guess money is more important; revenue from pure search: $0. Revenue from advertising: I dunno, $1billion PA?
It's common because it would be too resource-intensive to provide transcripts for every quote.
Articles from high-circulation newspapers often have five or more interviewees per article. Quality newspapers are averse to publishing quotes without fact-checking them if possible (e.g. if a politician makes a false claim, you don't want to publish it without indicating it's false). To maintain the same principle, newspapers would need to fact-check the entire transcript, versus just the quoted part, for accuracy.
But if you want only a partial transcript, then you're essentially at the current state of affiars where you only quote the part you need, and paraphrase the rest. Journalistic ethical guidelines already require quotes to be in context for fairness. Reputable publications have an incentive to publish quotes in context (the interviewees, journalist watchdogs, and many readers would criticize that publication if they don't). So I don't see anything wrong with reading quotes and assuming they are published in good faith.
To mitigate ethical lapses, you can also read the same coverage from different sources (e.g. Wall Street Journal and New York Times) to get broader context about particularly important articles, and also subscribe to newsletters on reporting (e.g. the American Press Insitute newsletter, the Columbia Journalism Review).
There are plenty of cases in which transcripts exist (and they're auto-generated with high accuracy presently). The habit of not providing any direct access to the source where it is trivially available seems to be the one OP is specifically criticising, and I'd agree strongly.
I have personal experience with transcription software (e.g. Otter.ai), and it's still not good enough. Even if you get 95% accuracy, which isn't a given if the audio is recorded outside with background noise, that's still 5 in 100 words for correction, more if there are technical terms.
So you need someone to review it and clean it for accuracy. It's not trivially easy at all to provide all the source materials for every interview because it's time consuming to clean and verify. For especially sensitive investigative reporting that isn't breaking news, and where there's more time to report, news outlets (e.g. CBC News) already publish recordings and full email transcripts.
I would also argue that it's the norm for journalists from respectable outlets (usually the ones with paid subscriptions) to put quotes in proper context. It's an ethical principle of the field. When they don't, the current system works when the interviewee, readership, and press watchdogs call out the unethical reporting.
The purpose is to definitively source the citation, as a protection against journalists Making Shit Up and as a courtesy to others wishing to independently verify the accuracy and context.
If there's an observed inaccuracy of the transcription, then note that fact.
I think if I’m on record I’m recording the conversation and the reporter should do the same. The highest standard would be to provide all on the record statements in recorded audio so we can confirm the reporter didn’t misremember to make the story juicier…
That's fair game to record the conversation too as an interviewee (most reporters wouldn't object). Most reporters by default also record the conversation directly (better for fact-checking and makes the job easier). Misremembering isn't typically a problem in practice; there are legitimate consequences for journalists, at least at respected publications, who misreport quotes (issued correction notice in the article, and the publication can get bad press from other outlets).
The main downside with providing all the on the record statements in recorded audio, is that some statements by an interviewee can be false. If a scientist misstates a figure and corrects it later, listeners can latch on to the incorrect figure. Keeping it to print allows the reporting of the correct figure, or the printing of the quote with a note that it's a misstatement. You could also try to contextualize such statements in the transcript itself, but it then becomes more resource-intensive than the current system (publications are obligated to verify the entire transcript, versus selected parts).
Apologies, I was agreeing with your point.
Reading over my short comment it can be read as criticism!
I wholeheartedly believe sources need to be provided for everything online, it's web a lies and deception without.
I know you’re being hyperbolic there, but if I take it at face value, I’m left wondering if that would pass First Amendment protections. I suspect most such policies would be in violation of 1A.
Yes, I see that argument as well. 1A doesn’t say “Congress may pass laws abridging the freedom of the press only when they serve the public good” but has rather stricter/broader prohibitions.
If you study the history of US case law you will see "content neutral" [0] regulation that "serves a public good" is often used as part of the standard to decide when the US government is allowed to restrict speech.
The "content neutral" part is really important because it is what allows a huge range of government regulations that ideally are equally applied to everyone regardless of how popular a message is. The "public good" part is a portion of showing that a speech limiting regulation is narrowly tailored enough to achieve that public good without unnecessarily hampering speech.
Regardless of what you think about the validity of these court decisions, there is reasonable precedent to think that such a law would survive a 1A challenge.
Very interesting and relevant citation. Thanks! Those cases do seem slightly different in character from “if you, as a news organization, literally say X, you are compelled to also say Y; violations are a crime rather than a civil violation”, but I agree it’s not open and shut.
What is "the price level of an economy?" How do you measure it? What factors are included and excluded? Why? Who decides?
Do we include real estate? Financial assets like stocks and bonds? Or do we stick to things like milk and eggs. Housing? Is that an asset or a consumable?
And this happens before we can really talk about what causes inflation to increase or decrease. The problem with most of the discussions of inflation I've read and seen is that each side has its own, often implicit, definition of inflation.
Sure, we usually use CPI, and it has some downsides, but all the measures are correlated to some degree.
Headlines regularly use the U-6 unemployment rate, but academics usually use U-3. Nothing's stopping you from using a different measure of inflation in a discussion, and I'd personally love to hear your take.
Sometimes this question matters but sometimes like now it doesn’t. You really have to contort your basket hard to not see inflation in 2021. No matter what you pick it’s up10-20%
IMO, economics is an area that will continually be hampered by models that don't fit, and increasing complexity.
Any model that predicts things simply and well, will be gamed; thus requiring a more complex model.
Or as Goodhart's Law[1] has it: "When a measure becomes a target, it ceases to be a good measure."
That's presuming we never reach some economic state so perfect, that even with an accurate model, no one can find an extra advantage, nor can it be disrupted by natural events.
Economics like psychology aren't true sciences yet because they don't have a repeatable theoretical model. They're like Alchemy before it evolved in to Chemistry or Astrology before it evolved in to Astronomy. How can you get a repeatable theoretical model? imo you would need to model a world simulation near or at the level of atoms. The more abstraction and the more assumptions the simulation has, the less useful for the social "sciences". imo this is what Hari Seldon's "equation" is in the Foundation series; a simulation
Note that even with Seldon's predictions, a requirement for their fulfilment was that the predictions not be made public so that they would not be altered. The difference in economics and psychology, unlike in chemistry or astronomy, is that these fields are self-reflective. They have an "awareness" of themselves as disciplines and can change and act on information of themselves to in turn gain new "awareness" and behaviour.
Economics is even worse, as it does hold to some fundamental aspects of finite resource allocation and supply/demand in addition to the self-reflectance. This means its model is probably some hybrid of physics-like fundamentals and the weird self-awareness of the "soft science" disciplines.
'Repeatable theoretical model' is not an episemological criterion of a science, usually for empirical sciences what is needed are fasifiable predictions.
Falsifiable predictions are generated by theories. You don’t just throw out predictions haphazardly and test them, they always originate from a theory.
The relationship is circular. Asimov's story was of course based on emerging notions of economics, which had become increasingly mathamaticised and grounded in statistics. His writing also affected and influenced economists, and at least one, Paul Krugman, has stated this specifically:
There are certain novels that can shape a teenage boy's life. For some, it's Ayn Rand's Atlas Shrugged; for others it's Tolkien's The Lord of the Rings. As a widely quoted internet meme says, the unrealistic fantasy world portrayed in one of those books can warp a young man's character forever; the other book is about orcs. But for me, of course, it was neither. My Book – the one that has stayed with me for four-and-a-half decades – is Isaac Asimov's Foundation Trilogy, written when Asimov was barely out of his teens himself. I didn't grow up wanting to be a square-jawed individualist or join a heroic quest; I grew up wanting to be Hari Seldon, using my understanding of the mathematics of human behaviour to save civilisation.
I studied Physics because of reading Asimov as a child, and discovered it was way more difficult and boring in real life. Re-read Foundation when I heard the TV show was coming out, and discovered that it was a terrible book. Asimov, you old deceiver
What made you think it was terrible? I recently reread it too, and while the writing isn’t earth-shatteringly good, I definitely appreciated it for being the novel idea it was at the time.
It's not really a story at all, just an exploration of an idea. The plot is very predictable, and the characters are just the thinnest of veils for whatever point the author is trying to make.
First time I've ever heard of this (always preferred Heinlein to Asimov) and I'm glad I'm not the only one who immediately drew connections to Historical Materialism and Marx.
I have thought this for years. It’s like they don’t realize they are studying a living system, and even worse one that is actively trying to invalidate their models.
I think most economists understand the adversarial nature of an economy, which is why a lot of their models are built on game theory.
I think the bigger issue is that people are not as rational, nor as consistent, as the models treat them. The fundamental premise of a lot of economic theory is that people have consistent, ranked, preferences, and that people work to maximize their preferences. Most people don’t fit that.
My sister is a political science professor, and she says this is an open secret in political science. The assumption is that people have consistent preferences (e.g. someone who is pro gun control is always pro gun control), but research has shown people are fickle, and will give different answers at different times.
Living organisms also adapt to their environments and models which understand them.
If you want to get to base levels, look at metabolism, energy inputs, conversion efficiencies, productive activity, and immunity / defence / risk dynamics.
Economic analysis arose out of cost accounting in which those inputs were specifically discounted, under-priced, and/or externalised.
The paper disputes the idea that people’s expectations for future inflation matter much for the level of inflation experienced today.
What I have been reading lately gives me the impression that different patterns of capital allocation have changed inflation dynamics.
There's excess demand for older-generation used by the auto industry. In text book economics, that would lead to higher prices and then more factories and the meeting of that demand at a higher level.
But what happens is chip makers, the only ones apparently capable of making even older generation chip factories, won't allocate capital for such factories because they view as on their way regardless of demand.
So essentially, with huge capital allocations, companies won't chase short-term demand surges because they don't want to be left with future excess capacity (which is more costly than any immediate payoff). Look at Nvidia actively fighting the demand of crypto miners for their products. This seems to be a barrier to any inflationary spiral (increased demand leads to shortfalls, not higher prices and production. Maybe prices too but increases not propagating).
So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory.
This has always been the case. Economists are great at explaining the economy in retrospect - oh if demand rises we'll see extra supply. Oh except the suppliers can predict peak demand and won't expand to meet unsustainable demand causing a shortfall in supply even under excess demand. Sure, it sounds obvious, but actually predicting it rather than observing it is what's valuable.
> So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory.
This reminded me of General Relativity and the problem of unifying it with Quantum Mechanics. QM is defined on a fixed background, while GR says that background is dynamic.
Seems we need the Quantum Gravity version of economic theory, which tells you how interactions happen in a dynamic background.
> So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory.
Pure economic theory is an oxymoron, other fields dealing with human behavior figured this out a long time ago, while economics desperately clung to the idea that it was actually math, rather than a social science.
just a small nitpick in the overall correct train of thought - is that it this reduction in output still does drive up the inflation - as fewer cars are made, their price increases (and it has knock on effects of increasing prices to anything affected by cars - delivery, logistics, you name it)
Except if the increase in car prices is known to be temporary than it doesn’t really drive overall inflation. I for one just fixed a car I would otherwise have replaced, due to the used cars I would replace it with being in short supply.
Inflation is a general rise in prices, not a rise in the price of one or a few goods. In order for prices to rise generally, there has to be an increase in the money supply relative to the goods and services it represents.
> In order for prices to rise generally, there has to be an increase in the money supply relative to the goods and services it represents.
That's not true, even with simplistic models like supply and demand curves. Prices can rise across the board with a fixed money supply, and you'll have a corresponding reduction in amount of goods traded.
Yesterday 1000 people each bought 2kg of potatoes at $1/kg, and 1 kg of meat at $10/kg. Today, potatoes cost $2/kg, and meat costs $15/kg. So, 800 people buy 3kg of potatoes and 0kg of meat, and only 200 people keep buying both potatoes and meat. Meat producers adjust their production down to account for the new conditions, firing extra staff and sending the spiral ever downward.
what you're both saying is true, so where you think you are correcting him, you're not.
the inflation of the 70's was caused by the increase in the price of a single good, oil, due to the Arab oil embargo.
Oil being a factor in the cost of many other products, there was a knock on effect causing a broad increase in prices across the board, general inflation.
There were also 2nd order macroeconomic effects caused by the govt's attempts to deal with the inflation and economic slowdown, but at the root, price inflation was necessary to reflect the realities of factor prices in the economy.
reducing the money supply would not have worked to curb that inflation (nor btw did it work in the Great Depression, though it did bring about some deflation. Deflation is why bitcoin is not going to ever work.)
In the 70's, the government tried hard to blame inflation on the oil embargo, greedy capitalists, and the avarice of unions. Gerald Ford's idiotic W.I.N. buttons (Whip Inflation Now) were a particularly pathetic attempt at deflection of the real cause - government running the printing press.
Other notable examples of inflation in America:
1. The "not worth a Continental" inflation in the Civil War.
2. The inflation of the Confederate dollar as the Rebel treasury was a printing press
3. Inflation due to the flood of gold coming from the California gold rush
There is also the inflation in Spain as they looted the New World of gold and silver. It all didn't help Spain that much, as it just produced inflation. Spain never realized what the real wealth in the New World was.
> the inflation of the 70's was caused by the increase in the price of a single good, oil, due to the Arab oil embargo.
If the price of a single item goes up, and you buy it, you have less money to spend on other items, and so the prices of those other items goes down. Supply & demand.
In order for a general price increase, the supply of money must increase.
> If the price of a single item goes up, and you buy it, you have less money to spend on other items, and so the prices of those other items goes down.
Almost no one buys crude oil directly.
But it is a production input for a lot of things, so a shift in its supply curve shifts the supply curve of lots of other goods (including most consumer goods) in the same direction.
> In order for a general price increase, the supply of money must increase.
For demand pull inflation, supply × velocity × average propensity to consume needs to increase; for supply push inflation, though, nothing is required on the money (which is demand) side, you just need on average decrease in supply of consumer goods and services.
Again, if you have $10, and the price of X goes from $5 to $7, now you only have $3 to spend on other things, which reduces the price of those other things.
But if someone gives you $20, now you have $7 to spend on X and $13 to bid up the prices on other things.
Demand push and supply pull explanations do not account for this, and are inadequate (though still popular) theories.
> now you only have $3 to spend on other things, which reduces the price of those other things.
That's only true if anyone is willing to sell those other things at lower prices. With changes in price in something as base-level as oil, the production costs of virtually all goods and most services increase. For low-margin goods, price can't decrease even if demand decreases. As people see their income dwindle, most only buy strict necessities and stop buying other things entirely - leading to increases in the price of luxuries to make up for reduced demand (targeting only those who can afford things at higher prices).
Let's say John has $50 and Sally has $10. The price of X which they both need goes from $5 to $7. The price of Y that they both want but don't need used to be $5. After buying X, John has $43 and Sally has $3. Sally can't afford to buy a Y, but since she doesn't need it, that's ok. The makers of Y realize that they will only get $5 if they only sell to John, where in the past they were making $10. So, they increase the price of Y, knowing that John will still afford to buy it at $7, so they now make $7 in total. If instead they had reduced it to $3, both John and Sally would have bought a Y, but the company would only make $6 in total.
> Again, if you have $10, and the price of X goes from $5 to $7, now you only have $3 to spend on other things, which reduces the price of those other things.
Only in the bizarre world where prices are set by demand alone, and quantity traded is held fixed by the Hand of God. Real supply curves aren't horizontal lines except in very bizarre circumstances.
In a real economy, a restriction in supply of a widely used input with no significant change in money supply, velocity, or relative spending vs. saving desire causes the price per unit of consumer goods to go up and the quantity traded to go down.
> Demand push and supply pull explanations do not account for this
No, they don't “account for” your fantasy that consumer goods behave such that a price change for one good has the results expected only if all other goods had perfectly inelastic supply, because perfectly inelastic supply isn't normal.
> It's useless trying to deny supply&demand setting prices
And yet you keep positing a model which entirely ignores the effect of supply, by pretending that quantity of consumer goods traded is fixed constant and prices are set only by demand (i.e., assuming no changes in preference, supply of money among buyers), so that with a given supply of money being spent, increase in price of one good must be offset by decreases in other goods rather than decreases in aggregate quantity traded.
> The law holds whether it's a personal fantasy of mine or not.
Yes, despite their basis is known-false rational choice theory, the so-called laws (which aren't at all laws) of supply and demand are a reasonable approximation of real behavior of markets in aggregate.
But they don't predict the behavior you describe unless you assume perfect supply inelasticity of all goods other than the one whose price is assumed to increase.
> If you can explain how increasing the price of oil causes money to appear in my pocket to pay for it
It doesn't, decreasing the quantiry of oil traded at any price (increasing the price at any quantity traded) also has the same effect on all goods and services oil is used to produce or deliver. As a result, if the unit price of oil increases (and there are no changes in money supply, pre-purchase distribution, consumer preferences, etc.) so does the unit price of most consumer goods and services, with the quantity of goods traded likewise dropping.
What does not happen is the same basket of goods being traded, with those impacted by oil getting more expensive but that being offset by other goods getting cheaper, leaving overall nominal price levels the same as before despite shifts in per-sector prices. That would be expected if all non-oil goods had perfectly inelastic supply, but not otherwise.
> Nowhere did I say that supply was inelastic
No, you just described an effect that is total nonsense unless you assume perfectly inelastic supply.
If inflation is reduction in broad (not one single item) purchasing power of the monetary unit, then inflation will be felt when people lose confidence in the money or the organization backing the money. USA will feel significant inflation when the public loses confidence in the federal government. EU is much further down that path.
That is a good example of a commodity money that experienced supply volatility and subsequent price volatility. It was inflation - more supply of the money.
Money is tricky to do in all times for all use cases. Bitcoin is making a run for store of value money, and unlike gold it is truly scarce.
Usually inflation is defined using the prices of a basket of goods. This does not capture the inflation that people feel - most people are far more interested in the price of a home than the price of spaghetti, but spaghetti is the definition. One reason why spaghetti is used rather than house prices is that it is less subject to speculatory swings, or local variation - to be used as a basis for adjusting other prices inflation has to be defined in terms of something stable and uniformly priced. This may seem circular, and it is.
What we see is that increases in the money supply generally don't go into the prices of basic goods tracked by inflation. Instead they go into the prices of assets that are not tracked by inflation. Nobody is using spaghetti as an investment vehicle.
It would be nice if the era of economic theory were to end.
Herbert Weisberg argues in Willful Ignorance (paraphrasing for brevity; read and come to your own conclusions) we’re using statistical and probabilistic tools in economics that were purposely left crude by the mathematicians that defined them, as they were defined to handle abstract quantities.
Applying them to human economics means we’re mathematically accepting rounding errors that leave people behind.
That is the pattern we have to break politically. We spend a lot of time emotionally promoting certain stats and hand waving away at a number like “2% reduction in poverty” still means we’re leaving millions behind.
Not having services like universal healthcare is clearly politically gamed, but we refuse to see it as anything like a government bombing civilians.
"Nobody knows" is too simplistic a take. Nobody knows when they don't know anymore is more accurate.
A better way to describe the situation is that most mainstream established macroeconomic theories/models work only conditionally. They match reality accurately only in certain periods, on the condition that myriad of other factors doesn't become important. Over time, some excluded variables become important. The explanatory power of the old model erodes. When the theory is finalized and explains the situation for the era it was created, it may be already outdated.
Inflation expectations theory works reasonably well for fast growth, increasing labor force industrial era. It's not so good in 2% annual GPD growth, aging or slowly growing labor force era.
The new school of economists thinks that that inflation is not likely to be a long-term problem. Fed will be back in trying to get inflation up in 1-2 years. Old school economists who look at the older models and data from 50-90s think that expectations will keep inflation going once it starts.
To emphasize: people can describe the rules that governed the economy of the past.
Problems:
Companies and people are constantly changing how they do business to best exploit the economy. This can change how things work in large and small ways - every financial disaster leads to a raft of rule changes.
The Fed employs some very clever people. They never believed that public fears of inflation tend to be self-fulfilling. They "believed" officially because if they didn't then their policy would be reckless, and pointing out the rather obvious reality like this Rudd bloke is doing might well be bad for a career.
The logic is like saying we would all get a pony if we believed hard enough. Economics doesn't work that way, there is an underlying reality that people are trying to sniff out and some error bars around where prices end up because the signals are all noisy.
> I went to read the paper, and I have to say I am baffled. It didn’t change my priors at all. I didn’t see new empirical estimates, or new theoretical arguments, and furthermore I didn’t see the most relevant factors discussed much. I did see a lot of pokes at Friedman, Phelps, and Lucas (and there is also an introductory assertion that, even given enough time, markets with flexible prices do not clear. Then he goes on to deny that the theory of household choice is sufficient to derive downward-sloping demand…why do that???).
> I would start by looking at the clearest cases where inflationary expectations do matter. If inflation rates become quite high (say above forty percent?), many people switch to alternate currencies. Or in hyperinflations the velocity of money, after some point, accelerates very dramatically, thereby fueling the inflation further. So inflation expectations really do matter, as supported by both theory and evidence. Contrary to Rudd, the theoretical case is there, though the question of magnitude at lower inflation rates is largely an open one. But let’s not slip from “open” to “we are justified in thinking they don’t matter very much at all.”
"For example, when inflation has been low in the recent past, workers might not demand raises as they would in a world where inflation was high; after all, their existing paychecks go pretty much as far as they used to. You don’t need some theory involving inflation expectations to get there."
Isn't what is described here /actually/ a theory about inflation expectations?
Literally this mechanism that recent inflation creates the expectation of more inflation and that drives behaviour that generates further inflation.. and no one is sure how to turn that back around without a crushing recession. Isn't that the conventional wisdom this article is allegedly skewering?
And... Welcome to a bunch of layoffs from rent seeking parasite industries while all the fat cats try to park their capital somewhere else ahead of the regulatory crackdown curve.
The problem is centralization of wealth, absurd expectations on the returns of capital, and the coupled wage theft that enables those returns, popularized by an entire generation of Welch worshippers, and skewed expectations created by export of production, and increasing reliance on safe-harbor third world labor prices.
As wealth inequality rises there are more people who have no idea what to do with their wealth and more people who have ideas but no wealth.
According to Dirk Löhr the biggest driver of wealth inequality is just good old real estate and it's mostly the land that appreciated in value. Chasing land rents (I mean speculation on rising land values, not renting out apartments as a landlord) feels wholly unproductive.
Yes but... in healthcare, a lot of those "rent-seeking parasites" are in fact millions of low-skill middle-class paper pushers called "insurance coders", "claim adjusters", "billing specialists", etc.
You make healthcare cheaper, but need to concurrently give the millions of people who depend on this overcomplicated system a different path...
I don't think that's as big a problem for white-collar workers as it is for blue-collar. Processing paperwork, managing a team, calculating risk, these are all things that readily translate to new fields, as opposed to something like mining or carpentry. I have zero concerns that someone losing their job in insurance would struggle to find work.
Isn't that exactly where the magic of capitalistic creative destruction is supposed to swoop in and save the day? Put them out of work and let the invisible hand sort them out.
I like the headline. Nobody really knows how the economy works. Economics is an attempt to explain how wealth and prosperity are created. That also means some branches are biased towards what we already have. It gets especially bad when morality is used because from the perspective of something as uncaring as an economy there are no meaningful morals, they are all made up. I personally think the vast majority of economic problems are caused by modeling errors. The model we use to look at the real economy is too rigid to represent it.
The laziest way to explain the rigidities is to just blame someone else, most of the time governments. However, getting rid of goverments doesn't seem to get rid of all rigidity because, as it turns out, our physical world is constrained by more than just politics. What's often forgotten is that governments can also fight against natural forces that reduce flexibility in the economy. Therefore the answer is neither more government or less government. No it's the usual boring answer. What we need is better governments. It's like a supply and demand situation. There is demand for a certain size of government and the supply is often either too high or too low. The goal is to find a balance.
> Economics is an attempt to explain how wealth and prosperity are created
To expand on the question's unknowability, "wealth" and "prosperity" are measures on a population's utility functions. "Utility" is an attempt at mapping the set of possible things a person could want to an ordered set [1]. This goes to the heart of preference, free will and consciousness.
Fortunately, at a population level, persistent effects do manifest. But we don't know why. Because at the individual level, they're inexplicable (if existent at all).
This is why, by the way, economics often finds inspiration in particle physics. Not because people are particles. But because it's a field that has developed techniques and methods that make useful population-level predictions without completely understanding the individual components.
Framing the question as one of "more" or "less" government seems to contain an implicit assumption about the value of government itself. The value of any government. It assumes all government is qualitatively the same. Hence the only question is whether we should have more or less. Whether that is a reasonable assumption to make is left as a question for the reader.
> Economics is an attempt to explain how wealth and prosperity are created.
Overly simplistic view from scratch: Individuals start businesses to offer other individuals and businesses goods and services. Wealth transfers daily to and from many individuals/businesses. Where does this definition fall apart/breakdown as you start to zoom in (or out)?
I would clarify the sentence "Wealth transfers daily to and from".
What's important to keep in mind is that while money may transfer, utility doesn't. Utility is generally increasing on both sides of the exchange, otherwise one party wouldn't have entered the exchange.
This isn't always true (e.g gambling or opioid addiction), but it's true enough most of the time and explains why trade happens in the very first place.
I think it breaks down when you start trying to look at emergent behavior that only becomes apparent at large scale.
An analogy would be to start looking at a water molecule, H2O, and then trying to explain glaciers and oceans without any sort of similar system to use as a model.
These abstract businesses are going to have an awful lot of trouble producing anything of value without employees. The three-way relationship between worker, owner, and customer is required to meaningfully model anything about our economy.
Employees are just other businesses providing a service in exchange for money with a strict contact regulating that supply of service (and tons of regulations)
Breaks down instantly when you try to define which activities count as businesses, or try to define why individuals are offering goods and services to one another.
"define why individuals are offering goods and services to one another."
Because these individuals think it's mutually beneficial to enter into the trade. This explains all voluntary cooperation including barter and modern trade. I sell my goods and services to someone who needs them because I can then go and buy food with that money. Currency obfuscates this picture a bit but its only role is to solve double coincidence of wants. Underneath it is just barter via a layer of indirection.
Is a Wikipedia author participating in a business when they update an article, thus contributing to the service of a better encyclopedia? Is an open-source programmer doing business when they post their GPLed source on the web? Is gift-giving (offering a good) business?
That definition seems to be a bit too broad. So maybe there needs to be compensation. But then the determinists would say that even gift-giving has compensation (in the form of reciprocity) and thus isn't much different from credit. So the compensation should be something closer to monetary compensation. But then barter economies have no businesses. Etc.
When I'm considering how much to ask for (or demand) in pay, I'm not primarily thinking about inflation. I'm thinking about the supply and demand for my type of labor. If I think I could get more, but inflation is low, that doesn't stop me from asking for more. If I think there's a labor surplus right now, but inflation is high, I am nonetheless unlikely to walk out in search of higher wages.
Similar logic, I expect, applies to the boss side of things.
Almost no one thinks about supply and demand when negotiating for a job.
Most workers have little sense of demand for their position, and even if they did, most jobs are not fungible. Location is extremely important, as are subjective things like culture and the brand of the employer.
All that to say: the Econ 101 conception of supply and demand in the labor market is almost never enough to explain the labor market even in very simple terms. That's why the labor market is often doing "unexpected" things, like having trouble filling high-paid jobs driving trucks.
If I'm getting a lot of recruiter emails, I know demand is high. If I get emails from former coworkers looking for news of job openings, I know supply is high. I think I'm not too unusual in that regard.
True, in that case it would be, "do I see lots of 'Now Hiring' signs around town?" Which, currently in Austin, TX, USA where I live, I do. Sometimes more specific, at construction sites, wanting specific trades.
My take is beyond economic activity to enable the biological survival of the species, our economics are historically built on gossip and political whimsy. I suspect there are many fewer rules needed than we’ve been lead to believe.
We like to believe it must be complicated because of course society is. But social laws are based on social network effects which are politically manipulated.
So in conclusion, it’s rhetorically a free market but in practical terms it’s gamed by social corruption as usual, requiring ever more Byzantine economic theory to capture the edge cases.
Infinitely big little numbers have allowed economists to iterate on the edge, but socially it’s belly button digging.
Society itself is built on gossip and bullshit, if you think about it. Ability to gossip and make up bullshit is the main thing which enables large groups of people to work as a semi-coherent whole. All of the social constructs we participate in are little more than blind faith. Lawyers are basically priests, legalese is the prayer, and the laws are the Bible. Those who sin (go against the law) or reject the society entirely are severely punished. And so on and so forth. This is not a novel idea, there are books written about it.
Which is to say that just because it's bullshit doesn't make it any less valid, yet bullshit is typically much harder to model as it lacks the internal logic that a non-bullshit system would have. It's full of contradictions and non-sequiturs. This could explain why economists (and especially Paul Krugman) are so consistently wrong about everything.
90% of central planning is having a central bank. That's pulled form a quote from Lenin btw.
In much of its early history, the Soviet economy outperformed many other leading industrial economies, which is what scared capitalists in the West so profoundly in the 1930s. It did so at a great and terrible cost that would be unacceptable in a free society, but it performed nonetheless.
China today is another example of central planning and high performance.
In any case, the US is clearly a planned economy - the Fed even states its inflation target, and there is a target employment rate.
China became successful after the market liberalizing policies of Deng Xiaoping that turned it into a mixed economy. They had a few hundred dollars in GDP per capita before that. So isn't this evidence that central planning was a failure?
The free market always determines the money supply, that’s not the issue. Money is created when banks make loans and is destroyed when loans are repaid. The problem is sometimes this mechanism breaks down during a banking crisis and turn get deflation or it balloons in a speculative bubble and you get inflation.
I learned in economics 101 that although banks are individually responsible for making the money, the overall supply is ultimately controlled by the interest rate and reserve requirements. Both are set by the government. The free market determines who the money is supplied to, but it doesn't determine the money supply.
Do economists really claim that? Or do they study economic behavior and try to make predictive models to better their understanding? It seems like the general public misunderstands what economists do, and the misunderstanding is due to ideological/political reasons.
Economists definitely claim to know how things work. I vividly remember reading neo-liberal gospel (the economic theory, not political leaning) in the NYT opinion section written by Paul Krugman 10 years ago. Allowing completely free trade will be great he said. Prices will be lowered and the economy will run more efficiently. Maybe that’s true, but it also hollowed out the U.S. manufacturing base and consequently the middle class. You don’t see articles like that anymore.
Well, the problem isn't free trade. It's that some countries work more than they need to. If every country had balanced trade there wouldn't be many arguments against it.
> Economists definitely claim to know how things work.
Some do, most don't. Most economists are just trying to publish their work in peer reviewed journals. The one that have time to talk on mass media every weeks are not regular economist. Krugman had some great papers, but he is definitely not considered as a researcher anymore by the profession.
> Allowing completely free trade will be great he said. Prices will be lowered and the economy will run more efficiently. Maybe that’s true, but it also hollowed out the U.S. manufacturing base and consequently the middle class. You don’t see articles like that anymore.
The HOS model, commonly accepted in the trade literature that Krugman knows well, is very clear about the effect of free trade (even if the model could be regared as too simplistic): it lowers the prices and increases total production, however, it creates unequal gains (or even loss) within countries. The standard policy recommandation among trade economists is public polices should be aimed to losers using a fraction of gains from trade.
The middle class in cities is probably doing fine. Rural areas not so much, and that's where the manufacturing base was gutted. Offshoring has had a large negative impact there and also made our supply chains more fragile as we found out during COVID. These facts are a big reason why Trump's anti-China message really resonated in those areas.
Cities had pretty substantial manufacturing bases before deindustrialization.
Middle class in cities is shrinking, and most American cities of any notable size are split between knowledge workers and a service worker underclass. That’s why so many American cities are split between very nice neighborhoods aNd those that resemble 80s Detroit.
If economists did their work without ever leaving academia, you certainly could argue that they're simply "trying to make predictive models to better their understanding". But as soon as they begin advising governments on policy, they abdicate that argument.
Yep. Economists and meteorologists. What they try to predict is sort of like trying to predict where the disc will land in Plinko [1]. Neither of them have a clue until it actually happens... "Our models showed the disc going the other way (especially the European Model), but we were wrong again. Tune in tomorrow while we talk fast and act confident again."
Personally, I always love the "50% chance of rain" forecast as it perfectly describes that they have no idea if its going to rain or not, but yet sounds so scientific and official.
That is absolutely not "we have no idea". It's a very precise prediction, not like a [10%-90%] range. If you look at all their 50% prediction, the half of it should be rain and half should be no rain. This is what this number tells you.
Predicting 50% can be validated: if I say a coin will be heads 50% of the time, I know more than nothing: I know more than someone who incorrectly claims it will be heads 75% of the time.
And we can quantify in various ways how much better the 50% prediction is than the 75% prediction.
within a limited time horizon that is. IIRC meteorological forecasts are about 80% accurate a few days in, 50% accurate about two weeks into the future, and after that of not much use.
Economics of course is often expected to make much stronger claims, people have expectations of it that resemble Asimov's psychohistory despite the fact that there is no science that manages to tame that level of complexity.
I think it was Tyler Cowen who said once that economics is more useful as a tool to clarify thought rather than a tool to make predictions. People just have the wrong expectation of what economics is.
Economics at its base is group psychology, and humans are irrational and wildly unpredictable. A lot of economics writing depends on a rational human that actually doesn’t exist.
Hence why a lot of economics is speculative and should only really be applicable to specific cultures that are being studied, since cultural behaviors and expectations will effect economic behaviors and outcomes.
There’s a balance between data and interpretation in economics, which is why it’s a social science. There are disciplines like Austrian economics that discount quantitative analysis, but that’s as wrong as relying purely on quantitative analysis.
A human is irrational and wildly unpredictable, but groups of people (like most animals) are more easily predicted. While it's difficult to predict a specific stock, it's easier to predict trends given global situations, within a certain time frame, with enough information. The main problem becomes having access to such information. So much of the economy is global now, and behind closed doors, that information is unavailable or at a premium.
>IIRC meteorological forecasts are about 80% accurate a few days in, 50% accurate about two weeks into the future, and after that of not much use.
80% accurate about what ? If this is overall then I'm not impressed because in stable weather you'll get a high % of being right just by extrapolating. Similar with economics for that matter. What I usually care about and where weather forecast failed me just last month, is unstable time over a specific area. Just last weekend my wife and I were about to cancel our trip to my hometown because the forecast was high probability of rain for the entire weekend, this was the forecast on Friday. Went anyway and got a sunny Saturday and Sunday morning, got a bit cloudy by the end of Sunday when we were leaving. This happens so often that I don't know why I bother checking anymore.
> IIRC meteorological forecasts are about 80% accurate a few days in, 50% accurate about two weeks into the future, and after that of not much use.
I think the accuracy is more complicated than that, because while they lose precision (and thereby the correct prediction of the amount of rain in your neighborhood or town), they can predict larger movements pretty accurately pretty far in the future. I remember how bad weather prediction was 30-40 years ago, and am shocked how they now have pretty good insight into the weather two or three weeks from now.
Well, there has been a little-noticed revolution in meteorology in the US in the past 15 years, driven by improved simulations and measurement systems (mostly funded by the federal government). Our predictive capability is well over 10x improved from just the late 90s when it was still quite poor.
Not in Seattle. Today was forecast as a dry day (even this morning), but it rained. I tend to do better just by stepping outside, sniffing the air, and looking at the clouds. It's not expertise on my part, just experience.
The problem is economists who say things in the public sphere are heavily scrutinized and criticised and feel the need to 'prove' their theories. Also, because of the pay factor, many great economists go make millions working for banks and hedge funds. Economists know, economics can predict it, but for reasons, it doesn't end up as public knowledge.
Of course it's about prediction. There's no point spending time trying to understand something unless you're going to use that understanding to try and anticipate the future.
"To most people, economics is a dull science full of statistics and jargon, mainly concerned with money and designed to answer a narrow (but important) set of questions. To economists, economics is a
powerful tool for understanding why armies run away, voters are
ignorant, and divorce rates rise, as well as solving practical problems
such as how not to get mugged. Its theme is not money but reason-
the implications, especially the nonobvious implications, of the fact
that humans act rationally. Or to put it more formally:
Economics is that way of understanding behavior that starts from
the assumption that individuals have objectives and tend to choose
the correct way to achieve them."
Excerpt from Hidden Order, a book which explains economic concepts to non-economists.
> Explanations are useless if they can't make predictions.
Nonsense. Most sciences aren't about making predictions. Another example is linguistics. Linguists have reconstructed languages long extinct and figured out how they evolved into modern languages. Yet, they can't predict how these languages will evolve in the future. Does this mean these explanations useless? No. Why should they be useless? They may not be of interest to you, but that doesn't mean they're useless.
I disagree with you, strongly, but I'll just note this -- you appear to espouse the view (in you last sentence) that utility is the only value something can have. There are many things to know that lack utility but still hold value somehow. Useless does not mean worthless; but science really is about prediction.
I don't know what you're on about. It's been over a century, since economists adopted a subjective theory of value, according to which value is that—subjective. As such, we don't try to explain it, because it doesn't matter. You may think something is valuable because it's useful, or because some other reason. It makes no difference, and we don't care. All we care about is how much you are willing to pay for it. This tells us everything we need to know.
Same as any scientific endeavour, studying a particular phenomenon, which in the case of economics is the production, distribution and consumption of goods and services.
Not really. For example, a model can accurately explain variable X as a function of Z, Y but if Z and Y are exogenous variables, i.e. outside of the scope of the model, then the future behaviour of X cannot be known, despite the fact that we may understand very well the mechanisms by which Z and Y cause X.
Economics is a social science and as such, is not really amenable to the methods of falsification or experimentation that work well in physics or chemistry. In short, it's not really a science. That doesn't mean you shouldn't try to do your best to be logical and factual as much as possible, but at the end of the day you will produce mostly unfalsifiable theorizing.
Really you need more modest goals, for example to at least try to approach the subject objectively rather than via sentimental moralizing. Even that is a massive effort. Imagine a physicist decrying how "wrong" it is for gravity to be weaker than the other forces. You would laugh at such a person and immediately classify them as not a real physicist. So you can use that as a filter to exclude much of heterodox economics and economists as a start. That's the battle being waged -- objectivity -- not falsifiability.
If social sciences are not sciences, what are they? Please, explain. Also I'd like to know how falsifiability applies to the big bang theory. Thank you!
A good rule of thumb is that fields which style themselves by adding "science" to their name are not sciences. An economist friend of mine told me that, and it stuck. In fact if you are a physicist you don't go around insisting to people that you are a scientist and what you do is science and if they disagree with you they are anti-science. You just say "hey, this is physics".
So far, this rule of thumb has not let me down.
FYI, you may want to read Feynman's lecture on Cargo Cult Science -- that is avoiding the trappings of science while not actually having the rigour and intellectual honesty of true science. A good link is here:
https://calteches.library.caltech.edu/51/2/CargoCult.htm
I enjoy economics, political science, anthropology, sociology, etc, but they are most definately not science.
> good rule of thumb is that fields which style themselves by adding "science" to their name are not sciences
And this is your whole argument?
Isn't physics a "natural science" and therefore not science according your rule of thumb.
This discussion is stupid. If you want to argue that social sciences are not science, all you have to do is show that social sciences don't follow the scientific methodology. If you can't show that, you should shut up and stop wasting everybody's time.
Falsifiability applies to the big bang theory because the big bang theory is not about the general concept of "a" big bang, but about specific models of how exactly the events very shortly after the big bang happened, which make testable predictions about all the consequences of those very early events - the distribution of matter and energy in the universe, properties of cosmic microwave background, etc; such models can predict observations/measurements (of ancients events) that we have not yet made, and be falsified if those observations disagree with the model predictions.
Falsifiability is feasible to some degree -- e.g. in history you can hypothesize that a civilization had copper and then look for evidence of copper artifacts.
But in the physical sciences you have well-formed mathematical models that make very specific and precise predictions and can be tested to a high degree of accuracy. That specificity allows you to set threshholds like 5 sigma for acceptance of a result as being verified.
"Did we find copper" is a bit different, and thus there is a fuzziness in history that you don't have in physics or chemistry, which is why we don't view history as being a science even though it benefits from use of the scientific method. Everything -- cooking, dating, gardening -- can make use of the scientific method, but at issue here is the trust that the public places in accepted findings of science and such trust is not justified in the fuzzier fields. People need to add big error bars in their heads when listening to results from social sciences and much smaller error bars when listening to results from physics.
You can't really prove or disprove whether an economic theory is a good choice or not for a country at a specific time.
How are you going to measure the outcomes and for how long will you measure them?
The problem with economics is how politicised this field is and how the best theory ends up being what's best for governments and politicians. Is mainstream economics what's more convenient for the 1% or what's best for the world?
We will never know what the economy would be if we weren't so Keysian. Maybe we wouldn't have a crisis every 10 years.
Generally speaking, statistical models are validated by measuring how well/bad they fit the data, for example, studying the residuals and performing statistical tests. Predictive power can be estimated by using the model to predict known outcomes (using out-of-sample data).
What I find amazing is that people can make careers (Economists and Meteorologists) out of guessing and being wrong most of the time. Anyone with a real job would get fired within the first month if they had the same record of performance.
> The Federal Reserve's job is to keep the banking system afloat, w/ the big banks functioning and well fed. And they do a good job of it.
The Fed's job is:
> The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. When prices are stable, long-term interest rates remain at moderate levels, so the goals of price stability and moderate long-term interest rates go together. As a result, the goals of maximum employment and stable prices are often referred to as the Fed’s “dual mandate.”
There is a tension between maximum employment and stable prices though: if the economy is starting to run hot, it means more and more people may be employed to keep up with demand. But if there's too much demand, and not enough supply, inflation starts kicking in (there are other sources of inflation though). So the 'trick' is to know when employment has reached the point of being 'maximum enough', and slowing down the economy then.
If you want to be cynical about it, I don't think that's even cynical enough. How about: Optimize between maximizing profits of the rich and minimizing chance of social disorder or rebellion from the poor being too numerous and too miserable.
A quote from a book by Terry Pratchett that springs to mind...
"They think they want good government and justice for all, Vimes, yet what is it they really crave, deep in their hearts? Only that things go on as normal and tomorrow is pretty much like today."
I've often wondered if for the majority in a lot of societies, that isn't essentially true.
Well, there are some in such misery that things going on tomorrow pretty much like today is intolerable. Which is to some extent both objective and subjective.
I guess how stable a social order is depends in part on for how many.
(Of course there are also societies in which an extreme minority who wants tomorrow to be much like today can keep it so by raw force; I guess that can be a kind of stability too, with enough force, maybe)
And if you believe that cynicism, and believe that the market follows what the Fed sets out with, the only question you can really have is: When does it break?
We know from the Martingale Betting system that when you have a losing bet, it doesn't matter what sizing you employ. Eventually the risk accumulates and it blows up. We also know from the Kelly Criterion that even if you have a winning bet, if you bet to large, you will go broke.
As time goes on, the Feds bets have been getting bigger. They have been keeping more and more losing companies in business. Moral hazard is accumulating. Those that make the biggest bets get the biggest gains allowing themselves to make even bigger bets.
>In the common telling, the Great Inflation of the 1970s got going because people came to believe inflation would keep spiraling. The surge in gasoline prices wasn’t simply a frustrating development, but a harbinger of things to come, so people needed to demand higher raises, and businesses could feel confident charging higher prices for most everything.
This has always been spoken like it's from someone who was not present at all during the Nixon destruction of the US dollar.
Or not observant in the least.
But that's when people started saying things like this, and after influential people start believing it without thorough questioning, well here we are.
The only significant demographic that could demand raises of any kind were unionized workers, who were shortly kneecapped by the Wage & Price Freeze.
Businesses at the time almost never felt confident about anything, and only raised prices out of desperation for survival. At least they were allowed a little head start ahead of consumers & workers, and the Wage & Price Freeze was delayed as long as possible (ie prices were allowed to skyrocket) before being strategically kicked in right before workers' pay would have had a chance to drift toward parity.
It always takes a lot longer for workers to share in any economic benefits, if at all, with great delay & lag when it does occasionally come to pass.
Since it appeared mathematically as if half the wealth in the pockets of a nation's workers had been lost forever in only a few years, yes people believed that inflation would keep spiraling, but nobody thought there was anything that could be done about it since the regime in power was not only crooked to the bone, but working for a corrupt political party which was already too big to fail. There was only one alternative party and they were not math wizards either, and equally untrustworthy.
By the time Reagan came along no one with good mathematical recognition could have come close to leadership advisory positions any more because it actually had been too late for a while.
They're not betting with their own money anyway, and people already had to accept that the chance of any winnings had become infintesimal by then.
Reagan did turn out to be a better actor than people thought at first.
But even George Bush Sr. was able to recognize what he called "Voodoo Economics" of the Reagan years because it was not based on reality or things that can be good to actually have faith in.
Not that he had a better plan, but at least his hindsight came into focus for a bit. Even the most excellent plan would have had no chance of deployment with the type of economists monopolizing worldwide influential positions by then.
So the Bush I Recession ended up based on somewhat different types of superstitions than the Reagan Recession.
And here we still are.
The problem a decade ago was not fundamentally that the banks had grown too big to fail, but rather the political parties which have proven their economic incompetence had already been too big to fail for longer than most voters have been alive.
And neither economists nor the voters can do the math since it is far too complicated for most, plus it doesn't matter anyway since the more powerful are going to extract as much as possible from the financially weakest before it's even more too late for them both.
And then there's the pessimistic narratives, but just trying to keep it as positive as possible right now.
Hm, interesting, I don't see it that way, it seems to me that "cynical" interpretation leads to the reverse: that ills of the system are structural, that the fed is fulfilling it's intended structural role in the system -- preserving the stability of an unjust system -- the problem isn't the morality of the people who happen to be in the fed, even the most well-intentioned people will find themselves fulfilling this role (without systemic/structural change), because it's structural.
But I see your point about how it (the simple 'most cynical' description) could be interpreted the other way too. I don't agree it is necessarily that way; perhaps that simple one-liner is not sufficient to distinguish the structural from the moral interpretation.
Have you considered the possibility that Fed actually has overall positive role (limited by it working within the mandate)?
I'm not saying it does. But most people with very negative view barely know what Fed does and why it does what it does. Also they don't differentiate between what tools Fed has and what should be done using other means by Treasury and the rest of the government, but was left to Fed because politics is dysfunctional.
I would say that the Fed’s job is protecting Wall Street bankers and promoting a rise in stock market prices. I don’t think they care much about regular people.
I would love to see economics reparameterized in terms of it being a social network, with nodes and links, and then trying to measure how much the network is clustered or more un-clustered, the power relations between central and peripheral nodes (rulers and workers), and how that affects total network efficiency and how that affects inequality. And how resources flow between nodes and how when network connections break (people lose jobs or other business relationships) it can cascade through the network, and how the clusteredness affects how much and how fast it cascades. That is probably where the business cycle comes from imho. It just seems like nobody is looking at the problem from the right perspective.
Then once you have a model with realistic qualitative behaviors- once you can identify the important variables like clusteredness and inequality, identify constraints and artificial forcings like government programs, then you can try to measure those variables in the real world and you might be able to make some near term projections that have actual predictive power. You could also make some predictions of how new government programs will impact things you care about like total productivity, how precarious or robust each individual's situation might be (do people have second chances or do they collapse into homelessness after one bad decision or accident), what the baseline economic outcome is (do we have people starving), etc.
Right now I really don't feel like the state of the field of economics is advanced to the point where anybody is able to apply economics to problems we care about in any kind of rigorous way. After the fact you can always find some economist that will say "I predicted this" but you can also find 99 others who didn't predict it. And the people who get put in charge of the federal reserve are always one of the other 99. In fact I get the distinct impression that nobody in a position of power actually cares whether economics produces reliable intelligence. After the year 2000 bubble, after the financial collapse, nobody in a position of authority at that moment should have ever held a government job again. But yet here we are. (Same thing goes with the people who said that the Iraq war would pay for itself and that Afghanistan would be quick and easy- why do those people still have jobs?? But that's a tangent.) We are so used to catastrophic incompetence that we can't imagine any other situation.
It think that's why most central banks are showing interest in distributed ledgers for traditional currencies, so that the flow of cash actually become visible.
Basically it is well known that the economy is a gigantic graph and that graph theory might help answer fundamental questions about it.
The issue is that you need a massive amount of data to have a somewhat accurate model. The central banks do have some data (none on cash tough) as banks have some reporting requirements but generally those data are available only in aggregate and in economics (or basically any forecasting activity) the devil is in the details.
Not exactly surprising. A while ago I had the task to automate a part of my company’s business process. After meeting probably 20 people I concluded that everybody does their part and somehow it works ok but there is nobody who really knows what’s going on.
I find it hard to believe that there could ever really be a good economic model. Predicting the weather works with a supercomputer since all the processes (temperature, pressure, etc) can be modeled as continuous. A very successful Spiderman movie saving Sony's quarterly profits hangs often on a coin-toss.
Our lives are governed by relatively simple rules of physics but the world is in an incredibly complex state. Economics takes the output of those rules of physics and tries to wrangle the state of all the atoms in the world into some simple values, and then uses some simple equations to make predictions. How is this not worse than spherical cows?
Lots of system consisting of discreet pieces can be modeled fairly exactly.
The thing that makes economies very hard to predict is they're a combination of people acting according to quantifiable economic incentives and people acting accord to a collection of ideas, fashions and emotions that can switch unpredictably or simply aren't known.
> Predicting the weather works with a supercomputer since all the processes (temperature, pressure, etc) can be modeled as continuous
Except it's not continuous. That assumption works most of the time. But sometimes--often--it doesn't. Particle interactions chaotically manifest systemic effects in unpredictable, dramatic ways.
The limitations on our current models of fluid dynamics and economics are uncannily symmetric. (The latter fails more unexpectedly.)
Well, yes, my main point was that the weather is much closer to a perfect continuous model than the economy, and we get weather predictions wrong all the time. I doubt we'll have a change with the economy in the next 50 years.
> Predicting the weather works with a supercomputer since all the processes (temperature, pressure, etc) can be modeled as continuous.
Why can't the flow of money be modeled? Don't we have enough data on human behavior historically? Can't we trace where money generally ends up?
Using the recently printed money isn't a super great example because as far as I understand, it's mainly held up in the banking system.
Maybe the stimulus money given to American citizens recently would be a better example. We know some of it went to savings, some of it went to bills, some of it went to frivolous purchases, etc.
If AI can detect fraud / objects on a road and make decisions, why can't a few of the most common economic possibilities be fed into some kind of model?
The argument was that discontinuities exist in things like, starting with the specific example, whether a movie turns out to be particularly interesting enough to drive people back into theatres.
From the Fed perspective, they've discovered the hard way that the few knobs they can adjust, such as the discount rate, don't do what they thought they did.
Tax and spending policy can control an economy at a finer level of detail, but if taken beyond simple goals, like "increase exports" or "build war materiel", tends to result in boondoggles with lobbies behind them. The dairy industry, NASA, ethanol from corn, and university administration staffs are well known examples. As a control system, it has too much lag for stable control.
One thing that the pandemic has made clear is that today's "free market" has more lag than previously thought. Half-empty store shelves are the new normal. There's a correction, but it's slow. It takes several years to react to a disruption. With long supply chains, back-propagation of market signals through the supply chain takes longer. With today's excessive outsourcing, there may be only a few places in the world making some minor but essential item. Worse, that minor but essential item may not be a big money-maker for the producers, and so they lack the incentive to add capacity.
Then there's overshoot. It now looks like there will be a semiconductor fab glut around 2023.
> the few knobs they can adjust, such as the discount rate, don't do what they thought they did
What is the evidence for this? We have low rates spurring inflation expectations, in the population, and concerns, at the Fed. That's about as orthodox as monetary policy gets.
That, 2009-2020, real interest rates went all the way to 0, and even negative, in attempts to generate more economic activity. Yet this didn't generate inflation.(The pandemic did, but that's a different effect.) That was quite unexpected.[1]
It is vivid evidence that macroeconomics, despite the thousands of highly intelligent people over centuries who have tried to figure it out, remains, to an uncomfortable degree, a black box. The ways that millions of people bounce off one another — buying and selling, lending and borrowing, intersecting with governments and central banks and businesses and everything else around us — amount to a system so complex that no human fully comprehends it.
Still not harder than modern physics or modern math. Unknowable is not the same as complicated. The lottery is easy to play and model mathematically but unknowable. It's not that hard to understand: an economy is a set of inputs: govt. spending, personal consumption, innovation, private investment, etc. and then based on these inputs the economy either grows or shrinks, and then this can be indexed to some baseline such as CPI. The understanding of this stuff dates back to the 50s. Just because recessions cannot be predicted does not mean the economy is a black box.
Much to the contrary, it is much much much harder than any system in fundamental physics. The economy (like the weather, or cells) is a much more complex system than a black hole or a hadron.
Furthermore, it actually has a peculiarity unique to studying systems of humans (as does psychology or sociology): predictions about the system affect the system, which makes it even more difficult to distinguish true predictions from self-fulfiling prophecies.
I agree -- as a "former mathematician", I find economics to be much more daunting than math, and I'm skeptical about anyone who has more than a modicum of certainty about it. Modern mathematics is certainly complex, but there are definitive axioms that are nearly universally agreed-upon, and proofs operate on logic alone. It's like a hard game with known rules. Are there definitive axioms in economics that apply to the real world with irrational actors?
As you say, I think the key component that introduces all the uncertainty is: humans. You can't prove anything interesting about a human-based system using pure logic (at least not that I'm aware of).
I'm reminded of the quote by Von Neumann: "If people do not believe that mathematics is simple, it is only because they do not realize how complicated life is."
But I will be the first to admit that my economics understanding is shallow. I'm curious: what are examples of theorems or definitive truths in economics that we know apply to the real world with real humans?
>But I will be the first to admit that my economics understanding is shallow. I'm curious: what are examples of theorems or definitive truths in economics that we know apply to the real world with real humans?
Supply/demand, IS-LM model, risk-neutral pricing, no arbitrage conditions. In the latter, 'free lunches' tend to be arbitrag-ed away by market participants (humans).
Even tough those are very robust models, they can still end up being wrong given some policy (some asset distributed via first come first served or via a lottery to avoid price increase for instance).
The only real definition I see is the equation of exchange which is purely mathematical and not linked to any real world data, but there are probably many other that are definitions and not theories / models.
We know the rules of physics and math. We can make predictions using those rules and express them as well defined terms. Physics and math are not a black box.
The inputs of "the economy" are not even well defined. We measure SOME of the inputs and cannot predict the outputs like recession. Sounds like the economy is a black box.
> We know the rules of physics and math. We can make predictions using those rules and express them as well defined terms. Physics and math are not a black box.
We can make a good deal of economic predictions that validate. Predicting recessions is in a similar class of problem as predicting the weather. We understand, in broad terms, the system-level dynamics. But we don't get it at the granular level, and that granular level sometimes manifests systemically in a chaotic way.
Ever since the fallout of the Great Recession we've had to deal with the reality of dead money in the system being much larger than what's in circulation. Heck, I suspect that's been the case for decades earlier than that but over all I think now we can account for it better due to our use of computers to keep track of the balance sheets. So in effect we got a better picture of what's going on but not the reason for it happening. And it would be nice if economists would take chances on less mainstream theories in economics to see what actually works rather than keep using overly simplified models that pretend to be right when they can't even match on the most basic trends in the economy.
I have just started reading Marx. I believe one of the core aspects of his analysis of capitalism is exactly what you mentioned here - the economy is a living organism and to truly understand it you have to understand the relationships.
I'm still working it out, so I would very much appreciate it if someone here had more insight to confirm/deny my understanding?
Isn’t it just as simple as there is a supply of money that everyone is chasing that expands forever if governments let it. If it stops expanding governments cause recessions if it expands more people get richer but this leads to everyone getting really scared there is too much money (debt) and so people start doing things to repay the money supply causing a recession. It can’t possibly be this simple so governments need to pretend it’s much more complex than that and that their tough stewardship of the economy is going to save the day.
I don't see 2% inflation as some kind of evil thing. The problem is that things like automation reduce the need to work by some degree so people get to work less but employment tends to pile up on fewer people. People don't measure prosperity by how much wealth their work produces. They measure prosperity by how much their job pays. It's employment that decides everything.
Since work has become a social activity people actually like to work more than they demand work themselves. So people compete for fewer and fewer full time jobs as productivity rises.
Here is my explanation. 8 people work at a restaurant and spend 5 hours out of 40 per week making pasta. Someone invents a pasta machine. So now everyone gets to work 35 hours. The boss decides to fire one worker so that the remaining employees work full time again. Everyone is competing desperately to not end up as the last guy without a job. Full employment in this scenario would require people to eat the additional pasta (=consume more) that the machine produces.
If you truly believed that the 8th person would find a better job then it wouldn't matter if you fire them or not. In fact, if you create a new full time job that needs 40 hours of work, then all 8 restaurant employees would apply at your company because they know they get to work 5 hours more. The best out of 8 would be chosen for the new job. One person leaves the restaurant, resulting in full employment of the 7 restaurant workers.
Meanwhile if you just fire a random restaurant worker then it is entirely possible that one of the 7 employed workers is switching jobs and the unemployed worker has to get back to work at the restaurant. It's quite inefficient.
> If you truly believed that the 8th person would find a better job then it wouldn't matter if you fire them or not. In fact, if you create a new full time job that needs 40 hours of work, then all 8 restaurant employees would apply at your company because they know they get to work 5 hours more. The best out of 8 would be chosen for the new job. One person leaves the restaurant, resulting in full employment of the 7 restaurant workers.
The "8th person" is the person who made the pasta making machine.
Whats happened is you've lowered the cost of production of pasta. The owner can now try to increase profits by either keeping the price the same and taking the savings, or lower the price to increase sales, in which case consumers see the benefit, which most economic theories predict they should through a competitive market if the owner does have some monopoly on pasta making machines.
From the saved money that the owner and/or customers, they will (hopefully) spend it on other things. Like maybe remodeling the restaurant or their home. Which means jobs are generated for restaurant and home remodelers.
Yes for the laid off restaurant worker who only knows how to make pasta by hand and cannot easily transition into a job remodeling houses, this is a problem. But on the other hand you have two wins here - the company/person that made the pasta making machine, and the person who in the end receives money that otherwise would have been spent on laboriously making pasta by hand.
If you think of money as representing a claim on the finite resources of the world then if the distribution of the increase in the money supply is too concentrated then you can have a situation where more people end up poorer.
> that long-term inflation expectations are not just interesting but are a decisive determinant of real-time inflation
I think economists neglect to include an obvious factor: people are greedy opportunists. When inflation first get reported on (in some tangentially related sector) the most opportunistic and greedy businesses jump at the opportunity to bump prices.
When less opportunistic (but still greedy) businesses see one of their suppliers bumping prices, they follow suit and it quickly gains momentum.
> I think economists neglect to include an obvious factor
In general, if you ever find yourself thinking that an entire discipline is neglecting an obvious factor, you should check whether that's actually true. I am pretty sure that your phenomenon of opportunistic price-hikes at reports of irrelevant inflation is either
> find yourself thinking that an entire discipline is neglecting an obvious factor
Fair. Perhaps I'd rephrase it to "economists might be able to better understand the inflation phenomenon by recognizing that people are - by nature - greedy opportunists".
Just stop meddling with the economy and it'll work perfectly. Soviet Union had the world's smartest economists trying to control their economy, and probably wrote smart scientific articles with all kinds of complex mathematics trying to prove each other wrong.
To me it seems obvious that laissez-faire economy would just stabilize itself in the most optimal way. I don't know if the economists actually know this, but can't do it because of politics or their own benefit.
It really depends what “most optimal” means. For example, our regulatory system today is the result of companies crossing a line that society is unhappy with:
- Massive pollution. Think of the burning Cuyahoga River or the terribly smoggy Pittsburgh.
- Horrible working conditions. Where plenty of employees (including children) were forced to work more hours than healthy, and in environments which kill them.
A similar modern example is hospitals price gouging super basic medical supplies.
Those are the natural results of companies operating in a purely profit-driven manner. A laissez-faire economy has no concept of morality or rights, just of profit.
Given that most people are completely unwilling to live under those sorts of conditions, our society has interjected itself into the economy to protect our rights. That happens via government regulation.
If we remove regulations and “stop meddling with the economy,” companies will take the cheapest route to profit, because they basically have to. With no regulations, that means many companies won’t build expensive filtering systems to reduce pollution or wool quickly disregard expensive or time consuming safety rules.
I’m also not convinced that laissez-faire actually works at all when the primary goal of the sector in question ought to be different from profit. A great example is health care, where the primary goal should be human well-being and health, but being profit focused would be completely at odds. If you’re profit-focused, there’s nothing stopping you from fixing prices very high because the person getting emergency services doesn’t have a chance to shop around or look at competition.
In fact, any place that competition can’t or doesn’t exist is very bad for society and consumers. Any sort of monopoly means prices are very high and quality is very low.
And monopolies always form over time in a laissez-fairs economy because it’s the best way to increase profit. And yet this is completely to the detriment of society and consumers —- e.g. to the detriment of everyone who exists. (I would posit that even a Walmart exec would have parts of their life that would be better if Walmart wasn’t monopolizing small markets.)
How do these problems get solved without “meddling” in the economy?
Well, the idea is that the economy should be able to self-regulate. People don't want to work in bad conditions and they don't want to support polluting companies, which makes these companies unable to compete. In this way, laissez-faire economy has morality, because people can directly vote with their wallet and their feet. In order to maximize profits, companies will have to seek the favor of people.
Even today, companies compete on being clean and treating their workers well, even further than any regulations would require them. The historical difference is that back then people weren't asking for higher standards, i.e. there was lack of knowledge and lack of alternatives. Also, I don't believe that horrible working conditions have ever been a standard practice, but rather an extreme example of some anomaly that has resulted from coercion or even state regulation of some sort.
There would be less price gouging and less monopolies, because these both are caused by lack of competition. There are lots of regulatory moats than decrease competition and increase costs.
The economy, back when it was on a gold standard so that the money supply was more constant, tended to show a strong boom-bust cycle. The bust would lead to bankruptcies and unemployment. I'm not sure if this counts as "working perfectly" or not. These days, central banks flood the economy with money if there's the slightest hint of anything going wrong, so that interest rates have persistently tended to zero and even below.
A capitalist economy is based on government intervention, in any case. They provide all the enforcement of contracts and property rights, and do some wealth redistribution, especially helping people who can't survive from what the market provides. Without the latter, it seems inevitable that the system devolves into a few winners and many losers, and such a system will eventually be overthrown by the losers.
I think this is more or less aimed at macroeconomics. And to be frank, macro and monetary economics are mostly bullshit. And you really don’t need these top down policies when we are capable of facilitating demand at an individual level. Yes, we have the tools and tech to do that today but we also have extremely slow government and extremely powerful cluster of people trying to keeps things at status quo.
This feels like one of those "and water is wet" type posts.
I can't stand basically any political commentary anymore, at least in regards to economics. It feels like everyone has "simple" solutions to the best way to solve every economic problem, and it doesn't really seem like the economy can easily be reduced to a ten second Fox News soundbyte.
And no one is surprised, least of of all economists (whose livelihood depends on it but know exactly how much BS their field is) and politicians, who, like tribal chieftains of old using sooth-Sayers to give justification to their decisions find economists very useful.
I think it's sort of self-fulfilling when it comes to the economy. The economy, after all, is the system of all of us using the maximum of our brains and abilities to compete with each other in the making of money. I think it's a chaotic system by it's very definition.
Economists are really good at providing explanation after the fact, which makes people feel good because it feels like they understand what's going on.
That's why economists are still in business to this day.
However, when it comes to predictive power, the entire field's output is exactly nil.
Somewhat disturbed by this article. It feels almost like the author's purpose might be to justify further monetizing the debt, so they don't have to address the inflation problem by tighter monetary policy. I hope I'm wrong here.
The r > g thing is cool in theory but it has an obvious flaw. As inequality rises returns go down. Interest rates have hit rock bottom rates.
You have to explain how returns can exceed economic growth. Your returns have to be earned through coercion basically, the other party can't refuse. Overpriced stocks just result in lower yields. I can only think of real estate as something that is earning a fixed return through coercion. The other thing would be money if the fed forcibly raised interest rates but interest is already zero.
I borrow $100 from the bank which creates $100. I buy seeds and plant trees. I sell 100 Apples to pay the loan back. Did the value of the dollar go down? No it didn't. This is how the supply of money can go up much faster than inflation.
in the end though, a dollar, euro or whatever is just a abstract unit which represents hours of labour spend.
Inflation is making the hours worked in the past worth less, and forces people to spend their money early to get maximum effectiveness out of their work.
From a labourer's perspective, inflation is making the results from work done in the past worth less, while those who have the means to take risks can negate these negative side effects.
Well, this wouldn't cause any inflation at all. It's basically just dead money. Either you own a stock or you save money in your bank account because someone bought your overpriced stock.
>Everyone invests in assets to start their own businesses.
This will cause inflation over the short term if there isn't enough labor available to do all investments. Interest rates would rise to encourage people to save their money.
There is also another form of inflation. There is enough labor available but the investment fails. You borrow $100 but only repay $80 (inflation adjusted of course). There is more money without enough production to back it up.
You can't invest money in stocks. Every time you transact with stocks, the person who is giving you stocks is getting your money, and so that money is not in stocks.
The only time you "invest" in stocks is during a public offering. And when a company does a buyback, that's a de-vestment. Over the last 20 years there has been more buybacks than stock issuances. The market is running dry.
Deflationary assets are exactly what r > g predict.
Sounds like motivated reasoning to me. We've had 40 years of pretty successful economic policy, but we'd really, really like to spend a huge amount of money when there's already a shortage of workers. But hey, who really knows, right? Maybe inflation won't be a problem.
nobody really knows... pretty much what Mises, Hayek and other Austrian economists have been saying for 100+ years.
Fatal conceit anyone?
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account." --F.A. Hayek
Can't read the NYT article, but the headline is a bit of a misstatement. It should be, "nobody can fully control or predict the results of how the market economy works". The source paper gets deeply into the work of Lucas, but misses the foundational nature of the Lucas Critique [1] (and Campbell's law, et cetera) in the effectiveness of economic policymaking. One challenge with setting fixed policy boundaries, particularly those based on fuzzy things like expectations, is that the reporting on the expectations affects the expectations. It's as if when the meteorologist predicts rain, people take some protective actions, that reduce the chances of rain. Thus, predictions of the effects of policy must take into account the predicted reactions to the policy. But if people know that policy is being constructed to already take into account the expected reactions, this will again affect their reactions, so policy needs to be adjusted to take into account these second order reactions, and so on.
Consider the source. It is by an employee of the Fed. The fed, like Federal Express, is a private corporation. It is not an arm of the government. I’m not saying the analysis is untrue. I’m just saying that this is not an unbiased source.
The minute we have solved AGI, will we have solved economics as well? I would imagine that if you just pit 100,000 smart agents against each other with a virtual currency you could calculate the ideal government policies to maximise welfare.
No, because as long as scarcity exists, there's going to be winners and losers - and losers will not be happy being selected as the losers. Whether it's by a bureau or by machine.
Scarcity is built into the fabric of humanity. Even if we solve food, material, and comfort, humans will continue to compete for mates and status, which are ordered human constructs.
There is artificial scarcity of jobs, i.e. employment opportunities. Think about how in a recession people lose their job even though they want to pay rent and buy food. It's because the remaining full time jobs pile up on fewer people. This results in a downward spiral as people without incomes can't spend and those with incomes become cautious and save instead of spending their money.
Let's say the maslow hierarchy ranks needs according how productive they are with shelter and food at the bottom being the most productive and social needs at the top being the least productive.
By that logic we should be employing people according to their needs to achieve high productivity in the economy. If you have two employees and fire one the economy will shift away from the productive part of the economy to the less productive part because the second employee is no longer able to buy food. Income welfare exists for this very reason. To take the surplus of the first employee and reallocate it to food and rent. If we had "job welfare" then we would take the jobs and spread them out over more people.
Instead of, "oh you want to eat? too bad we won't let you work" it's "you eat, you work"
