[Economics] - A New Kind of Science: The NKS Forum

A New Kind of Science: The NKS Forum

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Economics

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Posted by: Karl Smith

I've been reading over some of the posts here. I think there may be a little muddying of the waters about what Economics is.

Economics as field can be subdivided greatly. There is MacroEconomics and MicroEconomics. There is Theoretical and Empirical. Econometics and Applied Econometrics. Academic Applied Econometrics and Industry or Government Applied Econometrics.

A lot of what I am hearing seems to be of the ilk that the Microeconomic Theroetical Foundations of economics are flawed and thats why we have such poor Macroeconomic Governmental Applied Econometric Predicitions.

To me thats a little like saying that P-Chem is flawed and thats why your getting such poor gas mileage in your new Honda.

Yes, the gasoline you used in developed by Chemical Engineers who depend at least somewhat thereotically on the results of P-Chem. But thats a far far stretch.

The predicitve work that you are looking at is in my opinion quite good. Especially when from a static equilbrium microeconomic point of view it is impossible.

That is if you asked me, a theoretical microeconomist, what I think GDP growth next year would be, I would answer:

"The general equilbrium is fully discounted therefore GDP is a random walk and fundamentally unpredicitable.

"Besides even if it weren't its hoplessly co-integrated with any "explanitory" variables and therefore unestimateble.

"Besides even if that weren't true it suffers from Sensitive Dependence on Intial Conditions so no computer in the world is going to be able to figure it out past a few weeks."


Now all of that aside, the fact is that Government does estimate GDP growth and makes a fairly good stab given the crappy data they have to work with.

Thats because the world has transitions cost which causes economies to move in waves. Almost as if they had an inertia of sorts. That is completely different from the transition costless bang-bang differential world of microeconomic comparative statics.

Researchers basically put there ear really close to the ground and they can in effect hear the economy moving one way or the other. There is no thereotical basis for this at all. Particularly no microeconomic theoretical basis.


Now as for Micro-Economics I think we have a pretty solid basis for thinking that people's behavior can be modeled mathematically.

Not only that but some smarter than I econometricians can do a pretty good job predicting it.

Perhaps you quibble with the axiom of choice, which is given any two bundles of goods a person can answer the question, right here, right now, at this instant do you like bundle A at least as much as you like bundle B.

In all honestly I think that axiom is slightly flawed but not to the point where it doesn't make useful science.


Posted by: Gunnar Tomasson

Re. the following:

In all honestly I think that axiom is slightly flawed but not to the point where it doesn't make useful science.

Three brief comments:

1. Axioms are points of departure for LOGICAL reasoning - as in the axioms of Euclidean Geometry.

2. The axiomatic points, lines, and circles of Euclidean Geometry are figments of our imagination - they are NOT descriptive of any real-world phenomena.

3. Hence, the adequacy of the axioms of Euclidean Geometry is to be judged by their completeness, coherence, and consistency - NOT by their non-existent real-world or "useful" application.


Posted by: Karl Smith

If we were in a purely mathematical contex I would agree with you. In fact I think theoretical economists are often accused of being overly content with a self contained analytical framework.

However, at least in principle, we are not just mathematicians. We are mathematicians on a mission. Our, mission is to provide a set of results which is useful to emprical economists.

It would be convient to say well, lets just stipulate that consumers have a twice continously differentible utility function defined upto an affine transformation.

That would be nice for everyone except young theorists hoping to get tenure.

Luckily there are such young theorist and they say, "What a minute. Maybe thats too quick. Maybe we ought to get a little more explicit and then people can judge whether or not or assumptions are appropriate for their work"


Now truth be told all that has really happened is a reformulation on basic more basic principles, the lighting of many cigars, and the handing out of a few Nobles.

However, I'd at least like to think that we've exposed some of the guts of the grand model. Some of those guts I am even making a vein attempt to challenge.

I think that a restatement of the basic assumptions will lead to a theory which explains some important observations.

Namely, if you guys think everyone is so optimal why are so many people getting screwed. Well, obviously there are differing endowments but I think its deeper than that.

I think on one level we are not actually optimizing. I don't want to say too much because I don't have it worked out formally and I don't want to be made out to be a complete quack before I have even published anything!!!!




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