Unsolved problems in economics
en.wikipedia.org
en.wikipedia.org
This is a partial list. Any specialist in any subfield of the discipline could list a large set of open problems. Nearly all have broader significance.
In my own specialty (industrial organization) unsolved problems which would be of interest to readers here include optimal regulation of platforms and two-sided markets. Theory and empirics are difficult, so regulators are to some extent fumbling in the dark a bit. It is not at all clear how to regulate (for example) Amazon’s offering its own versions of products sold on its marketplace OR what the right tariff Apple should charge for access to the App Store is.
Extremely confident claims that such behavior is permissible or should be forbidden are likely unsupported by any careful analysis one way or the other.
It's infuriating. I've stopped trying to contribute.
This is a tired trope, and it shows you're the one who can't be bothered to understand Wikipedia. Wikipedia is basically an anarchy (most of the time...), meaning that it's unlikely that the person who "rejected" your changes had elevated privileges, it was probably just another editor like you. Incompetent and/or malicious admins do exist on Wikipedia, but its much less likely you encountered one of those as opposed to just a regular user who disagreed with your change.
I'm neither a fan nor a Wikipedia apologist (WP has loads of issues), just trying to explain some basics.
BTW, I assumed you meant "Wikipedia admin" when you said "moderator"; real moderators (Wikimedia employees) do exist, but they're even less likely to encounter.
On the other hand, you say:
> having intimate knowledge of a topic
These kinds of edits sometimes get reverted on Wikipedia, and rightly so. I'm sure you understand that anyone can pretend to have "intimate knowledge of a topic", ideally edits should be backed with good references/sources instead of the editor's (unverifiable) knowledge.
> The anarchy stuff is just marketing nonsense.
With this sentence you're implying that Wikipedians want the public to believe that Wikipedia is anarchic, but this is incorrect, see: https://en.wikipedia.org/wiki/Wikipedia:What_Wikipedia_is_no...
The link is a Wikipedia policy, so pretty much as official as it gets. The sad truth is that Wikipedia policies, guidelines, etc are mostly irrelevant to the functioning of Wikipedia.
The real de facto reality of how Wikipedia operates is that it's a complicated system with most decisions being made being local to only a single or a few articles. Furthermore, nothing is set in stone at Wikipedia, be it content or policy, they all change with the whims of the editors currently active at the relevant place and time. Which is also why policy is mostly powerless.
My references themselves (from impact factor 10+ journals) were attacked and the cause of rejection. I'm not pretending that I know more than someone else; I'm leading the audience toward where they can assess the data for themselves and make their own conclusion.
I do this by referencing high quality, peer-reviewed, reproducible research. I don't post opinion (on Wikipedia). I state facts corroborated by multiple sources.
yup this is a common problem with Wikipedia.
You aren't the only one (albeit in my case, for more mundane/esoteric topics)
Both are hard, especially in the cases I listed.
With a good theory of (e.g.) platforms, you could likely identify a few different fundamental forces which may push in different directions. Hypothetical example: force X would benefit the platform at the expense of sellers, force Y would benefit the sellers at the expense of the platform. A priori it may not be possible in theory to put a magnitude on those effects: there may be nothing that would say "we can show that X > Y in every case."
This is where you need data. (This part is especially hard for platform markets!) You would need data on the platform side AND on the consumer side AND on the supplier side. You write down a model of (generally) consumer demand, supplier response and platform behavior (at least - probably taking a somewhat simplified approach to at least one of those sets of agents). With your estimates, you would try to answer the "Is X > Y?" question posed above.
You can also simulate the impacts of counterfactual policies, among other things.
More specifically, this is where you need data which does not and cannot exist. Specifically, an objective scale which would allow you to compare the cost or benefit of policy to the platform and the sellers. There is no such objective scale, because value is subjective and not comparable between different economic actors, or even for the same actor at different times. Any model which assigns numeric "estimates" for these costs and benefits so they can be compared is substituting the authors' own subjective valuations in place of those of those who will be affected by the policy.
This is wrong. All important work in my field in the past 25 years has been empirical.
> Any model which assigns numeric "estimates" for these costs and benefits so they can be compared is substituting the authors' own subjective valuations in place of those of those who will be affected by the policy.
Very, very wrong. You’ll never get away with picking your own parameter values in modern empirical IO.
If you don’t know the field that’s fine. I probably don’t know your field either. But don’t make these overconfident and totally wrong claims about what’s done in a field you don’t know anything about.
The problem I have with much of economic theory is that it tries to tie things back to what's beneficial or not to societies and tries to do so through a very thick utilitarian lens. There's often a heavy amount of fairly sophisticated math, statistics, and modeling parading as certainty when the fact is, there's a very high amount of uncertainty in many assumptions and in variety of economic theories that are just hand-waved away. It's not to say the problems economists face are simple, they're actually incredibly challenging and I think it's good economist continue to push for a better understanding of these systems.
My gripe arises when economists masquerade or imply current theory with certainty when in many cases, as if it were a mature science. It simply isn't and far too many use the appearance of certainty hidden in complexity of theory as certainty to push a biased personal agenda or perspective. When you overload terms like efficiency, efficiency in what context? Efficient for whom and through what perspective of the world? Very clear definitions need to be made so I don't question the motives of the attempt of quantification and can look at flaws and oversights that may exist in such metrics.
Most economic theory lacks real empirical evidence because it's just to difficult to play the experiments and interplay of micro, meso, and macroscale systems at a global scale without actually running the experiment (changing policies).
It's the politicians and voting public that are the problem.
It's easy to get massive numbers of people to vote for you by giving out is completely wrong as long as you're extremely confident in your presentation of it. It's easy for these political winners to drive the economic systems to collapse while increasing authoritarianism by said false confidence. People want to vote uncertainty away, authoritarianism is one way of doing that.
But there is no link for "socially optimal", and the phrase appears nowhere else in the article, so this definition is incomplete at best and vacuous at worst because its meaning turns entirely on the meaning of "socially optimal" but I can't think of any reasonable way to define it that is not a judgement call.
Technically Pareto optimal. Pareto optimal points are not necessarily socially optimal.
NB I was just comparing the writing style of that page (which seemed a bit odd to me) with other examples.
So where do I find these definitions? Because I am still highly skeptical that they can be defined in ways that do not conceal hidden judgement calls.
You can be skeptical, but the cure for that skepticism is something more akin to taking an undergrad course, or two.
- Lacking time stability means no one tomorrow has any incentive to stick to the policy, and means the policy is unlikely to succeed in its objectives.
- Deadweight is lost efficiency
- The only arguable one is "fairness", and to clarify I blunted the term to avoid the nuance of explaining Pareto optimality. But sure, we can also consider egalitarianism and other moral frameworks.
That's true, but time stability means that a bad policy is going to be maintained even in the face of evidence that it is bad. Deciding which is worse is, as I said, a judgement call.
> Deadweight is lost efficiency
The flip side of increased efficiency is decreased resilience. Without unused capacity (i.e. inefficiency) the slightest contingency will send the entire system into chaos. How much inefficiency you want to maintain as a hedge against contingencies is a judgement call. Different people have different risk postures.
> Pareto optimality
I think it's safe to assume that people on HN understand Pareto optimality (or are capable of looking it up). Do you really think that Pareto optimality is synonymous with "fairness"?
> we can also consider egalitarianism and other moral frameworks.
Of course we can consider these things. But that doesn't answer my question, which is how do we address them in a principled way that doesn't degenerate into a political dispute?
See: CPUs and GPUs in 2020-2021, baby formula in 2022, etc.
It can absolutely be a judgment call.
It has nothing to do with the everyday meaning of the term “deadweight”.
So everyone pays the same charge for IT costs AND market does not have an unfair advantage.
I've talked to several big names that have told me about megaoffers from Amazon. (They probably don't care if people know, since they told me, but I'm not going to name them.)
- Time series forecasting.
- Reduced-form causal inference
- Structural, especially what is called "structural IO".
Among the questions people in the last category will answer are: how should we price this product? How should we decide which new markets to enter?
The subject was "unsolved problems in economics", not "unsolved problems in politics". Regulation is a political topic, not an economic one.
That last point might be economic in nature, but only if Apple is the one making the decision, and is free to choose their own price without fear of regulation. Otherwise it's still politics.
If you don’t care about getting it right, fine. Ask politicians to do whatever they want on the basis of whatever biases they have.
If you want to get it right, then you need to weigh the costs and benefits of different regulatory policies. That requires theory and data.
1) many of the assumptions in economics are culturally specific
2) many of the models in economics, while self consistent and plausible, have not been adequately tested with real world data
3) economic models don’t seem to take constraints into account leading to absurd results like infinite growth
Within the field, are any of those three seen as important problems? Thank you
Which ones and maybe I can comment. I don't think this is true.
> 2) many of the models in economics, while self consistent and plausible, have not been adequately tested with real world data
This is everything that we do. The entire field is all about data and has been for probably 30 years (more actually, but we can point to an improvement in our own standards in the mid-1980's).
> 3) economic models don’t seem to take constraints into account leading to absurd results like infinite growth
A very basic definition of economics in undergrad classes is "the theory of optimizing behavior subject to constraints" so constraints are very much our bread and butter.
Separately I don't think most (or any) macro economists (or growth guys) would say "yeah my model gives great predictions for what the situation will be 1,000 years in the future". Even 50 years in the future is pushing it.
>> at least the way it is popularly understood
This may be your problem. The understanding of the field you find from commenters on this website is a million miles from what it is really about.
The popular understanding of economics has very little to do with economics.
So, just like economists!
I’m glad people like you are at least thinking about it. I have no insights (different degree), but I was wondering about that exact thing a few months ago.
I've studied MITx Microeconomics course. It appears undergrad level Micro course, and a background in machine learning and software engineering.
There is a recent book by Belleflamme and Peitz, which should some day be followed up by a second volume about regulation.
There is also a recent survey of the empirics by Marc Rysman and two coauthors.
The opening line.
In a larger sense, academia and a big chunk of contemporary western "culture" is all about coming up with stories, narratives, explanations, mindsets (frameworks) to ignore the exploitation of humans as a resource for the sake of ill-defined (by design) notions of "the group" or "us all" when in fact the end result is a big hierarchical pyramid with little room at the top which requires lots and lots of desperate people at the bottom (by this point, the bottom is entire countries).
On the contrary, sociology is way more scientific than economics in building probabilistic models of social behaviors. Such models are quantitative and testable.
Economics is opinion based by design.
Regardless of the field, be it economics, cookery or mechanical engineering, you can ask a pool of experts:
- How can I solve problem X? What will happen if I do nothing?
- How confident are you that the solution will be effective or the prediction will be accurate?
The problem X is the input and then you compare predictions and real outputs.
There is abundant literature on the effectiveness of economical models and the ability to make prediction and the outcomes are clear:
- Economists systematically overestimate their ability to make predictions
- There is not even a single economical theory. Economists have different schools of thought that are incompatible with each other (!)
There are countless examples of economists failing to predict the future or having wildly different opinions.
I guess science is a failure then, better give it up.
Ask meteorologists about their models and they will honestly tell you the limitations of such models and the success rate at predicting the weather. They have little incentive to lie.
It will be difficult to find meteorologists with clear "anti snow" or "pro rain" biases.
Same goes for getting a blood check: they are not 100% reliable, yet it's difficult to find a lab with an ideological bias skewing the results.
Then, ask economists and you'll quickly find out that their predictions and advice on economic policies aligns with the school of though they belong to.
Politicians routinely ask for advice from this or that economist depending on what they want to hear.
Economics almost by definition can not make good predictions wanted by the public, because as soon you figure out precise model “a” of the economy, the economy takes the model “a” into account and mutates to model “b”.
This applies to all social science.
> There are countless examples of economists failing to predict the future or having wildly different opinions.
This applies to all social science.
it's not a risk, it's a measurable fact.
yup.
Physics: apply force F to projectile of mass M and know in advance where and when it'll land modulo a tiny error margin.
Economics: raise the interest rates by X%, wait unknown amount of time Y, observe state of the system after time Y, formulate complex theory as to why action led to "cause", go write a paper about it. Get wined and dined by policy makers who see great benefit in your "explanation".
The phenomenon is not new BTW, oracle, druids and shamans have occupied that ecological niche for as long as there has been tribes and leaders needing to justify their actions to the masses.
They just changed their names in the 20th century to sound more respectable.
edit: your take-away from this should be that you're mis-defining science.
edit2: you all forgot that medical and nutritional science has a reproducibility crisis, it's no less "science" for it. Add to the fact, the notion that nothing is reproducible in Economics is false. See for example: https://www.caltech.edu/about/news/famous-economics-experime... , https://www.science.org/doi/10.1126/science.aaf0918
Because they're indeed not sciences.
They call themselves that to attract funding.
Predictive power and reproducibility are defining characteristics of sciences.
Social "sciences" have neither and therefore aren't sciences.
> edit: your take-away from this should be that you're mis-defining science.
No thanks.
At the same time, physicists have problem telling precise location and momentum of the atom (at the same time; precisely).
(footnote: I love physics more than economics, but world is not perfect and sciences are not perfect. Except for math maybe https://xkcd.com/435 . Perfection and usefulness are not the same)
In both cases scientific study can help us determine when the risk is higher or lower, and can tell us definitively when one does occur. But no field that studies stochastic processes like markets or volcanic activity can make 100% certainty predictions years in advance.
These fields are all dealing with probabilities, asking for a yes or no answer is missing the point.
That said, it's important to separate Microeconomics and Macroeconomics.
Microeconomics is a solid Hard Science which has helped us understand many important things. Macroeconomics, OTOH, is a very difficult field, in part because the object under study is aware of the findings, and adjusts to it.
I agree that Econ doesn't quite have the hardness of say Physics, but insofar as you can characterize physics as the development of models that can meaningfully explain reality within reasonable error bounds and feasible energy usage, then Microeconomics sometimes does do this as well.
Are psychology or sociology hard science?
To be less jargon-y, microeconomics is sometimes called "price theory", and in its basic form models prices as depending on supply and demand.
Economics seems to break under Goodhart's Law.
What breaks is trying to get people to optimize for some other factor by manipulating economic signals (e.g. with inflation). Once they know about the manipulation they'll compensate for it. Not 100%, not always even in the right direction, but enough to make the eventual outcome chaotic.
What experiment can we make to empirically verify this claim? If no experiment is needed then the statement is a tautology.
The problem is the recurring claim that people are not rational actors, either because of imperfect information (sometimes things don't turn out as expected) or because what people choose to do isn't always what someone else thinks of as their own best interest. That isn't what is meant when we say that people are rational actors. Anything can be a rational action within some system of preferences; the point of the "rational actor" model is that if you assume people are potentially irrational actors, deliberately making choices which they expect a priori to satisfy their preferences worse than other options they are aware of, then the system is underconstrained and you can't say anything about people's preferences based on observations about their choices. Assuming rationality doesn't constrain people's behavior at all, but it is a more useful way of interpreting it.
I think this way of framing things, while not imposing any constraints, as you point out, is just quite confusing. We know people are not perfect logicians, why pretend that they are? (except of course in the situations where this is a good approximation).
Pretty much, yes. That's the only way you get any useful information.
Look, everyone knows that people sometimes make choices they later regret. That does not refute the rational actor model, because the rational actor model is about what they knew and what their hidden preferences were in the moment, at the time they made the choice. That includes preferences they may not even understand themselves. To refute the rational actor model you would need to show that the person knew there was a better choice, one whose a priori expected outcome was superior in all respects from their own point of view, and deliberately decided not to take it. Since you can't know how they valued all the possible outcomes from their point of view—they don't even know that—that means it can't be refuted at all. It's a framework for understanding people's revealed preferences, not a means of empirically predicting their behavior. At best you can use it to say that if people prefer A over B then they will choose A and not B, but it doesn't tell you whether a person will actually prefer A over B at any given point in the future, even if you can infer from their actions that they did in the past. Preferences change; circumstances change. No two choices are ever made in exactly the same context.
> We know people are not perfect logicians, why pretend that they are?
It's not a matter of perfect logic. It's saying that people (are assumed to) pick the course of action that seems to lead to be best outcome from their own point of view. That can, of course, include others' well-being, if they value such things. There is no requirement that their expectations be perfectly logical, or grounded in perfect knowledge.
There is a separate principle, not part of the rational actor model, which basically says that people either learn to hold expectations which closely align with reality over time or tend to lose wealth, and thus influence in the economy, over time. This implies that most of the economically significant actions are taken by those who make decisions they are not likely to later regret. Of course this breaks down a bit when poor decisions get subsidized, propping up the economic influence of poor decision-makers.
Nah I don't agree. Sometimes people act irrationally. A otherwise friendly person might seem unfriendly because they've had too little to eat. Or because they had a bad day at work. Typically they would agree that their temporary unfriendlyness is not in accordance with their eithical principles, nor generally in theirs or anyone else's best interest. They (we) are just limited as beings. Unable to do what they know to be best.
Another way to look at it could be to say that people are not a single actor. What is the self? What we perceive as a unified I could very well be a much more shattered / distributed fenomena. Relying on the "rational actor model" limits the perspectives we can take on what a conscious being really is.
And I do think logic is a *requirement* for rationality (agree knowledge is not though). Maybe perfect logic is not necessary, behavior of sufficiently rational actors is perhaps well approximated by the rational actor model.
But maybe not! Question is - will increasingly rational actors eventually converge to the same behavior? If not - then rational actor theory cannot even approximate human behavior, it intrinsically has to be a theory about "human logic".
And what's you opinion on astrology?
FYI microeconomics is the most controversial part of economics. Doing advanced math on abismally poor world models doesn't make a hard science, especially when none od your results are falsifiable…
I agree that economists as individuals are working competently and in earnest, it's just that certain economists will find it harder to get funding than others and that could manifest as bias with potentially wide reaching implications.
...
A lot of people practice things that they feel genuine and sincere about and they can even build entire institutions around those practices... doesn't mean anything if what they're doing doesn't have a measurably positive impact and there doesn't need to be any malice involved whatsoever. If anything, the people I know who believe in homeopathy are among the nicest and most honest people who deeply care about health, and yet... they are still full of crap.
It could simply be an emergent phenomenon where economists whose opinions align with the ruling class get more exposure and more prestigious appointments than those whose opinions disagree with them, or even worse disparage them.
I am reminded of a TV news reporter/presenter who took offense to the idea presented to them that they are spreading political propaganda in service of the elites and flippantly asked something along the lines "Do you think I am self-censoring myself in service to the elite class, like I'm just a pawn taking a paycheck to say whatever the elite want me to say?" and the response to that question was "You most likely believe everything you say and are honest about your position, but if believed something different you wouldn't be sitting where you are."
Suppose you open a spreadsheet right now, discount 100 years of cash flows, and measure each cash flow as a % contribution to the sum (aka npv). You will find that at medium to higher rates years 0-20 make up the greatest percentage of the npv by far. But as you lower them, that relationship flips and cash flows for years 20 to 100 become the lion's share of the valuation. Pretty sure this is how we wound up with WeWork and all the similar fiascos, meanwhile huge swaths of the capable working-age population has dropped out of society for lack of well-compensated opportunity. Hell, there's a lot of issues right now that seem pretty easily explained with a simple DCF interpretation.
All I ever seem to get is "lowering interest rates gets the economy rolling again by allowing businesses to continue hiring, and even if those jobs are just digging & filling in holes, those people have to buy food and housing and stuff so it gets the economy rolling again!" But that doesn't explain what happens if you "get it rolling again" too many times and the ratio of hole-diggers to food-makers starts to approach 1/2 (or wherever a "tipping point" may be). Hey great! Low unemployment! Except what's actually getting done is worthless.
Is there such a thing as the 'natural interest rate' in economics? A way to determine what the yield curve would be if we hadn't been intervening for the last half a century?
For the most part, I don't think low interest rates are a bad thing (though I don't think that they should have ended quantitative tightening prematurely in 2019). I share your sentiment that too much money is circulating around, but I don't blame the Fed. They have no way to stop Wework from receiving cheap cash without hurting useful small businesses. IMO, if Congress weren't so bad at balancing a budget, the government wouldn't have to issue so much debt, and in turn the Fed wouldn't have to buy so much of it back to achieve a similar effect with QE.
I wasn't suggesting that. OP did. Nothing I said suggests that economics is an incorruptible field. The problem is that a disproportionate demand for economists comes from people with an agenda. We all know that lobbying exists. When politicians get most of their knowledge about economics from these lobbyists rather than from less biased sources, of course it will seem like the field is more broken than it actually is.
It's popular on various front-page(!!!) subreddits like r/antiwork and r/latestagecapitalism.
I say "incel" there very deliberately. It's a set of toxic beliefs that prevents the formation of normal, healthy economic relationships, and this reinforces the toxic beliefs in a positive feedback loop.
I've seen a friend get sucked into this and it was (still is) absolutely devastating.
And it is like you said self fulfilling, where the world makes more sense the less economic success one has, and the narrative provides no moral option to changing one’s economic status within the system.
This is where my friend is right now. It really, really sucks.
I see this with macroeconomics, but economics is still a fairly broad field. Microeconomics has the spherical cow problem but econometrics has many useful applications, as does game theory.
A piece of evidence to your point is who quant firms hire: a lot more physics and math PhDs than economists. You would think someone who studies the science of the economy would be good at making money, but the real economy doesn't seem to care as much about those theories.
Let's start with the basics. In economics, what is "utility"?
> In economics, what is "utility"?
First result (using https://andisearch.com/ ):
https://www.investopedia.com/terms/u/utility.asp
> Utility is a term in economics that refers to the total satisfaction received from consuming a good or service. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility. The economic utility of a good or service is important to understand, because it directly influences the demand, and therefore price, of that good or service. In practice, a consumer's utility is impossible to measure and quantify. However, some economists believe that they can indirectly estimate what is the utility for an economic good or service by employing various models.
Circular definition, "impossible to measure", "indirectly estimate", "various models"...
Sounds like mumbo-jumbo with math to me.
"Utility" isn't a scalar value, or a vector, or even a matrix. It's got to be a higher-order tensor or some even more exotic mathematical object, eh?
> I remember my friend Johnny von Neumann used to say, "With four parameters I can fit an elephant, and with five I can make him wiggle his trunk."
~Fermi
I don't think anyone does.
> you've looked it up on investopedia, and on the basis of a web page
Is that definition wrong? Can you provide a better definition or link?
> your own entirely mistaken imagination of what the maths might be
But I do know what math is, eh? And I know how to use it to do things like design electronic circuits that work "like it says on the tin". Do economists have anything like Ohm's law? Can you describe the math? Does it makes predictions? How can it make predictions when there are no empirical ways to measure e.g. the "utility"?
Yes, utility makes predictions, because preference relations make predictions. See the Weak Axiom of Revealed Preference and its cousins. If I see you choosing oranges over apples, and then the price of apples falls and you still choose oranges, we have learned that you strictly preferred oranges at the old price. More generally, some patterns of choices are rationalizable by a preference ordering. Others aren't. So a claim about someone's preference ordering has empirical content. (It sounds as if you imagine measuring utility as something that might need a brain scanner. We haven't thought that way since about World War II.)
This is all Econ 101 (at a bit higher level than a first year undergrad). I don't expect you to know it. I do expect you to know it if you intend to pontificate about it. Similarly, I know nothing about Ohm's Law, and for this reason, I avoid making broad pronouncements about the invalidity of all of physics. I find this basic commitment to intellectual humility helpful.
Sorry for relying on investopedia again but, uh:
> Weak Axiom of Revealed Preference (WARP): This axiom states that given incomes and prices, if one product or service is purchased instead of another, then, as consumers, we will always make the same choice. The weak axiom also states that if we buy one particular product, then we will never buy a different product or brand unless it is cheaper, offers increased convenience, or is of better quality (i.e. unless it provides more benefits). As consumers, we will buy what we prefer and our choices will be consistent, so suggests the weak axiom.
https://www.investopedia.com/terms/r/revealed-preference.asp
The word "axiom" is inappropriate here. This isn't science, it's a "just so" story. It's cereal box psychology. It's an attempt to dress up in big kids' clothes and I've got no respect for it.
> It sounds as if you imagine measuring utility as something that might need a brain scanner. We haven't thought that way since about World War II.
That's a shame, disdaining the source of real data. Of course brain scanners weren't that good back then, eh? But you don't need them. Pupil dilation, changes in pulse and respiration, capillary response, there are all sorts of signals that let you see "inside" the brain w/o fancy technology.
> I do expect you to know it if you intend to pontificate about it.
First, I'm not pontificating, I'm decrying. Second, I don't need to know details about the nature of the BS, I can tell from the smell alone. Economics is in the same epistemological boat as Numerology and Astrology. Just as I don't need to study those in depth to know they're BS, I don't need to know much about economics to see that it's barren and, frankly, ridiculous.
> I know nothing about Ohm's Law
You might want to learn. Not only would learning electrical engineering give you a great working example of how to use math to reason about real world phenomenon, and unlike economics you can actually use it reliably to build useful devices.
> I find this basic commitment to intellectual humility helpful.
It would have been most welcome and helpful a couple of comments ago.
- - - -
See, the thing about Ohm's law is you don't have to take my word for it, or anyone's, not even Ohm's. You can build the circuit, apply the meter, and measure it for yourself. Humility or arrogance doesn't enter into it.
The problem isn't that economists want to study the economy and are doing it badly, the problem is that they want to be treated as if they are physicists, and we want to treat them that way because of politics and psychology. And even that's isn't a problem until we make mistakes and our blind following of the not-physicists' "science" prevents us from stopping or fixing the errors. Next thing you know, the Aral Sea is gone!
I don't see any substantive criticism here. Can you explain what's wrong with WARP? I see it as a way of going from theories (people's preferences are such-and-such) to predictions (given WARP and these preferences, we expect these choice patterns, and not those).
>That's a shame, disdaining the source of real data. Of course brain scanners weren't that good back then, eh? But you don't need them. Pupil dilation, changes in pulse and respiration, capillary response, there are all sorts of signals that let you see "inside" the brain w/o fancy technology.
If you think that, then you can build a theory of utility involving that. There is an approach called neuroeconomics which tries to do so. My point is not to disdain these sources of information, it's that they aren't strictly necessary: preferences exist to predict choices and a given claim about someone's preferences can be falsified by observing their choices.
> Second, I don't need to know details about the nature of the BS, I can tell from the smell alone. Economics is in the same epistemological boat as Numerology and Astrology.
Of course, if so, then there's nothing further to discuss. Meanwhile:
* Autor et al. claim "import competition explains one-quarter of the contemporaneous aggregate decline in US manufacturing employment." What's wrong with their method? Why is it astrology?
* Banerjee and Duflo analyse microcredit using a randomized controlled trial. They find "no significant changes in health, education, or women's empowerment" and almost no long run effects. It seems important to understand whether popular anti-poverty policies work. Why is this barren?
* James Heckman has spent his life trying to understand how to help disadvantaged children, building mathematical theories of human capital and testing them on data. Why is this numerology?
* You blame economists for the loss of the Aral Sea. I would think it's more to do with Soviet planning. I hold no brief for Marxist economics, which was far from the mainstream already by the 1950s, but in any case, which economists were to blame?
I want to be clear, I don't object to the study of economics, it's obviously an important and valuable field of study. What I object to is the (IMO) unearned social/political status of the field. I don't believe that economics is science (yet!) and so it seems to me that it functions (en mass) as a kind of psychological blind or bluff to let us feel like we have more agency than we in fact do. If I were to try to put it in a pithy "clickbait" phrase, "Alan Greenspan is a priest not an engineer." Hmm?
I don't think I'm going to convince you that economics is pre-scientific, and you're not going to convince me that it's a proper science. But let me try to be a little bit constructive. To me a legit scientific economics would have to be essentially:
Ecology + Psychology
Psychology, on the other hand, is a huge mess, far worse than economics. I'm not going to get into it here but the only rigorous engineer-able psychology I know of is dismissed as pseudoscience by academics, so there we are.
We're halfway there, viewed optimistically.
- - - -
> Can you explain what's wrong with WARP?
I can pick apart the definition and maybe that will illustrate where I'm coming from.
> This axiom states that given incomes and prices, if one product or service is purchased instead of another, then, as consumers, we will always make the same choice. The weak axiom also states that if we buy one particular product, then we will never buy a different product or brand unless it is cheaper, offers increased convenience, or is of better quality (i.e. unless it provides more benefits). As consumers, we will buy what we prefer and our choices will be consistent, so suggests the weak axiom.
To me, this is obviously a statement about psychology, but it's trying to treat the human being as a kind of "black box" by applying an abstraction ("as consumers") that's almost cartoonish, and then reasoning over this abstraction in ways that don't particularly match up to what you see in the real world, where people buy things for all kinds of reasons, most of them largely unconscious. There's the phenomenon where the price of something goes up and people want it more. Or the package changes and the sales go up (or down) even though the other qualities (price, convenience, quality) are the same.
Then there's the methodological difficulties. How do you actually measure these things to test the theories? How are these predictions stated?
To me, WARP says "people have habits" without adding anything of substance. It's taking a commonsense, prosaic truism and dressing it up in a lab coat.
> My point is not to disdain these sources of information, it's that they aren't strictly necessary: preferences exist to predict choices and a given claim about someone's preferences can be falsified by observing their choices.
If you have access to lots of purchasing data then, yes, I'm sure you can find regularities. If you're talking about predicting individual behaviour than again, how are you measuring this stuff? Are people following subjects around and recording them?
I want to be clear, I am pro-science. I'm not trying to undermine the authority of science, I'm trying to protect it. If we restrict the word to mean those fields of study that can make reliable predictions, or in other words that lead to reliable engineering disciplines, then it becomes pretty much unassailable. Only a fool doubts a physicist (in re: physics) eh? Chemistry is already a little squiffy though: e.g. nicotine "research".
If we continue to insist that psychology, sociology, economics, and the other "soft" sciences should carry the same authority when it's obvious to a lot of people that they are nothing like physics, then it seems to me we risk throwing the baby out with the bathwater.
I'm not going to go through those examples you gave, and I apologize for that. The first one sounds like it might be a statistical correlation backed by a lot of data, so perhaps it's okay? The second two sound like numerical naval gazing. Why study poverty? Just give people food and money. The reason poverty exists is that we lack love.
> You blame economists for the loss of the Aral Sea.
In re: the Aral sea. I do not blame the economists, or even the Soviets per se, I blame human nature. We are dumb, ignorant, and prone to hallucinations. That's why science is so important. These folks thought they had a correct economic theory but they were wrong and they didn't have the ability to notice and react. We (modern, Western) folks tend to talk and act like we have a correct economic theory but then things like the 2008 meltdown come along and Alan Greenspan is like, "Whoops."
To the extent that economics helps us see and understand reality, it's terrific! To the extent that it helps us fool ourselves, it's as dangerous as relying on astrologers.
> economics is a psuedoscience like all social sciences and astrology. They've predicted absolutely nothing of value. It's just people studying these things prior to them becoming scientific, like people did with alchemy and whatnot before chemistry.
The Nobel Memorial Prize for Economics is what it is. Both Hayek and Friedman both won it, even though they have very different ideas about how the economy should be run. As did Paul Krugman. Yet I've seen no one mention his Nobel prize when it comes time to criticize him.
Even looking at what her study that won her the Nobel showed:
"Banerjee, Duflo and their co-authors concluded that students appeared to learn nothing from additional days at school. Neither did spending on textbooks seem to boost learning, even though the schools in Kenya lacked many essential inputs. Moreover, in the Indian context Banerjee and Duflo intended to study, many children appeared to learn little: in results from field tests in the city of Vadodara fewer than one in five third-grade students could correctly answer first-grade curriculum math test questions."
You can only get those results by implementing the solution. You can only know it doesn't work by trying it and seeing it doesn't work. That's part of what makes the problem wicked.
And unlike one of the people who responded who wanted to use my statement as support for saying economics is not a "real science". What it really means, is that this shit is hard because it is incredibly hard to conduct experiments in ways that don't irreparably harm some group.
Or, to put it simply: economics is not a scientific discipline for any generally accepted definition of the term.
But it doesn't say that the only cause of inflation is excessive spending. That idea is a monetarist fantasy, who are able to keep saying that even in the middle of a pandemic, with a logistic collapse, an energy crisis and a major war. Still, they think that everything will be OK raising interest rates and taxes.
Totally crazy. I'm curious to see what they will say if we see something a lot worse, deflation, in the next years.
Except that it doesn't say that.
The basics of MMT analysis is that put forward by Warren Mosler in Argentina recently. [0]
- Floating exchange rate
- 0% interest rates and no further issuance of public debt
- a guaranteed job for all at a fixed living wage
Taxes are very much secondary in MMT analysis. The stabilisation comes from government refraining from giving people free money for doing nothing, which is what paying interest on debt and reserves represents.
"As Mosler tirelessly repeated in his expositions, the price level of an economy, and therefore its level of inflation, can only be explained by the price that the State is willing to pay for the goods and services it needs to supply itself. This especially concerns the price of labour reflected in wages, since the origin of all goods and services is socially embodied human labour. "
[0]: https://gimms.org.uk/2022/05/16/journey-to-the-heart-of-arge...
You won't find any MMT proposal that proposes changing taxes to control inflation, because that doesn't work any more than changing interest rates does. You don't want humans involved in the stabilisation system - it has to be done by the automatic stabilisers, and on the spend side.
Taxes are set based upon fiscal policy goals which are, or should be, indifferent to the business cycle.
The analysis within MMT comes from an understanding that we control inflation via a buffer stock of human labour, and that government sets the price of currency when it spends.
There's more money in demonstrating that raising the minimum wage destroys jobs than there is in demonstrating that it destroys profits.
But let's call a spade a spade: this is just another iteration of Marxist epistemological ideas. For Marx, the division between the proletariat and the bourgeoisie was much deeper than exploitation. Bourgeois had their own unsound systems of intertwined knowledge built to benefit their position in society.
Not to be flippant, but that's how forced re-education was morally justified by socialist regimes of the 20th century.
It turns out, markets are really good at figuring a LOT of that out. Planned economies are probably computationally infeasible even with vastly simplifying assumptions.
In this case, the problem was indeed that Soviet "scientists" - as bsedlm postulates - "were making up theories to 'scientifically' (but actually, just academically) justify whatever the ruling powers want to do" - in this case lysenkoism:
It can go wrong of course! But there essentially is no alternative that is even close to working.
The Soviets had economists too. They just had different dodgey theories.
Most of the stuff I learned that I've used in my career is related to things like consumer choice, price bundling and profit optimization, game theory, stats and econometrics.
[1] https://github.com/Aransentin/IGMscrape/blob/master/results....
Japan spent decades trying to create inflation to no avail. Despite trillions in spending from 2008-2020 inflation was very low, until finally spiking in 2021.
So, yeah, I think I agree that all that Economists have left is "people respond to incentives."
A live demonstration of the Dunning-Kruger effect in action. The effect of change in money supply on overall inflation is mediated by the velocity of that money. If the money supply were doubled but banks & consumers sat on the cash, stowing it under their mattresses, then there's no inflationary pressure on products to be had. Conversely, if an asteroid were to strike us in a year, then regardless of if the money supply was shrinking, if people were spending their life savings in days then inflationary pressure would skyrocket.
All contemporary economic issues, including the ones mentioned in the article, are problems which are easy to describe, not those which are important to society (McNamara fallacy).
Economics as a discipline describes an idealized fictional human-like colony on Mars, locked in a greenhouse. It doesn't even attempt to describe humans living on Earth, so be careful how you interpret it.
My favorite novel policy for addressing land markets is the Land Value Tax. https://en.wikipedia.org/wiki/Land_value_tax
Edit: I forgot the most important one. We have no minimum wage in Denmark.
Though in a way, that too is an economic problem...
I'm an economist, and this is not remotely true. It's not even true for economic theory (international trade, environmental economics).
Here are some economic articles about humans on earth:
Case and Deaton's Deaths of Despair paper: https://mronline.org/wp-content/uploads/2020/07/15078.full_....
Duflo and Banerjee, Poor Economics
Easterly, The White Man's Burden
Autor et al's China Syndrome on the effect of trade with China: https://www.nber.org/system/files/working_papers/w18054/w180... and their subsequent papers on its effect on social outcomes (marriage, divorce, drug overdoses) and political extremism.
The idea that economists don't study real estate markets is also absolutely false. Google scholar "real estate economics" gives about 2.5 million results. There's the Journal of Urban Economics. There's Glaeser's book Triumph of the City. Et cetera.
You forgot about Georgism
Keynes' book General Theory breaks down GDP into components, of which consumption and investment are two
Dynamic choices about consumption vs investment are at the core of macro models. In analysis of long term trends, the Solow growth model admits analysis of national savings rates. In the analysis of shorter term fluctuations, DSGE models explicitly address the household intertemporal consumption-savings question, seen in the Euler equation
Modern economics isn't unanimous about this.
Most theories will clearly distinguish a bridge from Netflix. And even that "valuable" word is problematic, modern economics thinks about events and consequences, while "valuable" is a subjective take on the consequences, that is outside of the subject (and are almost always mixed anyway).
Sure, some of them are difficult to have clear empirical answers and quantification of the effect impact due to huge amounts of confounding variables, but that doesn't mean the explanation isn't clear and obvious.
So solved in this context means consensus, not as in something mathematically rigorous. I think this is the problem with a lot of these unsolved problems. When I think of something being solved, it means that it absolves doubts.
Improved Black–Scholes and binomial options pricing models: The Black–Scholes model and the more general binomial options pricing models are a collection of equations that seek to model and price equity and call options. While the models are widely used, they have many significant limitations.[11] Chief among them are the model's inability to account for historical market movements[12] and their frequent overpricing of options, with the overpricing increasing with the time to maturity.[13] The development of a model that can properly account for the pricing of call options on an asset with stochastic volatility is considered an open problem in financial economics.[citation needed]
This is already done. There are a plethora of models to account for everything. It's not an open problem. It's just messy mathematically and does not have the elegant solution like the Black Scholes option pricing model does.
Is it saying that government bonds pay less then the free market and then asking why?
Why should that NOT be the case? Governments don't do anything productive, so why should there be an equal expected return compared to the private sector?
I dont understand this problem.
I don't know what you mean by this. It seems false. All states produce many goods and services, primarily security, but many others like health care and such.
I mean, in general, we don't have to government do jobs that would be profitable, but rather the jobs that we believe are necessary regardless of profit. Schools don't turn any monetary gains, but we believe it's necessary for the betterment of our children.
I therefore wouldn't expect the government to be turning large gains back afterwords. Feels like underperformance in that sense should be expected.
The classical answer is that stocks might return much more on average but are also much riskier / more volatile. Now the second part of puzzle is, that explanation only holds when investors in the aggregate are extremely risk-averse, much more so than how they are observed to behave in practice (such as in simple betting situations).
I wonder if it's something to do with corporate lobbying and a "if you scratch my back, I'll scratch yours" game going on.
For instance "If you give me the money (buy my overpriced bonds) I can do the things that get me re-elected, and meanwhile I can look into revising that bill you wanted me to look at."
Just a conspiracy theory though, I'm way too blue collar to properly understand this sorta stuff.
It's not a puzzle. When investors buy a stock that pays a dividend, they're looking mostly at yield. Dividend-yielding equities compete with fixed-income securities (bonds), not speculative equities. So dividend yielding stocks get bought up until the point where the yield is more or less the same as fixed-income securities.
> Home bias in trade puzzle:
It's not a mystery; most people are smart enough to know that when money stays in the community, everyone benefits. Even if the average consumer doesn't know this, enough experts do to push 'buy local' schemes. This is all else being equal of course.