~

In lieu of Diane Coyle's Sex, Drugs and Economics ... my personal preference is Sex, Drugs and Rock & Roll... wink wink

~OGD~

I would add that the flaw in most economic models is not found in the math---the operations, the structure, etc.---it is in the values that are assigned to the variables that are plugged into the equations. That is to say, the significance of certain variables is often exaggerated/misconceived to such an extent, they do not actually reflect the reality we experience in the real world.

One major error of this type that I find especially annoying is the assumption by most macroeconomists (even those who think of themselves as Democrats) that the interest rate is determined by a 'market' for loanable funds, the supply of which is provided by savers. Based on this assumption, the interest rate is assumed to be an endogenous variable, one that is dependent for its value on the changes that occur in other variables within the model (like the savings habits of households).

In actual fact, America's central bank exercises ultimate control of the supply of loanable funds, injecting loanable reserves into bank balance sheets that were not saved by any saver whenever it wants to keep the interest rate lower than the market would otherwise determine [if the Fed had not interfered with its total control of money supply]. It does this by simply buying paper assets with money it creates with a keystroke.

This reality should be reflected in macro models by 'assuming' that the interest rate is an exogenous variable, but it typically is not. Nothing wrong with the math, per se, but if the assumptions you make about the variables you are plugging into your model are flawed, then its predictive value will suffer.

Mathematics is a wonderful tool, but unless the theorist accurately deduces the correct weighting of the variables she uses---and their proper inter-relationships---then the tool only produces flawed outcomes. Ask any of these professional economists about the track record of econometric models in terms of their predictive value...

~

No wonder I stick with Rock & Roll...

... "I-IV-V"

~OGD~

Just as Newtonian physics made claims as to the behavior of all matter, so it would be nice that our economics could make similar precise predictions about human economic behavior.

Second, and this is what is important: Just as physics does not tell you what you should do given the laws of nature, so a descriptive economics will not tell you what to do about (how to shape?) human economic behavior.

And this is what it all amounts to. Smith et al want to merely describe and predict human economic behavior and for some inexplicable reason want to maintain that there should be as little interference as possible in markets.

That's like saying that now that we know that F=ma and that Fg=Gm1m2/d^2, we should do nothing with that knowledge at all. That is: don't utilize that knowledge to meet legitimate human needs and desires. But that's absurd. Perhaps the most valuable aspect of physics is that it allows us to craft nature to our wills.

Why then economists who pine for the descriptive rigor of physics seem phobic about market intervention--claiming that some mysterious "invisible hand" will optimize human utility--is beyond me. It would be as if Newton said "here are the laws of nature, just let them operate unimpeded and some "invisible hand" will make sure that all the useful gadgets that can be contrived will just coalesce on their own"

I really want to know why for example neoclassical and new classical economists think that way.

I would add that the flaw in most economic models is not found in the math---the operations, the structure, etc.---it is in the values that are assigned to the variables that are plugged into the equations.

even though empiricists claim otherwise, they unconsciously
create philosophies that justify their actions.

their values, I think, show up in those philosophies.

To boldly...

Seems the issue is not the math, although there are some intriguingly subtle relationships one could analyse a la John Nash; it's more the question of what is data? Is an expense that doesn't occur a credit? Is a cost one doesn't have to pay perhaps someone else's expense?

These questions don't need complex math, but deciding what is to be measured is the hard part.

All these questions are usually answered by one process: Politics! Economics and Politics join together in an incestuous relationship with special interest business to form a complex call and recall musical blues performance leading to a common crescendo of Choral music performance when the public coffers are being drained.

When an economist is chanting the mantra "On the one hand, but on .....) and raising and lowering each hand what is actual happening is a display of free market auctions at work. What is occurring is the economist is trying to bring forth higher auction bids by the opposing sides wanting their answer to be "the answer" for the question. It means government work. If asked in private about his actions he would say that by using the free market brought forth the best answer.

This also can be a problem for the economist if the bidding supplicant begins to feel that the auction actual has no one on the other side bidding against him, but that the economist has only his empty hand to weigh in for the auction.

The problem for the economist is it can lead to a loss of handiness. You would think that the search for a one handed economist then would be a life saver for these unfortunate economists who have this happen to them. It does not help, they cannot participate in the bidding to get new business.

-----------------------------------------------
Today, are we searching for I deals or Ideals?
-Thinking

But T isn't an unconscious assumption. It's the explicit economic theory--the one the economist advances in his or her writings; the one that they say explains the world of economic events.

You can put lipstick on a pig, but it still wants to roll around in the mud, to wit:

"The existence of some pockets of high unemployment -- among blacks in inner cities, for example -- is not caused primarily by competition from immigrant workers, but by the too-high expectations and too-low skills of the people in those groups." -- Diane Coyle, "Sex, Drugs and Economics."

Black folks don't work because they want too much money for the use of their limited skills.  If this is the soulful science, I'm the Duke of Marlboro.  (More here.)

Whoa, MCS, I don't know where you got any of that or how it applies. Empiricism isn't a science. It is a form of reasoning. Empiricism is based on the claim that in order for reasoning to be correct, it must be checked against the real world. This put empiricism in opposition to rationalism which holds that truths can be discovered without reference to the actual world.

In that way, empiricism is the basis for science, but it is not science in itself. What the above poster was discussing was the scientific method, specifically a form of naive falsification wherein a scientific theory is tested against the real world.

This test operates simply by modus tollens: If P, then Q. Not Q, therefore not P. In other words it relies on determining logical consequences of a theory and then observing the world to see if the consequences occur as expected. If the consequences don't occur, then the theory is falsified.

Thus, a scientist or economist will propose a theory T, determine what would occur in the world if the theory were true, and then look for evidence.

T can be any hypothesis such as evolution, Newton's laws of motion, or even social scientific claims such as the economic hypothesis of comparative advantage or the psychoanalytic hypotheses of Freud.

What the above poster is saying then is that economists develop theories (hypotheses) but then don't subject them to actual real world testing. Instead, through their particular methods, they search only for evidence that would support the theory not that which could prove it to be wrong.