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Are Economists Necessary?

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    Posted: 26 Sep 2010 at 22:10
Everyone knows that Marx, while a keen observer of his own world, got his History and historical processes wrong and that his forerunner, David Ricardo, never satisfactorily explained the whys behind distribution and trade on a global scale, specially with respect to a rational competitive advantage concommitant with the stated objective, the promotion of the general welfare as a function of the All (the key to the meaning of welfare). Nevertheless, Economists continue to pontificate that their constructs explain the course of History and can control or prevent the potentials for Armaggedon generated by human interaction expressed in terms of money and wealth. Naturally, the essential element in their constructs demanded rational management as a synonym for material justice.
 
The question: Is there such a thing as rational management? Is this a trick question? Perhaps, but were not Medieval social theorists far more capable in their approach to such things as just price and orderly markets than any contemporary analyst with his mathematical formulas and cost/benefit analyses? Is welfare strictly a function of the monetary?
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Parnell Quote  Post ReplyReply Direct Link To This Post Posted: 27 Sep 2010 at 00:26
Do economists really think they can predict the future based on the past? I don't think they do. 'Structural' interpretations of history are incredibly boring and a good example of self fellatio in action.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote drgonzaga Quote  Post ReplyReply Direct Link To This Post Posted: 27 Sep 2010 at 01:29
Come now, Parnell, they do it all of the time! Predict the future, that is. Is that not what scientism is all about?
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote fantasus Quote  Post ReplyReply Direct Link To This Post Posted: 27 Sep 2010 at 02:15
Originally posted by drgonzaga drgonzaga wrote:

Everyone knows that Marx, while a keen observer of his own world, got his History and historical processes wrong and that his forerunner, David Ricardo, never satisfactorily explained the whys behind distribution and trade on a global scale, specially with respect to a rational competitive advantage concommitant with the stated objective, the promotion of the general welfare as a function of the All (the key to the meaning of welfare). Nevertheless, Economists continue to pontificate that their constructs explain the course of History and can control or prevent the potentials for Armaggedon generated by human interaction expressed in terms of money and wealth. Naturally, the essential element in their constructs demanded rational management as a synonym for material justice.
 
The question: Is there such a thing as rational management? Is this a trick question? Perhaps, but were not Medieval social theorists far more capable in their approach to such things as just price and orderly markets than any contemporary analyst with his mathematical formulas and cost/benefit analyses? Is welfare strictly a function of the monetary?
Some scepticism may be appropriate toward the words :"Everyone knows". Usually everone does not know - or not agree. And it may be more interesting what theories were wrong, and were in particular,  than "Marx were wrong". But You may be right being a sceptic towards economists.
Perhaps one reason for unpredictabillity of economics may be that if good predictions existsed, some people would take advantage of actions working against them?
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Parnell Quote  Post ReplyReply Direct Link To This Post Posted: 27 Sep 2010 at 03:27
Agreed then, are we? The dismal science it is Big smile
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 04 Oct 2010 at 20:04
I had a contract once (never filled it) with McGraw Hill for a book to be entitled The Dismal Religion and I'm well on record as campaigning against the idea that management is a rational art (other than that it is rational to take irrationality into account.
 
However, how can one predict the future except on the basis of the past? And how can one choose between actions except by predicting the result of those acts?
 
Where economists. just like anyone else, go wrong, is in misinterpreting what has happened to fit some preconceived logical model (like corporations seeking the maximise profits), and basing their predictions on those  misinterpretations.
 
How else could such lunacies arise as the belief that the way to cure unemployment is to put more people out of work, and that where problems result from people not having enough money, the solution lies in taking money away from them?
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Post Options Post Options   Thanks (0) Thanks(0)   Quote kristi.gill Quote  Post ReplyReply Direct Link To This Post Posted: 08 Oct 2010 at 22:25
The economy could suffer a massive hangover from the government's efforts to save the financial system as a debt on the rise. But the alternatives look infinitely worse.To raise funds to buy bad mortgage loans that have threatened to impose a financial system to the brink of disaster, the government must borrow. And that borrowing will come at a time when the federal budget deficit is already growing.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 09 Oct 2010 at 01:48
Of course there is a thing called rational management, how the hell do you think the world reached to the heights it reached right now?
 
In the olden days people made their financial decision based on social or religious principles even if it meant their eventual ruin.
 
I will give an example in banking. A guy will agree to lend money (with no or little interest) to his "friend" even though he knows full well he will probably go bankrupt and won't see the money again. This curtailed the growth of money lending businesses and prevented credit worthy people who have no rich "friends" from getting the money to finance their successful businesses. However modern banking changed that. Now money was managed rationally rather than using emotions and principles and only credit worthy people got the money which lead to the general benifit of the economy.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote herry Quote  Post ReplyReply Direct Link To This Post Posted: 04 Jan 2011 at 20:58
be lated
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 04 Jan 2011 at 21:22
Missed this earlier.
Originally posted by Al Jassas Al Jassas wrote:

Of course there is a thing called rational management, how the hell do you think the world reached to the heights it reached right now?
 
In the olden days people made their financial decision based on social or religious principles even if it meant their eventual ruin.
 
I will give an example in banking. A guy will agree to lend money (with no or little interest) to his "friend" even though he knows full well he will probably go bankrupt and won't see the money again. This curtailed the growth of money lending businesses and prevented credit worthy people who have no rich "friends" from getting the money to finance their successful businesses. However modern banking changed that. Now money was managed rationally rather than using emotions and principles and only credit worthy people got the money which lead to the general benifit of the economy.
To some extent I envy you your naive optimism. What you say about lending money to 'friends' is exactly what still goes on. You seem to have taken a year or two out and missed the whole series of econmic events since 2008, which hinge totally on irratioanl fervour. Take Alan Greenspan's word for it: "irrational exuberance" was at the root of it.
 
Of course some controllers of economic entities behave 'rationally' in that they pursue their own private interests; the theories of 'rational management' and too many economic theories however assume that they pursue the interests of the entity they represent. That is simply untrue, even if it doesn't always reach the heights it did at Enron and WorldCom. 
 
It's surprising perhaps however how much those private interests pursued by the controllers are in fact not rational in the economic sense but have to do with things like status and self-esteem. If they were rational here wouldn't be any Metropolitan Opera, just for starters.  
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Omar al Hashim Quote  Post ReplyReply Direct Link To This Post Posted: 05 Jan 2011 at 08:07
Economics is a good idea but they haven't made any discoveries worthy of note yet.
I consider it a proto-science. One day it might evolve into something useful, but for the time being we should treat it with skeptism.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote pinguin Quote  Post ReplyReply Direct Link To This Post Posted: 05 Jan 2011 at 11:04
The economic theory hardly is put into practice. I bet that's part of the problem.

For example, everybody knows that no person, company or country should expend more than it produces.... but nobody listen.

With respect to economists predicting the future, well, they hardly can predict the value of bonds one hour ahead, less they could predict what is a year or decades ahead. I bet astrology is more accurate LOL


Edited by pinguin - 05 Jan 2011 at 11:05
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 05 Jan 2011 at 20:50
Originally posted by pinguin pinguin wrote:

The economic theory hardly is put into practice. I bet that's part of the problem.

For example, everybody knows that no person, company or country should expend more than it produces.... but nobody listen.
That's not an economic maxim, it's an ethical one.
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With respect to economists predicting the future, well, they hardly can predict the value of bonds one hour ahead, less they could predict what is a year or decades ahead. I bet astrology is more accurate LOL
Bond values fluctuate randomly over a long term trend which is fairly stable. However I doubt that you can define 'value' for me in such a way that the statement becomes meaningful. 
 
What makes bond values in money terms unpredictable in the short term though is an arbitrary exercise: the setting of interest rates, which is largely determined by how some people currently feel rather than any kind of objective exercise.  
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 00:09
Originally posted by gcle2003 gcle2003 wrote:

Missed this earlier.
Originally posted by Al Jassas Al Jassas wrote:

Of course there is a thing called rational management, how the hell do you think the world reached to the heights it reached right now?
 
In the olden days people made their financial decision based on social or religious principles even if it meant their eventual ruin.
 
I will give an example in banking. A guy will agree to lend money (with no or little interest) to his "friend" even though he knows full well he will probably go bankrupt and won't see the money again. This curtailed the growth of money lending businesses and prevented credit worthy people who have no rich "friends" from getting the money to finance their successful businesses. However modern banking changed that. Now money was managed rationally rather than using emotions and principles and only credit worthy people got the money which lead to the general benifit of the economy.
To some extent I envy you your naive optimism. What you say about lending money to 'friends' is exactly what still goes on. You seem to have taken a year or two out and missed the whole series of econmic events since 2008, which hinge totally on irratioanl fervour. Take Alan Greenspan's word for it: "irrational exuberance" was at the root of it.
 
Of course some controllers of economic entities behave 'rationally' in that they pursue their own private interests; the theories of 'rational management' and too many economic theories however assume that they pursue the interests of the entity they represent. That is simply untrue, even if it doesn't always reach the heights it did at Enron and WorldCom. 
 
It's surprising perhaps however how much those private interests pursued by the controllers are in fact not rational in the economic sense but have to do with things like status and self-esteem. If they were rational here wouldn't be any Metropolitan Opera, just for starters.  
 
Actually what happened in the lead up to this crisis proves my case. Corporations that managed their finances in a rational way, that is they joined the frey and then escaped the subprime fiasco in time, survived and those that were managed in an irrational way by throwing money despite all the indications of the impeding disaster went under.
 
As for making bad decisions, tell me a person who doesn't? In the end the measure is how bad is the damage and if you control the damage then you are good regardless of how bad your decisions were.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 00:13
Originally posted by Omar al Hashim Omar al Hashim wrote:

Economics is a good idea but they haven't made any discoveries worthy of note yet.
I consider it a proto-science. One day it might evolve into something useful, but for the time being we should treat it with skeptism.
 
The reason for this is because at the heart of economics lay the most unknown entity, human behaviour.
 
You might have all the numbers right and all the indicators where you want them but the one thing you can't control is humans. Look at gold prices. There is no logical or economic reason why gold prices should be at the level they are at right now yet people flood to buy it.
 
Until you can quantify human behaviour economics will simply be a science of projections.
 
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 01:22
Originally posted by Al Jassas Al Jassas wrote:

Actually what happened in the lead up to this crisis proves my case. Corporations that managed their finances in a rational way, that is they joined the frey and then escaped the subprime fiasco in time, survived and those that were managed in an irrational way by throwing money despite all the indications of the impeding disaster went under.
But that's an ex post justification  it merely defines as 'rational' 'making the right decision'. To decide whether an action was rational or not you have to look at the way it was arrived at, not whether it lucked out or not. The difference between Lehman Brohers and Goldman Sachs has nothing to do with the rationality or otherwise of their decision-making - certainly not their economic rationality, though there might be a case for saying of their political 'rationality' -i.e. the cultivated more friends in higher places more successfully.
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 As for making bad decisions, tell me a person who doesn't? In the end the measure is how bad is the damage and if you control the damage then you are good regardless of how bad your decisions were.
 Al-Jassas
 
I agree with you about 'good'. I'm only disagreeing that 'good' means 'rational'. The late Carl Duerr used to tell of the German subsidiary of a major US multinational which decided to build a new central headquarters and spent an immense amount ot time and money on operational research techniques to locate the best town to build it in.
 
At the end of the studies the town chosen turned out to be the one where the managing director's mistress lived.
 
Is that 'rational'? 'Good'? 'Bad'? From what else I know of the situation it made very little difference to anything except the director's convenience.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 01:27
Originally posted by Al Jassas Al Jassas wrote:

Originally posted by Omar al Hashim Omar al Hashim wrote:

Economics is a good idea but they haven't made any discoveries worthy of note yet.
I consider it a proto-science. One day it might evolve into something useful, but for the time being we should treat it with skeptism.
 
The reason for this is because at the heart of economics lay the most unknown entity, human behaviour.
 
You might have all the numbers right and all the indicators where you want them but the one thing you can't control is humans. Look at gold prices. There is no logical or economic reason why gold prices should be at the level they are at right now yet people flood to buy it.
 
Until you can quantify human behaviour economics will simply be a science of projections.
Agreed in general, but I'm not sure quantification is necessary or sufficient. What we most need is greatly more powerful mathematics than we yet have - at least than has so far been applied to economics. A mathematics that can for instance handle things that are not quantifiable in any normal sense.
 
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Zagros Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 01:29
Re Goldman Sachs; the cynic might claim that they had a big part in engineering the crisis; no wonder they profited from it:

http://www.guardian.co.uk/business/2010/apr/27/goldman-sachs-senate-committee-hearing
"There was glory in pissing, Corabb decided as he watched the stream curve out and make that familiar but unique sound as it hit the ground." So true.
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But Al, you are forgetting that there are many who make a living "predicating human behavior" and History itself is looked back upon as a measure by which the past serves as barometer indicating the possibility of dangers. For example, in the niceties of Risk Theory, quantification is premised upon historical data and such is a rather reasonable and rational approach as to the security of an investment. Now some might say that the implosion of 2008/2009 can be laid entirely at the feet of government and its total disregard of markets for the sake of social policies and "democratic" politics--an 18th century Mississippi Bubble for the 21st century. The Bust/Boom Cycles and hardly difficult to demarcate from the perspective of History and if one looks upon the experiences of the 20th century one might conclude that the overall premise behind government action in that period was the impetus towards regulation as the agency for protection and insurance against the vagaries of "free" markets. One might say that derivatives themselves appeared rational as a means of reducing risks stemming from political policies that contravened the long-held rules of credit.
 
Just some food for thought.
 
PS: As for the irrational behavior with regard to gold, think of it as the haunting of Tradition through a meaningless trinket.  
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If the government is at any fault it is because it didn't regulate the market enough. Fannie and Freddie are not responsible for the subprime market to begin with and it was there that the problem began. Once prices went down even prime mortgages guaranteed by the government began to falter. Those institutions existed with no major problems for more than 70 years so blaming them is not right.
 
As for derivates, these were mathematical inventions to artificially lower risk. Investors base their decisions on risk and the higher the risk the fewer the investors. So to make things look pretty banks lumped up all the bad loans and reissued them as low yield low risk products that were very good looking. The reality was those people who took the derivatives took on the exact amount of risk the banks did but because derivatives are only small portions of the big cake no one notices.
 
Buying derivatives without knowing what the hell were they was in fact an irrational decision however rational it seemed like.
 
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Originally posted by Al Jassas Al Jassas wrote:

If the government is at any fault it is because it didn't regulate the market enough. Fannie and Freddie are not responsible for the subprime market to begin with and it was there that the problem began. Once prices went down even prime mortgages guaranteed by the government began to falter. Those institutions existed with no major problems for more than 70 years so blaming them is not right.
 
But Al, both the privatization of Fannie and Freddy and the loosening of credit rules (under the mask of social legislation and the threat of legal action) were conscious acts of government in the 1990s. There is nary a difference between junk bonds and junk mortgages when it comes to measuring the financial capacity of the burden to meet obligations under the long term. The markets themselves were adequately regulated up until the 1980s and, apparently, the lesson behind the Savings & Loans fiasco (the first example of how the deregulation of banking provoked implosion) was totally ignored. The soap opera of imprisoning or discrediting a few jokers for "abuse" can not obscure the fact that the scenario was the direct product of the government disdaining the experiences learned from History. For goodness sakes the fusion of banking with speculative ventures decries the long held rules making sense of legal fiduciary responsibilities.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 04:59
Originally posted by Al Jassas Al Jassas wrote:

As for derivates, these were mathematical inventions to artificially lower risk. Investors base their decisions on risk and the higher the risk the fewer the investors. So to make things look pretty banks lumped up all the bad loans and reissued them as low yield low risk products that were very good looking. The reality was those people who took the derivatives took on the exact amount of risk the banks did but because derivatives are only small portions of the big cake no one notices.
 
Buying derivatives without knowing what the hell were they was in fact an irrational decision however rational it seemed like.
 
Dilbert as usual was on the mark:
 
 
The technical error was in forgetting that the reduction of risk through spreading only applies when the risks being spread are independent of one another.
 
If I make a $10 bet on red at roulette and someonelse bets $1 on each of ten throws, our expectation is the same, but the risk of losing all the stake is much less for him. However if one spin of red makes the next more likely to be red, his risk is not reduced by spreading.
 
And that's what happened with the mortgages: once one mortgage went down the probability of the others going down increased, and that then spiralled.
 
Like buying a herd of cows (actually it was like buying part of each cow in the herd, rather than one cow.


Edited by gcle2003 - 06 Jan 2011 at 05:05
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Omar al Hashim Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 08:00
Originally posted by Al Jassas Al Jassas wrote:

Originally posted by Omar al Hashim Omar al Hashim wrote:

Economics is a good idea but they haven't made any discoveries worthy of note yet.
I consider it a proto-science. One day it might evolve into something useful, but for the time being we should treat it with skeptism.
 
The reason for this is because at the heart of economics lay the most unknown entity, human behaviour.
 
You might have all the numbers right and all the indicators where you want them but the one thing you can't control is humans. Look at gold prices. There is no logical or economic reason why gold prices should be at the level they are at right now yet people flood to buy it.
 
Until you can quantify human behaviour economics will simply be a science of projections.
Not at all. Economics is the modelling of human behaviour plain and simple. You can't say economics would work if it wasn't for humans, economics is humans.
Economics models mob behaviour, and I have no reason to believe that you can't model that. Queueing theory for example does a pretty good job in it's narrow domain. Hardly the most unknown entity at all. I suspect the real problem is quantum-esque.
 
1) You cannot study humans without changing them - the act of measuring changes. Similar in principle to Heisenberg's Uncertainty principle. As soon as you develop tools to predict future human behaviour based on past behaviour the future behaviour changes due to those tools.
 
2) You cannot predict the actions of any particular human - similar in the sense that you can determine how many atoms will decay in a certain time period but never which atom will decay when.
 
3) As a studier is also bound by the rules he is studying there is an inescapable bias. The modelling of macro-level human behaviour is essentially the modelling of our biases. So a biased person trying to model his own biases is like a dog chasing his own tail. This can easily lead to positive feedback loops of biases, as the research communities (a mob) biases influence their opinion on the modelling of biases (economics). Mob behaviour prevents you from accurately studying mob behaviour.


Edited by Omar al Hashim - 06 Jan 2011 at 08:02
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 08:25
Originally posted by drgonzaga drgonzaga wrote:

Originally posted by Al Jassas Al Jassas wrote:

If the government is at any fault it is because it didn't regulate the market enough. Fannie and Freddie are not responsible for the subprime market to begin with and it was there that the problem began. Once prices went down even prime mortgages guaranteed by the government began to falter. Those institutions existed with no major problems for more than 70 years so blaming them is not right.
 
But Al, both the privatization of Fannie and Freddy and the loosening of credit rules (under the mask of social legislation and the threat of legal action) were conscious acts of government in the 1990s. There is nary a difference between junk bonds and junk mortgages when it comes to measuring the financial capacity of the burden to meet obligations under the long term. The markets themselves were adequately regulated up until the 1980s and, apparently, the lesson behind the Savings & Loans fiasco (the first example of how the deregulation of banking provoked implosion) was totally ignored. The soap opera of imprisoning or discrediting a few jokers for "abuse" can not obscure the fact that the scenario was the direct product of the government disdaining the experiences learned from History. For goodness sakes the fusion of banking with speculative ventures decries the long held rules making sense of legal fiduciary responsibilities.
 
And who is responsible for that? It was flawed ideology that drove those reforms not sound economics. If anyone is to blame its the politicians and the people who voted for them driven purely by ideology instead of common sense.
 
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gcle2003 View Drop Down
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jan 2011 at 22:37
Omar I agee with (1) and (2), which is a reason I say we need to use mathematical techniques much advanced over those normally used in economic theory (though, as you note with queuing theory, there have been some improvements in the 20th century).
 
I'm not so sure though tht modelling macro-econmic behavious is necessarily a biassed process, though I agree it normally is, in that it usually starts with the adoption of axioms that are based on prejudices or ethical maxims or beliefs about human behaviour that don't arise from observation: the commonest mistake of course being to assume that other people are like oneself. 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Omar al Hashim Quote  Post ReplyReply Direct Link To This Post Posted: 07 Jan 2011 at 08:09
Originally posted by gcle gcle wrote:

I'm not so sure though tht modelling macro-econmic behavious is necessarily a biassed process, though I agree it normally is, in that it usually starts with the adoption of axioms that are based on prejudices or ethical maxims or beliefs about human behaviour that don't arise from observation: the commonest mistake of course being to assume that other people are like oneself. 
That's pretty much what I meant, but added to that is that your opinions are being peer-reviewed by people who are like yourself.
Only certain people, who have a certain character (and therefore likes and biases) become economists. Plus there are fashions for the age, perhaps assymetric funding. Any economic theory is perhaps only a sample of the age it was devised in.
I suspect with enough time and involvement of enough different people in different places and cultures this could eventually be eliminated. But I don't think this has happened yet, perhaps another 300-500 years.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Reginmund Quote  Post ReplyReply Direct Link To This Post Posted: 07 Jan 2011 at 19:15
There is a lot of ground in between believing economists are unnecessary and believing their models explain all historical processes.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote fantasus Quote  Post ReplyReply Direct Link To This Post Posted: 05 Feb 2012 at 04:47
The following is just a subjective remark, and it could be - I shall not exclude it theoretically - that I am doing economists in general a great injustice (I think at least there is more favourable things to say for individuals in the profession).
Then first what I guess: Economists in general does not do a bad job, on the contrary: They do an excellent job, it is only the rest of us that misunderstand what it is about. We could think, some of us, it is in some mysterious way to "serve society" or some "common good". I think the profession generally see this as an illusion - their jobs and ethics are to enrich those who employ them and most of all themselves. 
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