Friday, March 18, 2011

Quote Of The Day

Caption: A salt lick. Recommended dining when economists are talking about the economy.

Image credit: Tomasz Przechlewski/Wikimedia (Full picture and explanation at the credit link.)

New York Times columnist and Princeton economics Professor Paul Krugman gets quote of the day honors for this one:
The point is that while economics certainly did have some of the characteristics of a science three decades ago, you can make a good case that significant parts of the field have lost those characteristics since then.

Economics as a Science: A Bad Example
No shit, Professor.

Actually this is one of the problems with much of economics. The classic example of this is the idea of maximum utility, the idea that a consumer can buy things to get the maximum amount of stuff. No, I don't think I've simplified that very much. Typically, they'll use an example in economics textbooks of the "Sally and Fred have ten dollars. Pizzas are $1, and paintings are $2. How many of each should they buy?" variety. What this is meant to imply is that if these things are useful to you in any quantity you can purchase, then to make the best use of your money you buy X number of pizzas and then you'll have enough money to have a certain number of paintings.

The problem with this, of course, is that practically no one buys things this way. The way people typically buy things is something like "I need a pizza and a painting, and I'll have $7 left over.", or "Why do I need to buy a painting? The blank wall looks just fine." We buy based on need with what we can afford and how much we need as constraints. We do it that way because, often as not, that's what makes sense.

This would seem to be obvious to just about everybody who isn't an economist. As if to prove that point, though, AmosWeb, a website about economics, has this to say on the subject:
Utility maximization is the guiding notion underlying consumer choices analyzed with consumer demand theory and utility analysis. It makes sense to think that people are generally motivated to do what is best for them, to purchase the most satisfying goods, to make the decisions that do more good than harm, to improve their overall living standards and well-being, that is, to maximize their utility.

Utility Maximization
It's a wonder they get anything right at all.

As an economics textbook I read recently explained, one of the guiding principles of the science is cetus paribus, first articulated by English economist Alfred Marshall. Marshall's idea was to reduce all the possible variables in a problem to just one, then see how things work out when you change that one variable. In a sense, this is one of the oldest principles of experimental science applied to economics, and not a foolish one, either.

Unfortunately, whenever you simplify something you potentially are making your model of reality less accurate. It might even be, for instance, that in something as complex as a real national economy you can't just change one variable without others being changed as well. Things you thought were independent of each other may actually be tied together somehow. That's why it's important to validate that model against reality - check to see when it works like reality and when it doesn't. That's what many economists seem to forget. They talk about things like the magic of the free markets as if that really means anything. In reality, individuals, and the markets they are a part of, often don't work the way those economists think they do.

This is why, while on the one hand I read or listen to what economists have to say on an issue, I have learned to take them with a large grain of salt.


george.w said...

There's a class of economists who call themselves; "econophysicists" now. And yes, I can see there are interesting patterns to be found and phase-change metaphors to be examined. But...

Just finished reading John Quiggins' Zombie Economics. Much-needed dose of humility for the economics profession.

Cujo359 said...

As is Yves Smith's Naked Capitalism, I think. For quite some time there have been economists that think that, just because you can simplify economics questions to the point where you can use equations to explain them, that this means you have the subject knocked.

Unfortunately, as was demonstrated by all the morons who were telling me that "the physics didn't add up" during the debate over the causes of the 9/11 attacks, I know that it takes some knowledge of the real world to be able to know what principles of physics can be applied where. There are specialists, usually engineers, who know those things when using technology to solve some problem. In engineering, when you use the wrong equations in your brilliant design, things go south and you often find yourself out of a job, or spending a lot of time in court.

Economists generally seem to have no such external pressure to discover the truth of things.