Economics: What should everyone know?

[ygolo]

What do people consider the essential from the field of Economics?

My dad used to say that psychology and economics are two sciences needed to be a functioning human being (another reason for to consider him an INFJ?).

Though I consider them to be the least scientific of the sciences. No offense to practitioners, the subject matter is just harder than the other sciences. But I don't think that means that we lower the bar on what we consider being scientifically validated.

Economics seems to be a whole lot better about being scientific when compared to psychology, but I think it is because aggregate behavior allows for better study using statistical methods (for similar reasons we can do statistical physics to derive most of thermodynamics using millions and billions of particles, but still have trouble with 6-body interaction problems).

Also, I consider the notion of arbitrage and the utilization of game theory to be excellent ways to incorporate what is most essential in any study of human beings--agency, or agent choice (free-will?).

 

[FDG]

I think that knowledge of the neoclassical approach (the one from which are derived most graphs you see) is the basis of the study of economics. It's usually classified, in most online courses, as basic and intermediate Microeconomics. Now most Micro has evolved into game theory, which I agree with you I find to be probably the most interesting branch, but it's still essential to know the basics imho.

As far as Macroeconomics goes, well, there is no unifying theme, but in spite of how it's lately been discredited, I still think Keynes was the only one that's been able to provide a logically consistent framework for macroeconomic analysis. I don't advise anyone to read his Treatise, though, since he wasn't a very clear writer. Easier to find sources online and derive understanding just from the system of equations (well, it's better if they're commented in some way).

Why do you find arbitrage to be important? I've always thought of it as a realistic hassle, meaning that in everyday layman terms arbitrage is always present but rarely utilized, and given that it's pretty much impossible to model an arbitrage-comprehensive economy without the presence of a bliss point (which is thought about as absent when dealing with money as good), well, economists just assume its absence when developing models.

I believe econometrics provide pretty good instruments to check the consistency of economics theory, by this making it more scientific; you see this in action every time a goverment adopts a new economic policy: there's always a study done in the background that predicts the consequences (however the simplifying assumptions that have to be made result in the presence of errors here and there, well, optimistically speaking).

 

[ptgatsby]

This is why we need economists;

TED | Talks | Bjorn Lomborg: Our priorities for saving the world (video)

TED | Talks | Hans Rosling: New insights on poverty and life around the world (video)

 

[Economica]

Principles of Economics, Translated

(Text version, but do yourself a favor and watch the video first.)

 

[ygolo]

I think that knowledge of the neoclassical approach (the one from which are derived most graphs you see) is the basis of the study of economics. It's usually classified, in most online courses, as basic and intermediate Microeconomics. Now most Micro has evolved into game theory, which I agree with you I find to be probably the most interesting branch, but it's still essential to know the basics imho.

What are the basics? I took an intro. to Microeconomics class in college and deemed it nothing more than common sense, with a little math (with the exception of the blind worship of maximizing profit ).

As far as Macroeconomics goes, well, there is no unifying theme, but in spite of how it's lately been discredited, I still think Keynes was the only one that's been able to provide a logically consistent framework for macroeconomic analysis. I don't advise anyone to read his Treatise, though, since he wasn't a very clear writer. Easier to find sources online and derive understanding just from the system of equations (well, it's better if they're commented in some way).

I liked the economic "accounting" aspects of macroeconomics (GDP, GNP, and the C+I+G+Ex-Im), but I thought a lot of the guessing about what effects what was largely arbitrary. I decided if I was going to take more economic classes, they were not going to be of the Microeceonomics variety.

Why do you find arbitrage to be important? I've always thought of it as a realistic hassle, meaning that in everyday layman terms arbitrage is always present but rarely utilized, and given that it's pretty much impossible to model an arbitrage-comprehensive economy without the presence of a bliss point (which is thought about as absent when dealing with money as good), well, economists just assume its absence when developing models.

I am no expert, but I thought what was done was to assume that no opportunities for new arbitrage exist in the models.

Is there a really technichal meaning to arbitrage? I thought it was essential to providing the liquidity needed in an efficient market. How else are two people with different values supposed to find each other to make trades?

I believe econometrics provide pretty good instruments to check the consistency of economics theory, by this making it more scientific; you see this in action every time a goverment adopts a new economic policy: there's always a study done in the background that predicts the consequences (however the simplifying assumptions that have to be made result in the presence of errors here and there, well, optimistically speaking).

There are more than a few studies done in medicine too, but they still get things wrong quite often. I don't think economists are that much smarter than doctors, and have a lot fewer trials they can do.

But we keep trying, no? I think that's a good thing.

----------------------

This is why we need economists;

TED | Talks | Bjorn Lomborg: Our priorities for saving the world (video)

TED | Talks | Hans Rosling: New insights on poverty and life around the world (video)

We have economists so we can watch them swallow swords, I agree.

In viewing these, I think economics may have just shed its name as the "dismal" science. These were rather hopeful. It also shows some interesting things.

Though Bjorn Lomborg made good points there is something about it that reminds me of "central planning".

[...]Imagine that the townspeople have made you their beneveloent dictator, but in exchange for your awsome powers, you are responsible for making sure the town is fed, clothed, and sheltered each day. No one will do anything without your say so, and therefore each morning you have to create a to-do list for organizing all the towns activities. [...] Now imagine what the to-do list might look like for managing the global economy as a whole. -Eric d. Beinhocker, p. 5-6 of the book that is linked

----------------

Principles of Economics, Translated

(Text version, but do yourself a favor and watch the video first.)

That's hillarious!

 

[ptgatsby]

Though Bjorn Lomborg made good points there is something about it that reminds me of "central planning".

I don't believe his argument over allocation requires a planned economy. Least, it is no different than every company/family/individual planning on where to spend the money.

They do the cost-benefit equation based upon the money provided, which is quite different. His advice is for the Bill Gates Foundation, not the IRS.

 

[ygolo]

I don't believe his argument over allocation requires a planned economy.

I don't believe it does either. I just get that feeling everytime people talk about priorities from an objective stance. It runs counter to what I consider common-sense. Priorities are inherntly personal.

Least, it is no different than every company/family/individual planning on where to spend the money.

I don't think every family/individual will see the priorities for their charities the same way the economists do. Increasing the overall GWP isn't necessarily what people believe they are put on the earth to do.

They do the cost-benefit equation based upon the money provided, which is quite different. His advice is for the Bill Gates Foundation, not the IRS.

I think they need to add a "value-at-risk", and "risk-of-ruin" concepts to their analysis as well. It is not always about mean value. But what do I know.

 

[FDG]

What are the basics? I took an intro. to Microeconomics class in college and deemed it nothing more than common sense, with a little math (with the exception of the blind worship of maximizing profit ).

Basic economics assumes that more is always better, even though even at the intermediate levels utility functions become upper bounded with the presence of a bliss point (that is, where the person is satiated). Much of it
is common sense in its basic axioms but the conclusions that can be derived
from them are sometimes counterintuitive. A good online textbook that will
be a very easy read (likely recreational) for an engineer would be this one:

http://www.introecon.com/

There's a little bit of everything, and everything's treated analytically.

I liked the economic "accounting" aspects of macroeconomics (GDP, GNP, and the C+I+G+Ex-Im), but I thought a lot of the guessing about what effects what was largely arbitrary. I decided if I was going to take more economic classes, they were not going to be of the Microeceonomics variety.

Great, we're of the same opinion then. I loathe macro because most of it are ad-hoc equations modeled purely on observed phenomena. This woulnd't be a problem in itself except for the fact that the phenomena are subject to change and thus, unlike physics, they are not valid for all time frames. As I said though, I think Keynes came closest to forming a cohesive framework valid for most situations.

I am no expert, but I thought what was done was to assume that no opportunities for new arbitrage exist in the models.

Is there a really technichal meaning to arbitrage? I thought it was essential to providing the liquidity needed in an efficient market. How else are two people with different values supposed to find each other to make trades?

Ah yeah you're right, there are no opportunities for arbitrage, I didn't make myself understood correctly.

There are more than a few studies done in medicine too, but they still get things wrong quite often. I don't think economists are that much smarter than doctors, and have a lot fewer trials they can do.

But we keep trying, no? I think that's a good thing.

I think the predictive power of economics is so-so both on very small and very large questions, but it seems like they've tuned the instruments in an okay way for the intermediate level stuff (like adjusting debt to gpd ratio etc).

As far as Bjorn Lomborg goes, there is a good objection to everything said during that video in one of the comments.

 

[ptgatsby]

I don't believe it does either. I just get that feeling everytime people talk about priorities from an objective stance. It runs counter to what I consider common-sense. Priorities are inherntly personal.

Priorities are about measuring and calculating based on resources to effect ratios. Yes, we can play the game of moving goal posts (but what if I don't want to save lives!), but reasonably speaking, he is talking about not making emotional decisions (ie: is global warming that dangerous? Should we focus on that?) more than anything else. Instead, we make emotional, irrational and political decisions.

I think looking at it as a personal choice undermines the rationality of what should be done.

I don't think every family/individual will see the priorities for their charities the same way the economists do. Increasing the overall GWP isn't necessarily what people believe they are put on the earth to do.

IOW, the families are not rational or not interested in achieving maximum value for their donation.

I remember one example notably; Families will continue donating to a church with an efficiency rate of less than 15% while not donating to a private charity with a very high efficiency rate (I don't remember the rate offered as a sample, but I assume higher than 80%). Despite being faced with the three things - 1) they do the same "good" deeds. 2) One does it better. 3) They donate to do good, not support the church - they will refuse to change their stance.

Another example is global warming, which is touched on in that lecture. People will not adjust their preference because it is based upon emotional attachment to the underlying problem. The reality is that we can do incredible things to help but are not because of these irrationalities.

I'm not advocating taking money for his ideas... but to emphasise that his work shows that our concepts of help are not rational.
I'm far more statist after working through how irrational the average person, and groups of people, are. I've had to deal with the most self-defeating situations and most irrational people... I've had the concept of "personal choice" as a defense utterly ruined forever. Personal choice is now an euphanism for "I don't think my decision is good, but it's my choice and I'm going to make it!" to me.

 

[ygolo]

I recently bought the book linked in an earlier post, and it has brought up some intersting points for me.

Amazon Online Reader : Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics

I have read some parts of it.

The main thrust is to shed the framework of equilibrium equations for closed systems for a framework of a complex self-organizing system (based on the evolutionary algorithm).

So far everything I read makes a lot more (common?) sense than traditional economics.

Have any of you Economics/Finance enthusiasts come across the work of the Sante Fe Institute?

It is a rather sparce website for what they are studying.