Saturday, July 15, 2017

Brad DeLong — How to Think Like an Economist


Possibly of interest. 

It also provides insight into how economists like Brad Delong think about basics.

Grasping Reality
How to Think Like an Economist (If, That Is, You Wish To...)
Brad DeLong | Professor of Economics, UCAL Berkeley

6 comments:

Matt Franko said...

I got a headache in 2 sentences...

Tom Hickey said...

This paragraph epitomizes how (conventional) economists think.

Opportunity Cost: Perhaps the most fundamental principle of economics is that there is always a choice. But making a choice excludes the alternatives. If you keep your wealth in the form of easily spendable cash, you pass up the chance to keep it earning interest in the form of bonds. If you keep your wealth in the form of interest-earning bonds, you pass up the capability of immediately spending it on something that suddenly strikes your fancy. If you spend on consumption goods, you pass up the opportunity to save. Economists use the term opportunity cost to refer to the value of the best alternative that you forgo in making any particular choice.

At the root of every behavioral relationship is somebody’s decision. In analyzing such decisions, economists always think about the decision maker’s opportunity costs. What else could the decision maker do? What opportunities and choices does the decision maker foreclose by taking one particular course of action? Many students make economics a lot harder than it has to be by not remembering that this opportunity-cost way of thinking is at the heart of every behavioral relationship in an economic model.

Neil Wilson said...

Owning bonds has never stopped me buying anything. I order the thing and by the time it comes to settle the debt I just created I've sold the bonds in a deep and liquid market. What this shows is that economists are impulsive. Everything has to happen in the now. They can't handle coordinated things that happen over time.

AXEC / E.K-H said...

How economists habitually mess it up
Comment on Bradford DeLong on ‘How to Think Like an Economist’

Economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.#1

Economists are well aware of the stagnation of economics: “... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower) Economists, though, do not locate the reasons for failure in themselves but in the specifics of their subject matter. These explanations have to be taken for what they are: as excuses.#2, #3, #4

Fact is that the subject matter of economics is ill-defined or, in methodological terms, that economics is axiomatically false.#5

Bradford DeLong argues: “While economics is not a natural science, it is a science — a social science.” False. Economics is a system science.

Therefore “… to understand people you have to get inside their heads: understand their hopes, fears, desires, reasoning, plans, expectations, and actions” is NOT AT ALL the business of economics. This is the subject matter of psychology, sociology, anthropology, political science etcetera.

The business of the economist is to figure out how the economic system behaves and how the economic phenomena and variables are structurally interrelated. In an analogy: economics is not about the motives/behavior/action of passengers/crew on an airplane but about how flight is possible.

Bradford DeLong explains why economist have always three answers for any question: “The major reason is that different people have different views of what makes a free, a good, a just, or a well-ordered society.”

Note well that the question about the good society is a political question that has to be answered in the political realm and NOT in the scientific realm. John Stuart Mill was quite explicit about the separation of politics and science: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.”

The main reason why economics is a failed science is that economists are not scientists but agenda pushers. There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Economics has been hijacked 200+ years ago by agenda pushers. Political economists have not figured out until this day how the market economy works.#6

Economists do not need a prescription ‘How to Think Like an Economist’ but an idea how to get out of the self-created proto-scientific mess.

Egmont Kakarot-Handtke

References
https://axecorg.blogspot.de/2017/07/how-economists-habitually-mess-it-up.html

AXEC / E.K-H said...

New Economic Thinking: the 10 crucial points
Comment on Bradford DeLong on ‘How to Think Like an Economist’

Bradford DeLong gives a comprehensive overview of what he and the representative economist understands under economic thinking.#1 His post can be taken as an inventory of all that is wrong with economics. This in turn delivers the red thread for the systematic enumeration of necessary changes.

(i) State of economics

The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

Provable false:
• profit theory, since 200+ years,
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM), since 80+ years.#2

This means that the popular textbooks from Samuelson (1947) to Mankiw and Rodrik are scientifically worthless.#3

(ii) Paradigm shift

Economics is a failed science. The four main approaches are indefensible. The arguments of the representative economist about specific difficulties of his subject matter have to be taken for what they are: as excuses, more precisely as thoroughly refuted excuses.#4

The fact that an approach is axiomatically false means that it cannot be improved but must be fully replaced.

(iii) System science

Bradford DeLong argues: “While economics is not a natural science, it is a science — a social science.” This is a popular misunderstanding. Economics is a system science. Economics is about how the economy works and NOT about Human Nature/motives/behavior/action.#5 These issues are left to psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory etcetera.

(iv) Separation of Politics and Science

The question about the good society is a political question that has to be answered in the political realm and NOT in the scientific realm. Already John Stuart Mill was quite explicit about the separation of politics and science.#6

(v) True macrofoundations

Fact is that the subject matter of economics is ill-defined or, in methodological terms, that economics is axiomatically false.

A paradigm shift means in practical term that economics has to move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations because if it isn’t macro-axiomatized, it isn’t economics.#7

(vi) Methodology

The failure of economics is mainly due to the Fallacy of Insufficient Abstraction. In other words, economists cannot rise above the level of storytelling. One story line is that of supply-demand-equilibrium and the wonderful feats of the Invisible Hand, the other story line is that of the struggle between the good guys=workers and the bad guys=capitalists. Storytelling is scientific rubbish but people like it.

The economy is an abstraction. The correct abstraction to start with is what Keynes called the ‘monetary theory of production’. Scientific theories are defined by material/formal consistency.

The analysis proceeds top down, that is it starts with macrofoundations which are step by step differentiated, in other words, the analysis advances from the elementary to the complex.

There is no vague blather, no rhetoric, no metaphors, no psychologism, no sociologism, no second-guessing of human motives or expectations and no storytelling. There is nothing but measurable variables, equations and graphs. Because all variables are measurable all conclusions are testable.

See part 2

AXEC / E.K-H said...

LINK

Somehow Part 2 vanished. For the full text see
https://axecorg.blogspot.de/2017/07/new-economic-thinking-10-crucial-points.html