Macroeconomists have physics envy
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Torie
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« on: August 17, 2022, 08:08:28 AM »

Or hubris, or something, the point being that surprises keep happening. Social "science" is a bitch.

https://www.nationalreview.com/2022/08/the-case-for-humility-in-economics/
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Associate Justice PiT
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« Reply #1 on: August 17, 2022, 12:39:55 PM »

     I am reminded of this XKCD comic:



     Economics would probably between psychology and biology...at least in the estimation of its practitioners. Having spent my undergrad in physics, the concept of a pecking order existing based on purity where people are dedicated to demonstrating that their field is a genuine science with a high degree of rigor and wide-reaching applications is entirely accurate.
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Benjamin Frank
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« Reply #2 on: August 17, 2022, 06:46:45 PM »

I've posted this here before, but always worth a listen.

https://www.cbc.ca/radio/ideas/it-s-the-economists-stupid-1.3219471

It's The Economists, Stupid

**This episode first aired September 9, 2015.

Interest rates.  Unemployment. GDP.  Markets. Austerity measures.  Economists tell us what we, as societies, can and can't afford.  But how do they decide? What values are at play?

'Physics envy' is mentioned in the context of economists who want to quantify all economics in order to claim that economics is a hard science and not a social science.
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vitoNova
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« Reply #3 on: August 17, 2022, 08:02:42 PM »

Micro was a bitch in college.  It kinda started venturing into quasi-business major type territory, which I simply had no patience for, dawg. 

Macro FTW.
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Benjamin Frank
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« Reply #4 on: August 17, 2022, 09:37:03 PM »

Micro was a bitch in college.  It kinda started venturing into quasi-business major type territory, which I simply had no patience for, dawg. 

Macro FTW.

For me, the theory of the firm is as fascinating as things can possibly be.
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vitoNova
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« Reply #5 on: August 17, 2022, 09:45:19 PM »

Micro was a bitch in college.  It kinda started venturing into quasi-business major type territory, which I simply had no patience for, dawg. 

Macro FTW.

For me, the theory of the firm is as fascinating as things can possibly be.


Had I been familiar with Glengarry Glen Ross at the time--which I wasn't--I would've slayed it.
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« Reply #6 on: August 18, 2022, 10:46:26 AM »

Micro was a bitch in college.  It kinda started venturing into quasi-business major type territory, which I simply had no patience for, dawg.  

Macro FTW.
Can confirm, am accountant who learned more from Management Principles and Cost Accounting than 200-level Econ wrt Micro’s applications in the decision-making process/budget management.
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parochial boy
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« Reply #7 on: August 18, 2022, 11:38:36 AM »

Micro was a bitch in college.  It kinda started venturing into quasi-business major type territory, which I simply had no patience for, dawg.  

Macro FTW.
Can confirm, am accountant who learned more from Management Principles and Cost Accounting than 200-level Econ wrt Micro’s applications in the decision-making process/budget management.


Yeah, a lot of orthodox economics is really weird in that respect in that it takes these things like ceteris paribus, or the efficient markets hypothesis - that are manifestly untrue; and then applies them anyway because it "sort of corresponds to reality. Sometimes" and it makes the maths work.

I mean, if you did this in any other Social Science you would be laughed out of the room because the very first thing you learn is that Humans Don't Work That Way. And yet orthodox economics does this and pretends it is a hard science of the back of it, rather than being an entirely ideological project. It's an almost surreal level of cognitive dissonance.
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Antonio the Sixth
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« Reply #8 on: August 18, 2022, 03:04:56 PM »

     I am reminded of this XKCD comic:



     Economics would probably between psychology and biology...at least in the estimation of its practitioners. Having spent my undergrad in physics, the concept of a pecking order existing based on purity where people are dedicated to demonstrating that their field is a genuine science with a high degree of rigor and wide-reaching applications is entirely accurate.

The problem is less where economics ranks in this "pecking order" than the fact that this mentality exists at all. How objective and empirical a given field isn't a mark of its prestige or the quality of its practitioners - it's dictated by the kind of phenomena it's trying to understand. Human processes, like economics, sociology and politics, are inherently less predictable and measurable than natural ones. Sociologists and (some) political scientists have the humility to recognize that, but economists have deluded themselves into thinking that they reduce fundamental human activities to a series of models and equations. And what's worse, theoretical economists in particular show little interest in the empirical validity of their models' derivations - in this respect mirroring the worst behaviors of some theoreticians in the "hard" sciences as well.
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Associate Justice PiT
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« Reply #9 on: August 18, 2022, 03:41:13 PM »

     I am reminded of this XKCD comic:



     Economics would probably between psychology and biology...at least in the estimation of its practitioners. Having spent my undergrad in physics, the concept of a pecking order existing based on purity where people are dedicated to demonstrating that their field is a genuine science with a high degree of rigor and wide-reaching applications is entirely accurate.

The problem is less where economics ranks in this "pecking order" than the fact that this mentality exists at all. How objective and empirical a given field isn't a mark of its prestige or the quality of its practitioners - it's dictated by the kind of phenomena it's trying to understand. Human processes, like economics, sociology and politics, are inherently less predictable and measurable than natural ones. Sociologists and (some) political scientists have the humility to recognize that, but economists have deluded themselves into thinking that they reduce fundamental human activities to a series of models and equations. And what's worse, theoretical economists in particular show little interest in the empirical validity of their models' derivations - in this respect mirroring the worst behaviors of some theoreticians in the "hard" sciences as well.

     I entirely agree, and I realize I did not say it outright but it is the truth that a major source of problems in the field of economics is that many economists strive to place as highly in the pecking order as possible. Classical economics divorced from human psychology is deeply flawed as a model of any real economy, yet it is a lot easier to keep practicing accepted older models than it is to actually attempt to do something different. That combined with the politicization of economics (creating a paradigm whereby academics are promoted for reasons unrelated to the quality of their work) has made it a field that has an immense amount of noise and little signal.
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Benjamin Frank
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« Reply #10 on: August 19, 2022, 04:29:39 AM »

    I am reminded of this XKCD comic:

     Economics would probably between psychology and biology...at least in the estimation of its practitioners. Having spent my undergrad in physics, the concept of a pecking order existing based on purity where people are dedicated to demonstrating that their field is a genuine science with a high degree of rigor and wide-reaching applications is entirely accurate.

The problem is less where economics ranks in this "pecking order" than the fact that this mentality exists at all. How objective and empirical a given field isn't a mark of its prestige or the quality of its practitioners - it's dictated by the kind of phenomena it's trying to understand. Human processes, like economics, sociology and politics, are inherently less predictable and measurable than natural ones. Sociologists and (some) political scientists have the humility to recognize that, but economists have deluded themselves into thinking that they reduce fundamental human activities to a series of models and equations. And what's worse, theoretical economists in particular show little interest in the empirical validity of their models' derivations - in this respect mirroring the worst behaviors of some theoreticians in the "hard" sciences as well.

I suspect your commentary is at least partly based on this book: https://www.amazon.ca/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926

Debunking Economics by Steven Keen.  If your commentary isn't based at all on that book, I'm sure you'll enjoy it. There are, of course, some economists who disagree with his arguments.

This wesite explains one of the main points made in the book:
In chapter 5 of Steve Keen’s Debunking Economics, Keen talks about some empirical papers that show the real costs curves of actual firms. Unsurprisingly, these empirical findings do not corroborate the neoclassical theory of long run average costs (see below):

It turned out that most managers did not pick curves that had rising average costs. Only 18 companies out of 366 picked curves that support the neoclassical theory.

https://curiousleftist.wordpress.com/2013/11/29/debunking-economics-part-3-5-the-real-shape-of-the-average-cost-curve/

As Steven Keen explained, for some reasons, academic economists have shied away from gathering actual micro economics empirical evidence.

I had a brief twitter conversation about this, and asked the guy I was having this discussion with if he had read this book, before noticing I was having this discussion with Steven Keen.

I went to UBC shortly before Covid and noticed that economic textbooks were still using supply and demand curves that showed rising cost curves.
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Benjamin Frank
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« Reply #11 on: August 19, 2022, 04:47:23 AM »

Micro was a bitch in college.  It kinda started venturing into quasi-business major type territory, which I simply had no patience for, dawg.  

Macro FTW.
Can confirm, am accountant who learned more from Management Principles and Cost Accounting than 200-level Econ wrt Micro’s applications in the decision-making process/budget management.


Yeah, a lot of orthodox economics is really weird in that respect in that it takes these things like ceteris paribus, or the efficient markets hypothesis - that are manifestly untrue; and then applies them anyway because it "sort of corresponds to reality. Sometimes" and it makes the maths work.

I mean, if you did this in any other Social Science you would be laughed out of the room because the very first thing you learn is that Humans Don't Work That Way. And yet orthodox economics does this and pretends it is a hard science of the back of it, rather than being an entirely ideological project. It's an almost surreal level of cognitive dissonance.

There are sections in micro economics clases that discuss where the efficient markets hypothesis doesn't hold, which is the concept of market failures.

However, I think the discussion of market failures lacks a thorough understanding of logistics, which increases by a fair amount additional situations in which markets aren't efficient. I spend a day with my students going over some of these additional areas.

As an example of this and an example of how economics definitely isn't a hard science, I look at how economists have admitted that they completely misjudged the ease in which losers from free trade would find other employment.

https://www.theatlantic.com/business/archive/2016/01/how-economists-were-wrong-about-free-trade/433818/

A major mistake was simply that many economists assumed that workers were essentially interchangeable: they lose a job one place, they find a similar paying job someplace else. That was more the case before jobs became higher tech, but that isn't the case now.

Economists also ignored the human issue of those over 45 in starting new careers.

So, to make this a bit oversimple but to demonstrate the point: that the economy operated one way before high tech, but then operated differently after high tech, and old economics 'laws' were no long valid, is completely different from how 'hard' science operates. 

Economics will always be a social science as much as the economic mathematicians and 'quants' try to pretend that isn't the case.
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Antonio the Sixth
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« Reply #12 on: August 19, 2022, 06:01:02 AM »

     I am reminded of this XKCD comic:

     Economics would probably between psychology and biology...at least in the estimation of its practitioners. Having spent my undergrad in physics, the concept of a pecking order existing based on purity where people are dedicated to demonstrating that their field is a genuine science with a high degree of rigor and wide-reaching applications is entirely accurate.

The problem is less where economics ranks in this "pecking order" than the fact that this mentality exists at all. How objective and empirical a given field isn't a mark of its prestige or the quality of its practitioners - it's dictated by the kind of phenomena it's trying to understand. Human processes, like economics, sociology and politics, are inherently less predictable and measurable than natural ones. Sociologists and (some) political scientists have the humility to recognize that, but economists have deluded themselves into thinking that they reduce fundamental human activities to a series of models and equations. And what's worse, theoretical economists in particular show little interest in the empirical validity of their models' derivations - in this respect mirroring the worst behaviors of some theoreticians in the "hard" sciences as well.

I suspect your commentary is at least partly based on this book: https://www.amazon.ca/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926

Debunking Economics by Steven Keen.  If your commentary isn't based at all on that book, I'm sure you'll enjoy it. There are, of course, some economists who disagree with his arguments.

It's not based on the book, no. It's mostly based on my own experience interacting with economics research (it's a big part of political science curriculums, because American political science has a huge inferiority complex toward economics and has fully bought into its pretense of being a Real Science), and to some extent by what I've heard from economists' critical of their discipline's culture.

Thanks for the recommendation, though. This definitely matches my experience.
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Alcibiades
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« Reply #13 on: August 19, 2022, 07:24:58 AM »

I’ve noticed that criticisms of economics of the sort that have dominated this thread tend to be pretty common among what I would describe as well-read laypeople, who often latch onto criticisms of it (frequently as originally presented in the high-brow media) because they, ostensibly, seem original and incisive. I think, in general, economics is unfairly demonised by people with some, but not lots, of knowledge of it.

I mean, I kind of find it hard to believe that some people think economists have just never considered these very broad critiques. To take just one example, behavioural economics has obviously been one of the major developments in the field in the past couple of decades, and has itself spawned a lively debate among economists as to its usefulness and accuracy. It is quite stunning that intelligent people would simply write off an entire field as illegitimate based off some caricatures of it they’ve picked up, despite never having studied the subject to a high level.

Much of this confusion probably comes from the way introductory undergraduate economics courses are taught, which does bear little resemblance to the discipline at higher levels, and in some cases even includes as examples theories economists now believe to be wrong. There are certainly very valid questions to ask about the current mode of undergraduate teaching of the subject, but ultimately this is the way most subjects are taught; you start with basic, fairly crude models, and as you advance to higher study, you refine them more and more, and begin to question your original assumptions and introduce further complications. It would be rather unfair to throw first-year undergraduates in at the deep end in this way, so to speak, however. Related to this, there seems to be some confusion here as to the nature of modelling itself. The purpose of modelling is not to perfectly describe reality, but rather to try and gain some insights as to important aspects of it. This is nicely summed up by the saying, “All models are inaccurate, but some are useful.”

None of this is to say that there are not legitimate debates to be had about economic methodology. For instance, you could definitely say that too many economists these days use complicated maths to obscure either weaknesses in their arguments, or the fact that they are not really saying anything profound. There is certainly a role for research which explains things in easier terms to non-maths specialists (though still backed up by rigorous quantitative reasoning) — a favourite example of mine is George Akerloff’s 1970 paper ‘The Market for Lemons’, which was absolutely groundbreaking in its contributions to information asymmetry (which, on a side note, is another example of a challenge to traditional economic models — in this case those that assume — which has been well-established among academics for almost half a century, but is still not taught that often in introductory courses), but yet is pretty readable for the intelligent layperson. Ultimately, though, any calls to more-or-less banish maths from economics are absurd — economists use it for a reason, which is that maths is a much more precise language than, say, English, and if used correctly is more conducive to tight logical reasoning.

Finally, I have to say the charge that economics is an “ideological” or “political” project, which, amusingly, has been levelled by both right-wing and left-wing posters in this thread, is pretty bizarre. While it is true that the centre of gravity of the academic field lies on the centre-left, economists span a very broad range of political positions. In general, I would also say that not all that many are passionate ideologues either.
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Benjamin Frank
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« Reply #14 on: August 19, 2022, 08:37:47 AM »
« Edited: August 20, 2022, 05:34:57 AM by Benjamin Frank »

I’ve noticed that criticisms of economics of the sort that have dominated this thread tend to be pretty common among what I would describe as well-read laypeople, who often latch onto criticisms of it (frequently as originally presented in the high-brow media) because they, ostensibly, seem original and incisive. I think, in general, economics is unfairly demonised by people with some, but not lots, of knowledge of it.

I mean, I kind of find it hard to believe that some people think economists have just never considered these very broad critiques. To take just one example, behavioural economics has obviously been one of the major developments in the field in the past couple of decades, and has itself spawned a lively debate among economists as to its usefulness and accuracy. It is quite stunning that intelligent people would simply write off an entire field as illegitimate based off some caricatures of it they’ve picked up, despite never having studied the subject to a high level.

Much of this confusion probably comes from the way introductory undergraduate economics courses are taught, which does bear little resemblance to the discipline at higher levels, and in some cases even includes as examples theories economists now believe to be wrong. There are certainly very valid questions to ask about the current mode of undergraduate teaching of the subject, but ultimately this is the way most subjects are taught; you start with basic, fairly crude models, and as you advance to higher study, you refine them more and more, and begin to question your original assumptions and introduce further complications. It would be rather unfair to throw first-year undergraduates in at the deep end in this way, so to speak, however. Related to this, there seems to be some confusion here as to the nature of modelling itself. The purpose of modelling is not to perfectly describe reality, but rather to try and gain some insights as to important aspects of it. This is nicely summed up by the saying, “All models are inaccurate, but some are useful.”

None of this is to say that there are not legitimate debates to be had about economic methodology. For instance, you could definitely say that too many economists these days use complicated maths to obscure either weaknesses in their arguments, or the fact that they are not really saying anything profound. There is certainly a role for research which explains things in easier terms to non-maths specialists (though still backed up by rigorous quantitative reasoning) — a favourite example of mine is George Akerloff’s 1970 paper ‘The Market for Lemons’, which was absolutely groundbreaking in its contributions to information asymmetry (which, on a side note, is another example of a challenge to traditional economic models — in this case those that assume — which has been well-established among academics for almost half a century, but is still not taught that often in introductory courses), but yet is pretty readable for the intelligent layperson. Ultimately, though, any calls to more-or-less banish maths from economics are absurd — economists use it for a reason, which is that maths is a much more precise language than, say, English, and if used correctly is more conducive to tight logical reasoning.

Finally, I have to say the charge that economics is an “ideological” or “political” project, which, amusingly, has been levelled by both right-wing and left-wing posters in this thread, is pretty bizarre. While it is true that the centre of gravity of the academic field lies on the centre-left, economists span a very broad range of political positions. In general, I would also say that not all that many are passionate ideologues either.

Speaking as an economist myself (economic historian, so I'm far less on the math side, but I think I've demonstrated here that I have a decent understanding and use of mathematics conceptually) I think a large part of the problem is those who I refer to as 'television economists.' Most, if not all of them are real economists - Larry Kudlow, Jim Cramer (not a real economist), Peter Navarro, Stephen Moore (technically people without PhDs who don't work as economists or as economics instructors aren't really economists, I don't really care about these technical distinctions here.)

I refer to them as 'television economists' because like much of journalism in general, they spout sensationalist forecasts with absolute certainy backed up by numbers of dubious significance or basis in reality. "Garbage in, garbage out."

I think the academic economists would do well if they repeatedly distanced themselves from television economists and stated repeatedly: "political economists advise based on likely possible outcomes from proposed legislation. Certainty of outcomes is impossible and anybody who forecasts with certainty should be ignored.'

One exception to the bad television economists is Catherine Rampell.

I appreciate the work that econometricians do, and the more recent 'quants' based on big data and analytics, but, I don't agree with them that economics can be made into a 'hard science' through using a lot more numbers, however precise numbers are. When there are a range of possibilities in outcomes, there should be a range of numerical output as well.

I think there are a lot of very intelligent people who graduate with degrees in economics, I think there are also a lot of people with degrees in economics who have learnt so much mathematics at the expense of learning economics conceptually.

There have been studies of people with degrees in economics failing at tests of economic questions that rely on basic economic concepts, and performing little better on these tests than those without any formal education in economics. Yet, I presume they can answer calculus questions very well. I would tend to think the basic purpose of an economics degree is to understand economics conceptually.

I would also remind you that it's economists themselves who refer to other economists as having 'physics envy.' There is a genuine debate in the economics field as to whether there is too much effort made to rely on mathematics and try to quantify things rather than focusing on conceptial more qualitative arguments.  

The quants keep arguing 'this time it's different, economics is a hard science now" and those who are on the qualitative side, which is obviously my side, keep pushing back, with, I think, good reason.
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Torie
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« Reply #15 on: August 26, 2022, 08:47:40 AM »
« Edited: August 26, 2022, 08:58:32 AM by Torie »

    I am reminded of this XKCD comic:

     Economics would probably between psychology and biology...at least in the estimation of its practitioners. Having spent my undergrad in physics, the concept of a pecking order existing based on purity where people are dedicated to demonstrating that their field is a genuine science with a high degree of rigor and wide-reaching applications is entirely accurate.

The problem is less where economics ranks in this "pecking order" than the fact that this mentality exists at all. How objective and empirical a given field isn't a mark of its prestige or the quality of its practitioners - it's dictated by the kind of phenomena it's trying to understand. Human processes, like economics, sociology and politics, are inherently less predictable and measurable than natural ones. Sociologists and (some) political scientists have the humility to recognize that, but economists have deluded themselves into thinking that they reduce fundamental human activities to a series of models and equations. And what's worse, theoretical economists in particular show little interest in the empirical validity of their models' derivations - in this respect mirroring the worst behaviors of some theoreticians in the "hard" sciences as well.

I suspect your commentary is at least partly based on this book: https://www.amazon.ca/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926

Debunking Economics by Steven Keen.  If your commentary isn't based at all on that book, I'm sure you'll enjoy it. There are, of course, some economists who disagree with his arguments.

This wesite explains one of the main points made in the book:
In chapter 5 of Steve Keen’s Debunking Economics, Keen talks about some empirical papers that show the real costs curves of actual firms. Unsurprisingly, these empirical findings do not corroborate the neoclassical theory of long run average costs (see below):

It turned out that most managers did not pick curves that had rising average costs. Only 18 companies out of 366 picked curves that support the neoclassical theory.

https://curiousleftist.wordpress.com/2013/11/29/debunking-economics-part-3-5-the-real-shape-of-the-average-cost-curve/

As Steven Keen explained, for some reasons, academic economists have shied away from gathering actual micro economics empirical evidence.

I had a brief twitter conversation about this, and asked the guy I was having this discussion with if he had read this book, before noticing I was having this discussion with Steven Keen.

I went to UBC shortly before Covid and noticed that economic textbooks were still using supply and demand curves that showed rising cost curves.

Somehow some 40 years ago I never focused nor recall that it was emphasized that marginal costs rise. But it makes sense that if your factory is producing more than it was designed to, that means more overtime, etc. So why what makes sense in "theory" just not the case? Costs are not as fixed as one might think in the modern economy or technology? Has it "always" been the case that in reality average costs do not rise at higher volumes, or have things changed?

Interesting post. Thank you.

Regarding your post immediately above, in finance and the matter of trying to exploit posited inefficiencies in the market, my perception is that some quants develop algorithms to measure and exploit Thaler's positing or investor irrationalities, e.g. that the market does not value risks that are more remote, herding and so forth. Sometimes though I wonder if while it may be true that more often than not, employing such algorithms  can generate some extra returns, when things go bad, they can go very bad, wiping out those extra returns, so the perceived outpacing of the market is a mirage. cf Lehman Bros collapse.
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Benjamin Frank
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« Reply #16 on: August 26, 2022, 11:08:59 AM »
« Edited: August 26, 2022, 11:13:48 AM by Benjamin Frank »

    I am reminded of this XKCD comic:

     Economics would probably between psychology and biology...at least in the estimation of its practitioners. Having spent my undergrad in physics, the concept of a pecking order existing based on purity where people are dedicated to demonstrating that their field is a genuine science with a high degree of rigor and wide-reaching applications is entirely accurate.

The problem is less where economics ranks in this "pecking order" than the fact that this mentality exists at all. How objective and empirical a given field isn't a mark of its prestige or the quality of its practitioners - it's dictated by the kind of phenomena it's trying to understand. Human processes, like economics, sociology and politics, are inherently less predictable and measurable than natural ones. Sociologists and (some) political scientists have the humility to recognize that, but economists have deluded themselves into thinking that they reduce fundamental human activities to a series of models and equations. And what's worse, theoretical economists in particular show little interest in the empirical validity of their models' derivations - in this respect mirroring the worst behaviors of some theoreticians in the "hard" sciences as well.

I suspect your commentary is at least partly based on this book: https://www.amazon.ca/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926

Debunking Economics by Steven Keen.  If your commentary isn't based at all on that book, I'm sure you'll enjoy it. There are, of course, some economists who disagree with his arguments.

This wesite explains one of the main points made in the book:
In chapter 5 of Steve Keen’s Debunking Economics, Keen talks about some empirical papers that show the real costs curves of actual firms. Unsurprisingly, these empirical findings do not corroborate the neoclassical theory of long run average costs (see below):

It turned out that most managers did not pick curves that had rising average costs. Only 18 companies out of 366 picked curves that support the neoclassical theory.

https://curiousleftist.wordpress.com/2013/11/29/debunking-economics-part-3-5-the-real-shape-of-the-average-cost-curve/

As Steven Keen explained, for some reasons, academic economists have shied away from gathering actual micro economics empirical evidence.

I had a brief twitter conversation about this, and asked the guy I was having this discussion with if he had read this book, before noticing I was having this discussion with Steven Keen.

I went to UBC shortly before Covid and noticed that economic textbooks were still using supply and demand curves that showed rising cost curves.

Somehow some 40 years ago I never focused nor recall that it was emphasized that marginal costs rise. But it makes sense that if your factory is producing more than it was designed to, that means more overtime, etc. So why what makes sense in "theory" just not the case? Costs are not as fixed as one might think in the modern economy or technology? Has it "always" been the case that in reality average costs do not rise at higher volumes, or have things changed?

Interesting post. Thank you.

Regarding your post immediately above, in finance and the matter of trying to exploit posited inefficiencies in the market, my perception is that some quants develop algorithms to measure and exploit Thaler's positing or investor irrationalities, e.g. that the market does not value risks that are more remote, herding and so forth. Sometimes though I wonder if while it may be true that more often than not, employing such algorithms  can generate some extra returns, when things go bad, they can go very bad, wiping out those extra returns, so the perceived outpacing of the market is a mirage. cf Lehman Bros collapse.

On the first part, the problem is, it really doesn't make sense in theory. The theoretical argument for why marginal costs rise (and this works in nonmanufacturing as well) is that there are diminishing returns to fixed capital. The extreme example I remember in a textbook is there is one jackhammer and one worker. If you hire a second worker, but still have only one jackhammer, there may be some additional things that the second worker can do to increase the output of the worker with the jackhammer, but the return is going to drop significantly.

The problem with this, the case you provide only occurs when a firm is working at beyond long run potential output. What Keen showed is that firms actually plan and engineer quite well the output that they can produce and then hire a total number of workers that corresponds pretty well to the output that they plan.

So, marginal costs over the range of potential output is mostly generally flat.  Once the maximum is reached, then, in the long run, the marginal cost would spike (I'm not a mathematician, but I believe the concept is the same as 'approaching infinity.') Firms generally try to prevent this by planning expansions first.

There may, of course, be times where firms don't expect a long run increase in demand when demand increases suddenly, so they generally know to not expand capacity (or potential output) in those situtations. I'm sure that's fairly obvious to you and most people, but I think it still fits to be pointed out here.

In the short term, there are the things that you mentioned that a firm can do to raise output beyond long run potential output.

When I was growing up, professional coaches, especially during playoffs, used to say 'the team needs to give 110%.' and there would be, especially, high school math teachers who would complain 'you can't give more than 100%.' And finally mathematics professors and psychologists who had a lot of math training repied "players can absolutely play at 110% of their long run portential for a short period of time.'
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Torie
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« Reply #17 on: August 26, 2022, 11:23:13 AM »

I think that is another way of saying fixed costs are not as fixed as might be imagined, so output can be adjusted without that much inefficiency.

The concept of approaching infinity that you may have in mind, or maybe not, is the asymptotic function.
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Benjamin Frank
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« Reply #18 on: August 26, 2022, 11:49:28 AM »
« Edited: August 26, 2022, 02:28:03 PM by Benjamin Frank »

I think that is another way of saying fixed costs are not as fixed as might be imagined, so output can be adjusted without that much inefficiency.

The concept of approaching infinity that you may have in mind, or maybe not, is the asymptotic function.

In reverse order, yes asymptotes. I wasn't sure how to spell the word so I didn't want to use it and I'm not sure that is exactly the correct term either.

I think you're aware I'm referring to variable costs, not fixed costs. The general concept in economics is that as output increases, variable costs increase per unit of output. Since a colloquial explantion for this is that 'too many cooks spoil the broth', the general concept is that the variable cost to produce the 100th plate of pasta in a kitchen is going to be higher than producing the first plate of pasta. The general idea is that in order to fit in enough cooks to produce 100 plates of pasta at the same time, they're going to be continuously getting in each others way, and slow each other down, thereby reducing productivity.  

So, the variable costs rise as efficiency falls.  Under this theory, whether the marginal costs rise or fall depends on whether the the variable cost to produce the 100th plate of pasta is higher or lower than the fixed cost allocated to the 100th plate of pasta.

So, fixed cost =$9,900, spread over 99 plates of pasta = $10 per plate, $9,900 over 100 plates of pasts is $9.90 per plate. So, the fixed cost is spread over more pasta.

But, if the total variable cost increases more than $0.10 for the 100th plate of pasta, then the overall marginal cost incresaes.

In the kitchen that I briefly worked in, even though the floor was crowded, the staff operated like a well oiled machine, so the variable cost to produce the 100th plate of pasta was likely the exact same as the cost of producing the first plate of pasta.

On the broader point, this also shows why stable growth is best for an economy, because it allows for more certainty in planning, although obviously it's still going to include, and should include, creation and destruction of firms and sectors.

This is why the current inflation being primary the result in transitory problems with supply chains makes so much sense. With uncertain supplies of inputs it's much harder to plan, and those that have the imputs are much more likely to increase their prices as demand increases. So, this makes it much more the case that marginal costs will increase as production increases.

Similar to this, I've heard that firms immediately after the economy started to ramp up again (and for a while before this as well) found creative ways to pay higher salaries to new employees than to those they were already employing. However, it seems the not surprising negative reaction to this is a fairly major reason for the 'great resignation.'
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« Reply #19 on: August 26, 2022, 11:57:20 AM »

What I am saying is that if your fixed investment was relatively inflexible (you have but one kitchen), then variable costs when you stress the kitchen go up. But if there are relatively cheap ways to expand the kitchen as it were, then it is relatively cheap to keep the variable costs from going up.
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Benjamin Frank
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« Reply #20 on: August 26, 2022, 12:05:02 PM »
« Edited: August 26, 2022, 12:10:20 PM by Benjamin Frank »

What I am saying is that if your fixed investment was relatively inflexible (you have but one kitchen), then variable costs when you stress the kitchen go up. But if there are relatively cheap ways to expand the kitchen as it were, then it is relatively cheap to keep the variable costs from going up.

I think the most accurate idea is that when the restauranteur plans the restaurant (restaurants aren't really a good example here) they know how many people the restaurant will serve, and they know how many people they will need to hire, and they know the size of the kitchen to build to accomodate the number of people they will hire without the cooks getting in each others way to the point that efficiency drops.  

This, according to Keen, is the main reason why marginal costs are flat after initially falling as fixed costs are allocated over more and more output.

If you have $10,000 in fixed costs allocated over 9 units, the fixed cost per unit is $1,111. If output is increased to 10 units, the fixed cost drops to $1,000 per unit.

If the fixed cost is allocated over 10,000 units, the fixed cost per unit is $1. If output is increased to 10,001 units, the change in the fixed cost for that unit is insignificant. So, marginal costs initially falls as the unit of output increases because the allocation of fixed costs drop dramatically initially, but as more and more units are produced, fixed costs per additional unit becomes insignifcant.

Isn't marginal thinking fun?
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« Reply #21 on: August 26, 2022, 12:14:14 PM »
« Edited: August 26, 2022, 12:34:10 PM by Torie »

What I am saying is that if your fixed investment was relatively inflexible (you have but one kitchen), then variable costs when you stress the kitchen go up. But if there are relatively cheap ways to expand the kitchen as it were, then it is relatively cheap to keep the variable costs from going up.

I think the most accurate idea is that when the restauranteur plans the restaurant (restaurants aren't really a good example here) they know how many people the restaurant will serve, and they know how many people they will need to hire, and they know the size of the kitchen to build to accomodate the number of people they will hire without the cooks getting in each others way to the point that efficiency drops.  

This, according to Keen, is the main reason why marginal costs are flat after initially falling as fixed costs are allocated over more and more output.

If you have $10,000 in fixed costs allocated over 9 units, the fixed cost per unit is $1,111. If output is increased to 10 units, the fixed cost drops to $1,000 per unit.

If the fixed cost is allocated over 10,000 units, the fixed cost per unit is $1. If output is increased to 10,001 units, the change in the fixed cost for that unit is insignificant. So, marginal costs initially falls as the unit of output increases because the allocation of fixed costs drop dramatically initially, but as more and more units are produced, fixed costs per additional unit becomes insignifcant.

Isn't marginal thinking fun?

Yes, it is so much fun that at this point it has replaced sex in my life.
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