Macroeconomists have physics envy

[Torie]

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/

[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.

[Torie]

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.

[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.

[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.