March 15, 2008
The Undercover Economist: Moments of truth
The three most familiar economic statistics are all measures of change: inflation, the growth of gross domestic product, and the daily rise or fall in the price of shares. Even so, they do not begin to capture the mad churn of the economy: the growth and bankruptcy of companies; the millions of sackings and hirings, which unemployment statistics barely summarise; the movement of goods and services around the world and the ebb and flow of consumer fads. Under the circumstances, it is strange that economists do not have a satisfactory way of talking about change; yet we do not.
As any undergraduate student of economics knows, both microeconomists and macroeconomists tend to describe change in the same way that an advertisement for washing powder does: “before” and “after”. When oil cost $20 a barrel the economy looked like this; now oil costs $100 a barrel, the economy looks like that. Quite how the process of change occurred – or how quickly – is a problem glossed over in the textbooks and most journals.
Continue reading Tim Harford’s column here. Please post comments below.
The contagious drying up of liquidity has sometimes been described as a freezing of credit. I have a feeling that a phase transition model might fit quite well. The relation to epidemics seems to resemble the the medieval freezing of trade in times of the plague rather than the spread of the plague itself.
Posted by: Diversity | March 15th, 2008 at 1:45 pm | Report this commentI think there is potential applicability of engineering control theory at its simplest level is just looking for the appropriate strength of negative feedback to hold the variable at its target level, but as number of variables increase the maths can get complicated.
Beyond that, economics is largely an aggregated statistical discipline, to get to individual behaviour, research in scientific psychology.
Posted by: RNB | March 15th, 2008 at 7:10 pm | Report this commentMoments of truth can not exist without first being preceded by moments of honesty. People as they are, will not normally choose to be honest without first being encouraged. Economically speaking, people are honest when the cost of dishonesty is too high.
At the most basic level, honesty required that words be defined correctly. The concept of ‘inflation’ is one such word that is commonly defined incorrectly and inaccurately. People who should know better usually defer to the ‘one size fits all definition’, and then proceed to assume that one cure fits all inflation.
If educated people were honest, they would differentiate between supply and demand based inflation vs inflation created by excessive money. Then money would properly be defined as currency, credit, or both. Then the concepts of controllable and uncontrollable would enter the picture. It’s easier to claim that asset bubbles are often uncontrollable and ‘impossible to recognize with accuracy’ until after the fact, then deal with the sources and uses of excessive leveraged credit prior to the eventual destructive pop.
It’s easer to aim low and pick the bottom fruit. Honesty is not a requirement if it results in disruption of thinking, policy, and ‘what everybody knows’.
Posted by: cinefoz | March 16th, 2008 at 4:29 pm | Report this comment