But the economy is mind-bogglingly complex and nuanced, full of billions of actors who act rationally and irrationally. Lately we have computer systems thrown into the mix that move billions of dollars around without a human decision involved.
The one thing economists can say is that people usually act in their own best interests. If there is a loophole to be found, people will find it. However smart the person coming up with the rules might be, those billions of people, due to the powers of chaos and sheer numbers, will always be smarter. You can't engineer billions of people like you would a skyscraper.
The logical conclusion here is to that simple systems that are easy to understand (and likewise easy to understand how to game) are better than complex systems that still get gamed but nobody can easily figure out why.
However there is a second camp that says that the economy is like a big science experiment: pull a rope here and see what happens over there. Sure -- things might not work as expected, but somebody has to be in charge and that's how science experiments work. After all, as you pointed out, just how difficult can it be? What do those guys do all day?
The problem is that the social engineering camp always seems to have the same problem as the laissez-faire camp -- there have been panics (recessions) for as far back as we have records. So policy doesn't seem to matter that much (or if it does, we haven't hit the magic combination yet). In fact, because of the points in the first two paragraphs here, there's good evidence that the more we muck around with the economy, the worse we actually make it. There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression -- turned something that would have taken a year or three to recover from and turned it into the biggest panic the country has ever seen.
So no, economics are chaotic, not Newtonian. the laws that apply are myriad, complex, and currently non-understandable -- and they apply at the individual rather than system level. That's why economics are so much fun (or suck so much, depending on your viewpoint.)
Hey -- if it were easy, everybody would be doing it.
"economics are chaotic, not Newtonian..." This is hugely important. First, there never will be a set of equations, that given a gazillion variables will pump out a usable long term economic forecast, but the reliance on faulty models will exacerbate the risk. Case in point: nearly all the players in the derivatives markets used the Value-at-risk model to price the riskd of their derivatives. Guess what, it was wrong, and it was so wrong that last year all the companies tanked, not just one. It was wrong because it couldn't handle the psychology of panic.
Second, the Newtonian fallacy that every effect has a direct cause, leads politicians and economists to rely on flawed models like VAR and misguided social programs where the belief is that, if you tweak the cause, the desired effect will follow.
The one thing economists can say is that people usually act in their own best interests.
Actually, it appears that things are too complex for even this to be true. They may try, but it's entirely conceivable that they don't understand what is in their best interest and what endangers their future.
I think I prefer to think of what I am pondering as Economic engineering rather than social engineering. It seems like a very faith-based discipline, rather than one that formulates hypotheses based on evidence:
There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression
But there is also emerging talk that Jimmy Carter prevented a global disaster like the one we are facing now. Neither claim is falsifiable, so not worth much mental energy to consider. Faith-based.
I think that is why I was so impressed with Greenspan's testimony before Congress where he basically said he felt like the underlying principles on which he based his understanding of the economy were incorrect (he specifically mentioned the one you did about acting in our best interest). Here was a guy in the field who was actually looking at evidence, and trying to learn. I don't know if he's correct or not, I'm no economist. I'm griping about the methods, not the principles themselves.
Second -- agreed. People act in what they perceive to be their best interests. We initially made the mistake of assuming this was what was actually in their best interests, but that seems more doubtful. (Unless acting strictly based on perception of best interests is the optimal condition. Then we're back to square one.)
Third -- agreed. It's to some degree faith-based. Climatology is faith-based as well, and for the same reasons. There are simply too many variables and the system is simply too huge and dynamic to be Newtonian. You get a bunch of smart guys, you make a bunch of models, and you take measurements, all the time having some "group consensus" that has as much to do with science as glow-in-the-dark watches have to do with nuclear propulsion.
I've slung some code for Greenspan and the FRB BOG (Board of Governors). The people there are all highly professional and tend to focus much more on facts than theories. But even then, in my opinion, there's no science going on. It's a lot of educated guesswork.
I wouldn't give up on the thought experiments such as what the Fed did during the Great Depression or what Carter might or might not have done. Thought experiments are powerful tools, and can lead to advances in science. To the degree that faith encourages creative explanations of what we don't know, it's a good thing. To the degree that it shuts out alternative answers, it's an obstacle. That's true in a lot of areas, not just economics.
>n fact, because of the points in the first two paragraphs here, there's good evidence that the more we muck around with the economy, the worse we actually make it. There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression -- turned something that would have taken a year or three to recover from and turned it into the biggest panic the country has ever seen.
That's the Austrian school of economics my friend, and in terms of "growing field" there's a lot of internet libertarians and the like that are "growing" into the field, with Ron Paul as their champion of the anti-FED.
However, amongst actual economists, the field isn't taken very seriously, because of many of its adherents semantic arguments (re-defining "inflation" outside of the standard scope, to make their argument) and its ability to ignore lots of contradicting reality. (Like, the fact that no, the Great Depression wouldn't have ended quickly, because Deficit Spending != More taxes, and our debt ratio after WWII was MULTIPLE times our GDP, and yet, our industry was booming.)
But the economy is mind-bogglingly complex and nuanced, full of billions of actors who act rationally and irrationally. Lately we have computer systems thrown into the mix that move billions of dollars around without a human decision involved.
The one thing economists can say is that people usually act in their own best interests. If there is a loophole to be found, people will find it. However smart the person coming up with the rules might be, those billions of people, due to the powers of chaos and sheer numbers, will always be smarter. You can't engineer billions of people like you would a skyscraper.
The logical conclusion here is to that simple systems that are easy to understand (and likewise easy to understand how to game) are better than complex systems that still get gamed but nobody can easily figure out why.
However there is a second camp that says that the economy is like a big science experiment: pull a rope here and see what happens over there. Sure -- things might not work as expected, but somebody has to be in charge and that's how science experiments work. After all, as you pointed out, just how difficult can it be? What do those guys do all day?
The problem is that the social engineering camp always seems to have the same problem as the laissez-faire camp -- there have been panics (recessions) for as far back as we have records. So policy doesn't seem to matter that much (or if it does, we haven't hit the magic combination yet). In fact, because of the points in the first two paragraphs here, there's good evidence that the more we muck around with the economy, the worse we actually make it. There is a large and growing faction of economists that believe that the actions of the Federal Reserve (and to some extent Hoover and FDR) made the panic of 1929 into a full-blown depression -- turned something that would have taken a year or three to recover from and turned it into the biggest panic the country has ever seen.
So no, economics are chaotic, not Newtonian. the laws that apply are myriad, complex, and currently non-understandable -- and they apply at the individual rather than system level. That's why economics are so much fun (or suck so much, depending on your viewpoint.)
Hey -- if it were easy, everybody would be doing it.