Thursday, September 29, 2011

prediction in economics

a philosopher has a conversation with Russ Roberts, on Econtalk, where he discuss the achievements and limitations of economics.

While praising economics for its departure in the last 3 decades toward more realistic assumptions and more empirical attention, he claims that economics is not yet a science because it lacks predictive power. By predictive power, he means one ought to be able to forecast the effects of a change in policy. Although this was attempted in the 1950s - by finding out exactly what a demand curve's parameters are - it was a flop.

My position is that the predictive power of any theory derives from how good the theory is, this point is noted by philosopher sahab. The other point of note is that no where do they talk about the new institutional economics, which offers a very powerful alternate.

To be clear, there are two kinds of new institutional economics, one deals with macro-level institutions (property, policy, regulation) this has Douglass North as its master and chief. The other deals with micro-level institutions (contract, transactions) this has Oliver Williamson as its headmaster.

One often neglected component of the Williamson type of institutional economics is the abandonment of the price-quantity framework. Williamson notes this in his Nobel prize lecture where he quotes Herbert Simon:

"In the physical sciences, when errors of measurement and other noise are found to be
of the same order of magnitude as the phenomena under study, the response is not to
try to squeeze more information out of the data by statistical means; it is instead to find
techniques for observing the phenomena at a higher level of resolution. The corresponding
strategy for economics is obvious: to secure new kinds of data at the micro level."

Observing economic phenomenon from the contract level is a genuinely different approach as it observes the same process through a higher level of resolution (this is not the same thing as observing the process in a more disaggregated manner). Fitting demand curves turns out to give poor predictions perhaps because demand curves are not the most appropriate tool.

So, before we judge whether or not economics can predict anything, we must first agree on what is the appropriate way to analyze economic behavior. That neither the host nor the guest on the show mention the idea in the above paragraphs indicates the some of the lessons of the new institutional economics haven't sunk in. But they are not alone. Even the eminent Samuel Bowles and Herbert Gintis in a 2004 article in the Quarterly Journal of Economics, one of the top journals to publish in, claim that the price-quantity framework is what is so wonderful and great about economics. No sirs, not quite.

For further support of this notion (that new institutional economics isn't as mainstream as it is thought to be), consider the following points

Paul Joskow claims that the reason electricity deregulation has proven to be a failure in the US is not understanding the lessons of the new institutional economics. If one of the leading lights (ha ha) in the business admits to this what hope has the ordinary economist.

Being in an agriculture and resource program, I have never once heard of Steven Cheung's outrageously brilliant 1983 paper on the notion of an externality. Cheung claims externalities are present in each and every transaction, there is nothing special about them, all trade is conducted to minimize (or maximize) the impact of "externalities". So all the policy and talk and publishing activity is misled by incorrect thinking. This is not to say that the "best" policy in any case will necessarily be different than one suggested by conventional thinking, but it works the wrong way, and so it is more likely to suggest incorrect policies than correct ones. If you live in the circles that most resource economists do, these statements contain the capacity to completely overturn the field. Yet, not a whisper of this to be found in the usual first or second year courses.

Tuesday, September 20, 2011

why are people always smiling in photographs

when they don't keep smiling in real life

if you see someone walking around with a smile on his or her face you either think the person is insane or laughing at you

but when we take photographs everyone is always smiling. what gives?

photographs would be much more interesting if there was genuine emotion instead of isko facebook par lagana hain.

grow up people. after all despite bollywood we don't break into dancing and singing when a definite turn in life's road is reached. if we can resist that, what is facebook? unite, we have nothing to lose but our smiles. scowl more. it will make you look older but you deserve it. what are you, a model or what.

Monday, September 19, 2011

*Indeed*

the next academic to use the word "indeed" in writing or presentation should be shot.

you're just being a smart ass, and knowing you can get away with it, because you have some clever little argument to prove your point.

stop it. if you're so smart, why aren't you rich.

Saturday, September 17, 2011

rant rant roar!

It's always a little funny, the things we take for granted, the things we don't, all the things that some say are beautiful, and you know you're thinking

"that bugger, always talking about something being beautiful, doesnt he know he cheapens the word by using it like that...and bloody I just want a beer, even this pale watery stuff in a plastic glass, not a lecture on the psychological inconsistencies of the english language, it's a friday come on I've been at that damn dataset the whole day"

all the pretty little flaws of the people around us, all that poetic talk of mystic meaning, you can all take a walk, i'm tired of all this over thinking, of trying to be clever why cannot people just be themselves. life would be easier wouldn't it. and then some smart ass says

"that guy, wow, he's so honest, I mean, he's got problems, but who doesn't. He could grow up a bit he's quite a child actually he is a child."

jeez, all I wanted was a beer! and a comfortable pre-midnight talk and off to bed and dream dreams no one else can see like what Bryan Adams said. and get up fix a strong cup of tea and toast and oatmeal and engage in pleasing, involving scholarly conduct. instead I get a debate or a lecture, my word, what efforts we put into friday evenings.

so anyway, I need to go, time and tide wait for no man etc.