Econ Geeks

[earcutter]

Any econ geeks out there?

I just finished an undergrad degree in econ and finance. Then went ahead and got a masters (though most of my masters was in managerial econ). The whole time they were ramming Keynesian economics at me, I always felt a bit uneasy. What the models showed, and what really was happening in the "real world" just didn't quite match. I came to believe the models were way to simplistic.

Then I started to study some heterodox economics (anything non-Keynesian in America anyway lol). It was fascinating, but the models were understandably simple as well.

Anyway!! TODAY is an exciting day! Today the IMF has come out with a paper that basically says taxing is good, as is redistribution!!

Here is a glimpse as to what i am talking about: IMF Paper Says Redistribution Is Good For Growth - Business Insider I am totally stoked!

I love the closing line of the story - ""Inequality and unsustainable growth may be two sides of the same coin."

Anyone have any thoughts??

[gugi]

I have some thoughts, but I usually do

My first thought is, where is the actual report? When I see something sensationalized and dumbed down to the level of that business insider article, all kinds of red flags go off.

My second thought is - why do you think the models are simple? In my view simple models are far better than complex models. The only problem with models is when people do not understand a model, particularly its applicability and limitations.

Here's an example from 'hard science'. You can model how a car moves along the road using newtonian mechanics. If, however, you want to use a GPS in said car to a precision of say 10m you need go go far beyond newtonian mechanics and consider special relativity, for precision 1cm you need to go even further into general relativity.
If you want the size of that GPS unit to be 10cm, instead of 1m you need to understand and use quantum mechanics.
However you are designing the transmission, the engine, the chassis, the suspension, etc. of that car, taking into account quantum and relativistic effects will be your pink slip.

BTW Einstein (of special and general relativity fame, and nobel prize for quantum mechanics) is just 4 years older than Keynes.

[earcutter]

The story is a bit misleading and I might have gotten a little too excited - you were right! But seriously, thanks for posting!!


Here it is in its entirety: http://www.imf.org/external/pubs/ft/...14/sdn1402.pdf


Ok, so as for basic models being useless - clearly not in all disciplines, and in many cases I would agree that keeping it simple is a good thing. However, when getting into economic models, simple is way too straightforward.

I mean all I ever hear here in KS is that everyone wants smaller government. "Were we to have less government, we would be more wealthy." And they are working at it!

On the surface that is very true. Less gov = less tax (to a degree). You don't even need a model to understand that - its intuitive. What's not intuitive is that large government is a function of civilization. The more people, the more specialized we all get, the more gov we need to look out for us. Regulation, as expensive as it is, reduces many negative externalitys that on the surface, one might not grasp intuitively. Hence, I was really excited about this story because I thought they might actually be starting to use "larger" computer software to actually model some of those things that aren't "intuitive" but measurable all the same. Because in my world - they are just as important.

Anyway, back to the point - take econ 101 models that show how regulation stifles growth. On its face, sure it does. The cost of doing business goes up when you have government body's (or any body you pay into) regulating. But what those simple models don't show is how much those regulators produce in terms of negating negative externalitys.

Personally - when I hear people going off about how they want less and less government and how they want to pay less tax, I always ask, "And do you expect to inspect all your food? Do you intend to go over to the nuclear power plant and make sure they aren't throwing hard water into the lake where you fish?" A more efficient government is a different story.

Of course those are simple examples - I am sure you get how complex a model would need to be in order to truly understand the benefits of wage distribution and taxes.

[gugi]

Yeah, just looked at the actual report to find out what it's really about and basically it looks at correlations in equality and growth across many countries and policies. They've improved in the usual problem that there isn't a uniform measure to compare, so you have to basically extrapolate the available data in order to have some degree of transferability.
They seem to be doing a pretty good job, which isn't surprising; I don't know what you guys do in econ classes, but if it were up to me I'll have the students review a recent research paper. I mean it's important to learn the basic tools and models, but at the end of the day there's gotta be a reality check on what the students have actually learned, can they use those tools, can they even comprehend the matter...

Anyways, this talking point about 'small government' is just a bad model - it is obviously wrong because it implies that 'no government' is best and as we know from history there is no successful society without a government. I think the problem on that one is that the republican party went for the short term benefits of a lie because it's much easier to 'win'.
The real question is what is the appropriate role of government, but that's hard because it involves making rational arguments and thinking. Some years ago they decided to swing towards hard populism and anti-intellectualism and that's where it went wrong. It's easy to make slogans about founding fathers, amendments to the constitution, etc. and pays well at least in the short term.

The thing though is that at the end of the day being smart pays much better than being dumb. Sooner or later all those people who are voting for the politician with the easiest to repeat slogan will end up much poorer than they started and that ain't no fun.

[earcutter]

I am feeling a little disgruntled today, so with respect to your assumption that smart pays more than dumb, and hence the smart will inherit the earth lol... all I can say is, God I hope you are right lol !

With respect to what is the appropriate role of government - short of the extremists, who in my opinion have no clue, I think that should be explored - and often. I think people on both the right and left would come to see they basically want the same things .

[gugi]

See, you spent a nice chunk betting on it, so I have no doubts you want me to be right
You won't inherit the earth though - to be among the chosen few you need a degree of ruthlessness that I don't think you have, and you've got a late start. You're probably good for a small plot in flyover country, but it's still a far better deal than the ones who didn't put a downpayment and get to work that plot for you

[earcutter]

See, you spent a nice chunk betting on it, so I have no doubts you want me to be right
You won't inherit the earth though - to be among the chosen few you need a degree of ruthlessness that I don't think you have, and you've got a late start. You're probably good for a small plot in flyover country, but it's still a far better deal than the ones who didn't put a downpayment and get to work that plot for you

LOL - you kill me Gugi! That's hilarious!! .

You are... of course, 100% right. Expletive, expletive!! .

[thebigspendur]

I've always thought those advanced Economic Models are purely theoretical exercises with little applicability to the real world. So they play with the theories so they seem to fit the real world. In many ways it's like Meteorology which is also a theoretical science and they use these models to predict the weather with varying degrees of success.

[Jimbo]

These macro economic models they teach at undergrad level are usually deterministic, and they assume "rational" behavior (almost, but not quite, the same as the layman definition of the word rational). And when I did my economics degree they made a lot of use of the phrase "ceteris paribus" . And lest we forget "perfect information" etc. Put it all together and it's no wonder they don't reflect reality much, except at the most generalised level. But then, that's half the point of undergrad degrees.

The really interesting, and more realistic, stuff happens when you start using stochastic models. Furthermore, I'm a firm believer that certain parts of economics (for example stock markets) are more psychology than economics. Models based on game theory are also very interesting.

But yes, as gugi points out a model is simply a tool to aid understanding. They're just a set of assumptions, sometimes represented mathematically, sometimes not. Jigging the assumptions is what wins you Nobel prizes, or at least if they're lucky and can get funding, keeps academics off the streets.

James