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Mio Since: Jan, 2001
#1176: Oct 1st 2014 at 7:45:32 AM

Realistically, macro models should be built upon micro ones.

Umm, why?

There is a reason the Fallacy of Composition, and by extension the Paradox of Thrift exist. You could demonstrate at Micro level why certain things make for good decisions, but that does not necessarily translate in aggregate.

This is not really a thing to be solved so much as it's just a fact of the profession. Just like the Relativity/ Quantum split in Physics.

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#1177: Oct 1st 2014 at 7:59:46 AM

What makes for good individual decisions does not necessarily make for good decisions when applied to the economy as a whole. As noted, the Paradox of Thrift states that, while it may be rational for individuals to save in a recession, when everyone saves at the same time, the economy gets worse. An agent capable of enacting aggregate remedies is needed in these situations.

edited 1st Oct '14 8:00:21 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
demarquis (4 Score & 7 Years Ago)
#1178: Oct 1st 2014 at 10:58:47 AM

It's critical, because to achieve the level of predictive precision that I think is necessary, a model has to include the same features that drive change in the real world setting it is attempting to model. In reality, people do not behave statistically. A real economy is millions of people making decisions which affect each other. If you want one day to be able to predict how many cars a car company will sell at a certain price over a given period of time, we need to get there.

And just to re-iterate, I'm not saying economics is unscientific or should be ignored. I'm saying public figures get away with promoting lies and fallacies because the real data we have is ambiguous enough that they can get away with it.

Now you might argue that this simply cant be done, or that doing it is not worth the effort, but that's a different issue than believing that we already have that level of detail in our empirical models when we dont.

I'm done trying to sound smart. "Clear" is the new smart.
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#1179: Oct 1st 2014 at 11:04:44 AM

Krugman would say that the decisions made by individual consumers when purchasing cars are not necessarily indicative of the performance of the whole automobile industry. The fact is that people need to buy cars. Whether they prefer small or large, domestic or import, gas or electric, matters in many ways but does not change the basic economic picture.

edited 1st Oct '14 12:05:00 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
demarquis (4 Score & 7 Years Ago)
#1180: Oct 1st 2014 at 2:23:26 PM

I'm not certain that makes sense. The individual buying decisions of consumers is the performance of the company or the industry. What else does it consist of? And how else would you predict them except by knowing what factors are causing those decisions?

edited 1st Oct '14 2:23:53 PM by demarquis

I'm done trying to sound smart. "Clear" is the new smart.
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#1181: Oct 1st 2014 at 2:44:31 PM

To illustrate the answer to that question, it is necessary to ask another question: Why was the government bailout of Ford and GM the correct action, even though rational market theory would suggest that those two automakers should have been allowed to go bankrupt and been liquidated?

edited 1st Oct '14 2:44:44 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
demarquis (4 Score & 7 Years Ago)
#1182: Oct 1st 2014 at 4:19:17 PM

I dont think that question is a good illustration, mainly because what decision is "correct" depends on what our goals are, which are mostly determined by subjective values rather than strictly economic considerations. A better question is how accurately and were we able to predict all the economic consequences of the bailout? Did we know how many cars they would sell in the next two years, for example?

edited 1st Oct '14 4:19:51 PM by demarquis

I'm done trying to sound smart. "Clear" is the new smart.
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#1183: Oct 2nd 2014 at 12:26:37 PM

I don't think that any predictions were made of the precise volume of sales, at least not when discussing the effects of the bailout. Consumers would continue to buy cars whether GM and Ford died or not. While their individual choices would be affected by the loss of new domestic brand makes, they'd still make purchases. The concerns were the immediate effects of the mass layoffs, the downstream consequences to the vast array of businesses that rely on supplying materials to GM and Ford, and the subsequent loss of aggregate demand.

Had those businesses all disappeared, the cumulative job losses would have been a serious shock to an already depressed economy. Losing those companies would also have had the effect of reducing total car purchases because of the loss of income to consumers.

None of these concepts are encompassed by microfoundations. In micro, the consumer simply makes another choice from a reduced menu, and in theory other manufacturers may step in to fill the void, presumably by offering a more competitive product. The idea that aggregate purchasing power would be reduced is utterly absent from these models.

edited 2nd Oct '14 12:30:15 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
Greenmantle V from Greater Wessex, Britannia Since: Feb, 2010 Relationship Status: Hiding
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#1184: Oct 2nd 2014 at 1:25:38 PM

[up] Fighteer, the effect would be worldwide — remember Ford and GM make and sell cars all over the world, a fair proportion of which never see the US.

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#1185: Oct 2nd 2014 at 2:07:49 PM

Well, of course. I'm not trying to exclude those effects, which wouldn't be on the consumer side (as noted, consumers can always choose to buy other cars) so much as they would be in the form of plant closures wherever GM or Ford had local manufacturing. There would also be losses in dealers and distributors, which would in turn depress overall demand via the mechanism of lost income.

Edit: The effects on other countries would also be offset somewhat by an increase in their own auto manufacturing sectors, partly to fill the gap in domestic supply and partly to increase exports to the U.S., which would become completely reliant on foreign brand cars. These boosts would themselves be offset by reduced demand from the U.S. due to its worsened economic state.

It's hard to figure out the competing effects without access to more detailed data. But all of this is straightforward Keynesian macro that you could get from a textbook, and is nowhere to be found in a neoclassical or Austrian classroom.

Edit 2: As Krugman notes today, the opposing viewpoints have all the hallmarks of bad-faith argumentation. They advance a position, then when that position turns out to have been wrong, refuse to admit it or change their opinions.

edited 2nd Oct '14 3:28:01 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
demarquis (4 Score & 7 Years Ago)
#1186: Oct 2nd 2014 at 6:41:18 PM

Fighteer, listen to yourself. You just advanced an argument against the bailout. If consumers will simply buy the same number of cars from another company, then those companies will hire new employees and there is no reason to bail anyone out. The problem with that argument is that it's not true- there are other factors in play besides pure supply and demand, including the fact that laid off employees dont buy cars. But where is the model that quantifies all these effects?

I'm done trying to sound smart. "Clear" is the new smart.
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#1187: Oct 2nd 2014 at 7:26:55 PM

You aren't reading what I wrote very carefully. I said that the classical/neoclassical view is that consumers will buy products from a competitor and nothing fundamental will change. The Keynesian point of view is that the failures of all of these businesses will have a depressing effect on the economy, reducing the overall ability of consumers to buy cars (or anything else).

You insist that macro must be able to be constructed from micro, but nowhere in micro is that latter relationship expressed.

edited 2nd Oct '14 7:27:22 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
demarquis (4 Score & 7 Years Ago)
#1188: Oct 4th 2014 at 7:12:11 AM

That's what I was saying. We are in agreement regarding the difference between Classical and Keynesian predictions. As for micro, cars are bought by individuals, not populations. If Keynesian economics is correct (and I agree it is) then the reason is because it is successfully modeling individual consumer behavior. It's just not doing it at a level of detail that will finally exclude competing explanations.

I'm done trying to sound smart. "Clear" is the new smart.
storyyeller More like giant cherries from Appleloosa Since: Jan, 2001 Relationship Status: RelationshipOutOfBoundsException: 1
More like giant cherries
#1189: Oct 4th 2014 at 11:55:29 PM

Think about it this way:

Biology is in theory just applied chemistry, and chemistry is in theory just applied quantum physics. But they are completely different fields. A quantum physicist who went to the biologists and told them all that they're doing it wrong because their theories don't have rigorous physic underpinnings would rightly be considered insane.

  • Of course I'm simplifying a bit since in science, there's always multidisciplinary work. But the main point is that aggregation often leads to properties at scale which are sufficiently different from the underlying behavior that they need to be studied independently.

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Ramidel Since: Jan, 2001
#1190: Oct 5th 2014 at 12:33:52 AM

[up][up]You're right. Keynesian economics has some fuzzy spots. The reason it is the superior model to the neoclassical one is because it is a better predictor of results than anything else we've got by a wide margin.

That uncertainty you mention is a problem in a lot of areas once politics gets involved. There's also a tiny but nonzero chance that global warming has absolutely nothing to do with human activity and everything we're seeing is just a huge coincidence. That infinitesimal nonzero uncertainty drives a whole lot of "teach the controversy." Same with economics, except that there the equivalent of denialism is a recognized orthodoxy.

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#1191: Oct 5th 2014 at 1:22:11 AM

Also, such uncertainty can drive simple wrong decision-making. Vested interests aren't everything.

"For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled." - Richard Feynman
Greenmantle V from Greater Wessex, Britannia Since: Feb, 2010 Relationship Status: Hiding
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#1192: Oct 5th 2014 at 1:24:38 AM

[up] That's a factor at both the micro- and macro- scale — with a lack of complete information (and innumerable other factors), wrong decisions are going to happen. Keynesianism can't also predict the weather, a tsunami, an earthquake or a terrorist attack, or indeed everything that may effect an economy.

edited 5th Oct '14 1:28:22 AM by Greenmantle

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Ramidel Since: Jan, 2001
#1193: Oct 5th 2014 at 2:22:01 AM

[up][up]That's true, yes. The main gripe we Dirty Communists have with the neoclassicists, Austrians and climate change deniers is when said uncertainty is turned into a weapon to discredit science.

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#1194: Oct 5th 2014 at 6:44:13 AM

It's what happens when people latch on to "99% certain" and start picking away at that remaining 1% like a small child trying to get his way. "But what if ...?" "That's stupid." "But what if ...?" "I already told you that's stupid." "But what if ...?" "Shut up, kid."

edited 5th Oct '14 6:44:26 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"
Discar Since: Jun, 2009
#1195: Oct 5th 2014 at 11:11:14 AM

There was that one show (I can never remember the guy's name) where three climate change deniers were brought in the debate ninety-seven supporters, led by Bill Nye. That's teaching the controversy.

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Ogodei Fuck you, Fascist sympathizers from The front lines Since: Jan, 2011
Fuck you, Fascist sympathizers
#1197: Nov 4th 2014 at 7:37:24 AM

Honestly Japan needs the crash to effect necessary legal changes, or to shift cultural norms, because yeah, there is a lot of good in them, as in other first-world countries, stymied by old legal and cultural systems that hobble them in the short run.

Greenmantle V from Greater Wessex, Britannia Since: Feb, 2010 Relationship Status: Hiding
V
#1198: Nov 4th 2014 at 7:50:19 AM

[up] You'll be lucky. Even small things take a long time to change in Japan, due to a desire for consensus, a close relationship between business, Government and the bureaucracy, and an unforgiving political culturenote .

And of course, Japan is a highly conservative culture — for example, cash machines are not open on a 24-hr basis, and cash is still used in a lot of transactions.

edited 4th Nov '14 7:52:00 AM by Greenmantle

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Fighteer Lost in Space from The Time Vortex (Time Abyss) Relationship Status: TV Tropes ruined my love life
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#1200: Nov 19th 2014 at 10:02:36 AM

One major difference between Krugman and his ideological foes is that Krugman is capable of admitting error. As far as the Euro is concerned, the reason he was wrong is that he severely underestimated the willingness of the ECB to stretch the rules to deliver monetary relief — something that the austerians rail against to this day.

edited 19th Nov '14 10:03:59 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

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