Mankiw’s 10 principles of economics

by Chris Bertram on February 28, 2008

Well, I thought it was worth passing on ….

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Economics for Dummies (i.e. Everyone) « Debris
02.28.08 at 1:17 pm

{ 41 comments }

1

karl strom 02.28.08 at 12:38 pm

This was funny. But not that funny.

2

Jimmy Doyle 02.28.08 at 1:02 pm

Was that Ted Danson?

3

ab 02.28.08 at 1:10 pm

It’s not really that funny because it’s too true.

However, it might be funnier for economists (and other social scientists) because they really believe all the original stuff.

4

stostosto 02.28.08 at 1:12 pm

I can’t decide whether it was funny, or just funny at the margin.

5

PHB 02.28.08 at 1:39 pm

Economists are irritating.

#1 Economists are the only academics that are simultaneously convinced of its own inability to predict anything with accuracy and absolutely convinced of their infallibility.

#2 Economics is the only academic field where prominence in the field is effectively decided by people outside the field with absolutely no knowledge of the quality of their work. Hayek, Friedman and co came to prominence because their ideas were politically convenient.

#3 Economists have a terrible habit of turning simplifying assumptions into axioms. Rat choice is merely a simplifying assumption that allows people to build models that sometimes work. Many economists consider it gospel truth that real people do reduce every choice to a linear one dimensional evaluation. Pareto optimal is conflated with optimal and so on.

#4 When challenged on #3 the economist accepts that this is not the case, but continues to claim it is true for the sake of argument and claims infallibility for the conclusion.

AGGHHHHHH!!!!!!

6

abb1 02.28.08 at 2:24 pm

Good point about “Blah blah blah” for 8, 9, and 10. I realize that it’s not as funny, but doesn’t “Blah blah blah” qualify for the whole set?

7

MFA 02.28.08 at 2:32 pm

When you say “…worth passing on”, do you mean like “No thanks, I’ll take a pass” or so bad it’s worth dying in order to avoid?

.

8

John Emerson 02.28.08 at 3:13 pm

Thanks, PHB. I’ve quit trolling the CT econ threads, but it’s nice to have someone else on the job.

Economists are completely disingenuous about the relationship between theoretical and applied (normative) economics, and about the limits of the field, and about the institutional economic and political power their profession has. They’ll acknowledge that econ is not a complete description of society when theoretically confronted, but act as though it is when giving policy advice. They’ll pretend that their science is pure and objective in order to preclude opposition, and then sneak in their own values when the time comes for application. And they will pretend that their profession is disinterested when when under attack, but in day to day business they’ll serve as errand-boys for finance and revel in the good things that gets them.

9

Great Zamfir 02.28.08 at 4:14 pm

When the guy claims that “people respond to incentives” is tautologic, the people in the room actually laugh.

10

asarwate 02.28.08 at 4:24 pm

I don’t think that theoretical economics is all bad — you want to develop some sort of model that has some sort of predictive power, e.g. that explains the data. So you make a model that makes (ridiculous) assumptions and then show that it has some implications. The part that is (often?) missing is comparing it against data and then retweaking the model to make it less ridiculous. Perhaps the application is flawed but is the process?

But if you throw out the modeling, you’re left with a pissing match based on handwaving about why you get some outcome. At least that’s what happened when I was suckered into arguing with a Von Mises guy.

Also, a lot of mathematical economics shows up in engineering systems, in which you can sort of enforce rational behavior via hardware/software.

11

Lester Hunt 02.28.08 at 4:40 pm

An incentive is not the same thing as a motive. It is a motive created by one’s social environment. But not just any such motive. A sermon is not an incentive. The threat of Hell is an incentive. Not tautological. And not funny.

12

Great Zamfir 02.28.08 at 4:52 pm

How is a sermon a motive at all?

As long as economists use ‘incentive’ to mean ‘more money’, or something with clear monetary value, it’s a useful statement, and a falsifiable one. But for situation where it is falified, they do have a tendency to redefine ‘incentive’ until it means no more than ‘the reason why someone does something’.

13

abb1 02.28.08 at 5:21 pm

I think “people respond to incentives” is meaningless, if not tautological. If people don’t respond, if it doesn’t incite, how is an incentive? People eat food. People drink drinks. People speak words.

14

notsneaky 02.28.08 at 6:16 pm

Yeah it should be “people respond to incentives in a consistent manner” – i.e. they’re rational, or boundedly rational or behavioral or whatever. It just means that there is something there to be studied in human behavior. It also means that the “economic problem” isn’t a purely engineering problem.

And as an off-hand statement it is a useful reminder to be aware of the possibility of unintended consequences and counter intuitive outcomes

15

tom bach 02.28.08 at 7:51 pm

“A sermon is not an incentive. The threat of Hell is an incentive. Not tautological. And not funny.”

If I go to a church with two pastors each of whom gives a sermon on Sunday one early and one late, and if one pastor gives a better sermon than the other even though it is the early one. Isn’t the better sermon an incentive to go to the early service? Depending on one’s religious orientation, Calvinist for example, Hell is either inevitable or it isn’t. If it wasn’t funny, why was everyone laughing? Not that I think humor ought to be determined democratically or anything.

16

Randy Paul 02.29.08 at 1:46 am

Thanks to Yoram Bauman for making the dismal science a lot less dismal – even if only briefly.

17

PHB 02.29.08 at 1:54 am

I get rather tired of economist’s arguments of the form ‘the free market has feedback, therefore it will reach a desirable equilibrium’.

Lets leave aside the fact that we can come to reasonable disagreements as to whether an outcome is ‘desirable’. The fact that feedback is present does not guarantee equilibrium and this was known long before economists started to base their arguments on math.

Modern economics has its origins in the work of Victorian engineers who discovered control engineering in the process of working out why their steam engines started blowing up when they tried to make their designs bigger.

The problem was that feedback can be stable or unstable. If you have a system with a delay in the feedback loop and you start cranking up the gain you will eventually reach an unstable point. That is what happened at Chernobyl.

Adding delays to the models makes them ugly and would require the economists to actually spend time measuring messy real world systems. It also makes it harder for charlatans like Friedman to claim that the only reason their theories are not working in practice is that people don’t have enough blind faith in them.

So all the stuff about ‘imperfect markets’ that Krugman keeps trumpeting as the latest word from the field was well known a century ago. It was just ignored as inconvenient.

18

Walt 02.29.08 at 3:46 am

There’s a certain argument that always comes up on these threads, and it annoys me every time. It’s the “we lofty engineers have this concept called feedback, you should learn about it”. Every single engineer in the history of the world, when they think about the economy, it makes them think of feedback, and a significant fraction think this has never occurred to economists ever, and that every single economist in the world knows less about dynamical systems than every engineer.

PHB, economists tried _exactly_ what you suggested throughout the 50s and the 60s. And guess what? It didn’t work. Do you know why? Because people are not like steam engines. People don’t follow mechanical feedback rules. Unlike steam flowing through a pipe, people can notice the rules of the system them are in, and can react to them.

Economics is worthy of criticism (which is why I read these kinds of threads), but if I have to listen to one more pompous engineer explain the concept of “feedback”, I’m going to go out of my mind.

19

derrida derider 02.29.08 at 3:54 am

I’m no friend of monetarism and I have my reservations about the way economics is used (Friedman’s saw about economists being least politically influential where they are most agreed and certain and most politically influential where they are least agreed and least certain is true), but phb is so ignorant he doesn’t even realise he’s ignorant.

Monetarism became popular only after Keynesian models failed to fit the empirical facts at the time, whereas monetarist ones did. Of course, Goodhart’s Law (google it, phb) meant that monetarism quickly failed when used as a policy principle too. But the upshot is that, ever since the Lucas Critique (a direct response to monetarism’s failures BTW), optimal control theory is at the core of modern macroeconomics.

phb is right that many, many things in economics were (and are) informally known long prior to their mathematisation and formal testing, but as an engineer he should know that “knowing” in this sense is of limited use. Everyone knows that if you make a steel suspension cable too long it eventually snaps under its own weight, but we needed to both mathematise and test this before we could build the Golden Gate bridge. Paul Krugman has an excellent post (one of the best he’s done) here on just this topic.

20

derrida derider 02.29.08 at 4:16 am

To reconcile the two answers above, phb, wherever I’ve mentioned “Goodhart’s Law” and “Lucas critique” (the things that ended mechanistic Keynesian and monetarist models alike), just reread the last sentence of walt’s second paragraph.

21

Robert 02.29.08 at 12:45 pm

Engineers have reasons for applying the optimal control theory of linear systems to their systems. One of the many reasons that macroeconomics after Lucas is nonsense is the unjustified assumption of linearity. But economists are applying feedback.

It would be incorrect to say that monetarism became popular after Keynes’ theory failed. (Notice the distinction between “Keynes’ theory” and, in 20., “Keynesian model”.) Kahn, Kaldor, and Robinson had developed theories of stagflation by the late 1950s/early 1960s.

22

PHB 02.29.08 at 1:27 pm

The fact that the economists in the thread cannot respond to the argument without cheap abuse is almost as unfortunate as their inability to comprehend the argument made.

Claiming that your opponents are stupid or ignorant is a somewhat interesting choice of argument to make when they are in essence pointing out that the emperor has no clothes.

My point was pretty clear: FEEDBACK IS NOT SUFFICIENT TO ENSURE STABILITY IN A MECHANICAL SYSTEM.

I thought it was fairly obvious that if the simplistic argument does not apply to mechanical systems they are unlikely to apply to social systems.

I did reference Charlatan Friedman’s theory of rational expectations, I think its horse puckey. The best conclusion that could be drawn from the theory is that it is impossible for economists to know what they are talking about. Come to think of it, that is one theoretical claim in this thread that we do appear to have strong empirical evidence for. But instead Charlatan Friedman managed to claim with a straight face that the reason his theories were not predicting the economy was that the markets were insufficiently convinced that his ideas would be applied.

I do not dispute the difficulty or complexity of economic problems, merely the ability of anyone to make infallible statements about them.

To borrow the economic mode of argument:

I[E] < P^(X/R)

The meaning and significance of which should be obvious.

23

Walt 02.29.08 at 3:05 pm

PHB: a) I am not an economist. c) Your every single comment has been insulting. I really don’t mind, but it’s a bit much to then complain about insults directed your way. c) Your argument in comment 18 is simply wrong on the facts. Economists have used with delays since at least the 50s. The existence of delays is the preferred method for describing the existence of the business cycle.

I’m happy to read a critique of economics. I don’t think much of rational expectations myself. But your critique is simply wrong on the facts of what economists do. Plus, it’s chock full of “I know, I’m an engineer”, which seems to go along with this particular wrong critique.

Also, minor point, but “rational expectations” is not by Friedman, though he did use expectations-based arguments. My impression is that he was actually somewhat skeptical.

24

PHB 02.29.08 at 4:24 pm

Walt, excuse me, but where exactly did I make any personal comment that was directed against another person in the thread?

My original complaint was essentially that quite a few economists are incapable of holding a discussion without resorting to bullying tactics.

Accusing people of disagreeing with you out of ignorance is a bullying tactic. You should stop it.

If you actually read #18 you would find that it is directed at a particular form of argument that is certainly advanced by certain individuals who purport to be economists. If nobody made the argument, there would be no need for Krugman et al. to debunk it.

Of course most economists understood that markets were imperfect in the 1950s. Why would anyone expect that they would be otherwise? It is pretty clear that Krugman promotes the ‘imperfect markets’ school because it is rather easier to persuade people that the Chicago school has been superseded as opposed to mistaken. But he also points out that there was good reason to believe that they were wrong from the start.

25

notsneaky 02.29.08 at 5:02 pm

Friedman was an Adaptive Expectations guy, pretty much. E(pi(t))=pi(t-1).

26

Walt 02.29.08 at 5:17 pm

PHB, let me draw your attention to “Economists are irritating” and “Adding delays to the models makes them ugly and would require the economists to actually spend time measuring messy real world systems. It also makes it harder for charlatans like Friedman to claim that the only reason their theories are not working in practice is that people don’t have enough blind faith in them.” So economists are irritating, they don’t like the real world, and one of their most famous practitioners is a charlatan. I was exactly as insulting about engineers as you were about economists, so stuff it with your complaints about civility. Be politer next time if you want a polite response.

27

PHB 02.29.08 at 9:19 pm

walt,

As you keep resorting to personal abuse, let me give you some in return.

The phrase ‘economists are irritating’ is abuse, but not personal abuse. Such statements are entirely acceptable in polite conversation, particularly in a thread making fun at the expense of economists.

The statement ‘walt is an ignorant git’ on the other hand is personal abuse. Or rather would be personal abuse if it did not appear to be true.

And yes, Friedman was a charlatan and a humbug. Like many on the right he talked such a good game about ‘freedom’ when he was not sucking off the teat of the dictators like Pinochet who actually made his career.

The friends and allies of blood soaked dictators are fair game for being called much worse. He was an evil, evil man.

28

notsneaky 02.29.08 at 9:27 pm

Ay ay ay.

29

Walt 02.29.08 at 11:33 pm

PHB, I spoke in the exact same generalities about engineers that you did about economists. You are a thin-skinned person who likes to dish out abuse, but can’t take it. It’s not a rare trait, but you shouldn’t be surprised when people reply in kind.

30

Walt 02.29.08 at 11:35 pm

Actually, looking over your reply, PHB, it’s striking how completely you go pieces in the face of opposition. I was actually going to ask you some follow-up questions about your comment in 25, but you are clearly too emotional produce much in reply.

31

PHB 02.29.08 at 11:51 pm

Walt, I think it is you who is showing the thin skin here. I made comments about economists, you responded with a personal attack. Then when I point out that people who resort to name calling tend not to have the best arguments you pretend that it was your attack on engineers that was offensive.

Then two minutes later you decide to have another go. Hardly a sign that you are confident in the argument you are making. Two posts in a row without making any substantive points. You object to me describing Friedman as a Charlatan and then make no response when I point out that he made his career working for dictators.

Looks like you are guilty of a bit of projection here to me.

32

notsneaky 03.01.08 at 2:30 am

(Ay ay ay)^2

33

Scott Hughes 03.01.08 at 2:53 am

The video a funny video but in a very silly sort of way. :)

Economics is fun to make fun of.

34

Walt 03.01.08 at 3:00 am

Okay, I don’t know what you were insulted by, if it wasn’t the remarks about engineers.

35

abb1 03.01.08 at 12:48 pm

You, engineers-hating bastards. You, charlatans. We’ll getcha, we’re everywhere.

36

Xboy 03.01.08 at 9:42 pm

Economics is not a science. It’s obviously not a physical science, though economists flatter themselves by talking about their own objectivity, mathematical rigor, and predictive value. It’s not a social science either, since ecomomists pay as little attention as possible to real inter-actions among people, preferring to make extrapolations from statistics which are already extrapolations.
Economics is simply the art of rationalizing whatever our rulers want to do to us. Ever since Reagan was elected president, economists have been
telling us that lowering taxes will increase revenues, that raising the minimum wage will increase inflation, that globalization is a good thing for everybody, and that deficit spending is disastrous (except when W went to war, when they prudently fell silent). This is exactly what bankers, investors, and corporate executives want to hear. Economists aren’t really concerned when the facts don’t bear out their theories, because the theories themslves are so beautifully consistent, and because the theories are just window dressing to disguise what is really going on.
Shakespeare was wrong. The first thing to do is kill all the economists… and then the lawyers.

37

Edward Rhodes 03.02.08 at 8:48 am

After reading the above,the incentive to contribute has an opportunity cost to harmonize my decision making capabilities.

38

Walt 03.02.08 at 8:06 pm

PHB, the fact remains that you don’t know what you’re talking about, yet you adopt a condescending and superior tone. Economists use models with delays, Friedman did not invent rational expectations, etc.

Your comment about Friedman working with dictators is a non-sequitor. I am perfectly aware that he worked with dictators. Really, fuck Milton Friedman. I am not a defender of his. But the fact remains that you don’t know what you are talking about, but pretending you do. Frankly, you got off lightly.

39

Daniel Reeves 03.02.08 at 10:58 pm

I suggest that everybody somewhat take phb says with a few grains of salt for his or her own good. phb seems knowledgeable, but phb’s criticisms of economics (“economists are ideologues,” “it’s more complicated than that,” blah blah blah) are among the most common economists ever hear, and the notion that economists haven’t realized it is quite silly. Krugman, a fine economist indeed, is not the only one in the field who “gets it,” as implied from his post. phb, you’re not the only skeptic out there; you can stop patting yourself on the back, mate.

I also suggest that everybody COMPLETELY ignore xboy because he is almost entirely wrong and probably hasn’t heard anything aside from blatant propaganda and lies. Let me correct him: most economists believe that the Laffer curve is bologna in most situations (by standard economic theory, it’s right in some situations, but requires extremely elastic supply-demand and/or ridiculously high taxation), that minimum wage only slightly increases teenage unemployment (although sometimes the degree to which is exaggerated), and that some deficit spending is alright because debt means nothing when it isn’t measured as a percent of GDP but too much is obviously bad (this is obvious). All you got right was that most economists think globalization is wonderful. And when you look at the facts and start thinking a bit, it’s hard to argue that it’s bad.

40

Questioner 03.03.08 at 3:22 am

Just out of curiosity, does anyone here think that any academic economist since 1950, because of his training and not because he’s got whatever it is that makes someone untrained in economics worth listening to, has ever said anything both surprising and true?

41

Robert 03.03.08 at 9:05 am

So walt, were you wrong to say in 27 that it is insulting to call Friedman a charlatan? Do you acknowledge that that was a bullying tatic? And I don’t think phb claims that the author of a paper defining the “natural rate” of unemployment and of a model with a long-run vertical expectations-augmented Phillips curve was the inventor of “rational expectations”.

I think most Crooked Timber posters and commentators have become bored with arguing about the curious scholarly standards among academic economists. Other threads like this have had 200 comments.

I think orthodox economists have little to say about the world. (Maybe Shleifer knows something about corruption.) But it takes years of study to find out where the errors in orthodox economics lie. The motivation for this study, given how little orthodox economists have to say, is hard to fathom. I guess such motivation might lie in the institutionalized power orthodox economists have.

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