Economists Do It With Models

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Apparently There’s Competition In The Market For Ruining Economics Jokes…

September 20th, 2013 · 11 Comments
Just For Fun

At least I’m getting advance warning nowadays…

So this is what Zach came up with…

I think I spent too much time pondering whether to punch him in the face, since pretty soon I learned that I would have to wait in line:

Oh Reddit, how you are so useful and interesting in some situations and yet take yourself wayyyy too seriously in others. Don’t you know that it is my job to ruin economics jokes? (I love that the current best comment is the one that chides people for taking themselves too seriously. And no, I didn’t write it. Also, in general, the economics section of Reddit is generally a pretty good source of reading material.)

(See here for a refresher on microeconomics versus macroeconomics.)

Overall, I can see what Zach was going for here- the assumptions in many microeconomic models include perfect rationality on the part of all players, perfectly competitive markets, and so on, and these assumptions probably aren’t totally satisfied very often. When they are, though, the models are very good at predicting market behavior. The nice thing about microeconomics is that, even when the models’ assumptions aren’t precisely satisfied, the predictions of said models are still generally approximately correct.

Interestingly enough, I could say the same thing about macroeconomics up until that last sentence- if it were true, for example, that business cycles were driven by technology shocks that follow a first-order autoregressive process and that households are constantly pondering how much labor to supply in the face of a changing technological and economic landscape, then, yeah, real-business-cycle models would probably predict aggregate market behavior pretty well. (I swear that everything I mentioned in that last sentence is an actual thing.) Unfortunately, macroeconomic models tend to get absurd when their assumptions aren’t precisely satisfied- the aforementioned set of assumptions, for example, leads to a conclusion that recessions happen because people decide that it’s not worth it to work and all go on vacation.

I guess what I am saying is that I would like to see a graph that has to do with the elasticity of model correctness with respect to the reasonableness of assumptions. Also, I would like to see behavioral economics in that top-right quadrant somewhere.

Tags: Just For Fun

11 responses so far ↓

  • 1 Michael // Sep 20, 2013 at 5:41 pm

    I believe it was Yoram Bauman who said something along the lines of ‘microeconomists are wrong about specific things while macroeconomists are wrong in general.’

  • 2 john S. Harvey, Ph.D. // Sep 20, 2013 at 5:56 pm

    This fits current models. The tried and true IS-LM macro models do a pretty good job when one makes reasonable assumptions about the role of expectations.

  • 3 econgirl // Sep 20, 2013 at 6:39 pm

    @ Michael: Yoram totally stole that from P.J. O’Rourke in Eat the Rich…or, technically, perhaps it was the other way around. 🙂

  • 4 Michael // Sep 20, 2013 at 7:03 pm

    @econgirl: I did a bit of research and it is paraphrased from P.J. O’Rourke – so he deserves the credit.

    I’ll agree that behavioral may find a place in the top-right quadrant so long as evolutionary game theory finds its way there too.

  • 5 David // Sep 21, 2013 at 8:47 am

    Behavioral Econ also appears to have more predictive power at the micro level than the macro level. It hasn’t really been able to dent efficient market hypothesis because no one has been able to find any inefficiencies to trade.

  • 6 Michael // Sep 21, 2013 at 3:54 pm

    I’d argue the efficient market hypothesis is more financial than macro. Bullard and Mitra have an interesting paper on learning and the Taylor rule, where they limit the possible equilibria to a subset of those which can be “learned” by the public.

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