Thursday, April 16, 2015

What did I miss?

I'm back from my (too short) vacation.

I. More links!

Tom Hickey discusses one of my posts and has a good analogy:
The analogy of the "scissors" of supply and demand can be called upon to summarize [markets] albeit simplistically. As long as each blade is functioning as it should, e.g., sharp enough to do the work, and the scissors is working correctly as a system, with the blades operating in alignment, the mechanism cuts as it should. However, if one of the blades is not functioning as it should, .e.g., is dull, or the scissors is out of alignment, e.g., the fulcrum screw loosens, then the scissors no longer operates correctly and the cuts are either off or done happen at all, that is, the system fails.
The discussion in the comments is also very worthwhile (I added to it a bit), and illustrates the fact that there is no natural constituency to embrace (or in some cases even look at) the information transfer/information equilibrium framework in economics ... I'll go into more detail in a new post.

II. Linear models!

Paul Krugman has a post about linear models
nonlinear modeling all too easily turns into a game with no rules

I'd add that a lot of things turn macro into a game with no rules, including expectations and ad hoc microfoundations with representative agents. Part of the reason I started on this blog was to create a framework to help eliminate possibilities!

One of the articles that sparked Krugman's post is this one by Wolfgang Münchau, which I commented on, but am having trouble seeing the replies that I received on FT ... anyway, Münchau says:

The second is linearity — the idea of a straight-line relationship between events. Standard macroeconomic models are complex, and their system of equations is linear. But if you want to understand why the economy did well before 2007, why there was a break in 2008 and why the path of economic output never returned to its previous trajectory, one would require models that incorporate the notion of non-linearity, and even chaos.

The complexity of macroeconomics is frequently presented without proof. Simply because we know that an economy is made up of millions of complicated pieces (humans, firms, etc) and there hasn't been a linear model that's been unequivocally declared successful doesn't mean that macroeconomics is complex.

Here, for example, I've put together a linear model that describes this lack of return to the pre-2007 path without chaos. Just because you can't think of the linear model doesn't mean it doesn't exist!

In general, though, the problem with nonlinear models is that there isn't enough data to eliminate nonlinear models. Macro data is only a little bit informative for simple linear models -- anything more is like string theory: models without data to prove or disprove them.

I did like this follow up letter from Michael Kuczynski:
Macroeconomics is about economic systems moving around to live within their relatively fluid accounting constraints: the physics of gases may be a better starting point than rarefied requirements in mathematical proof.
III. Groupthink!

This is terrible news for dither.

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