- 11 Sep 2018 08:33
#14945580
I'm told that the economics textbooks have not changed much for 40 years. That this is to some extent just laziness on the part of their authors. If true this is a HUGE problem. Why?
Economics claims to be a “science”. Sciences all rely on numbers and mathematics for their rigor.
The thing is there has been a revolution in mathematics in the last 40 years. Chaos Theory was discovered on one of the first personal computers. Chaos Theory is all about 2nd order equations and iterative systems [like the populations of bugs]. Chaos Theory has shown that you CAN NOT simplify the equations without destroying the insights you get from solving them. It is the study of dynamic systems.
Economics froze itself just before Chaos Theory became widely know. So, economics needed to use simplifying assumptions to be able to prove things. They didn't realize the simplifying assumptions will often destroy the insights that you get from solving the resulting simpler equations. Economics needed to assume that the economy of each nation is in equilibrium [or at least close to it]. At the time there was no way to study systems that were dynamic.
. . . Let me illustrate this with water flowing down a channel. If the channel has smooth concrete walls and the slope is not too great you get “laminar flow”. This is like equilibrium. At any given time the flowing water in front of a point is pretty much the same as at any other time. However, if the channel is full of big rocks and the slope is steep you get turbulent flow. Now, the flow is constantly changing. I can tell you from my personal experiences in engineering school in the late 60s, that then they had no theory for turbulent flow. They used empirical solutions like the Reynolds Number to approx. reality good enough to get on with designing things. Chaos Theory and computers lets us now solve the equations of turbulent flow.
When economics assumed that the US economy was in or near a state of equilibrium it necessarily made a huge mistake [to be able to get any result], because the economy is one of the most dynamic and turbulent things in reality. By refusing to change their theory economists are doing the nation a great disservice.
Obviously, Mainstream or Neo-liberal economics has made a lot of other assumptions that they also refuse to change. Like banks can only lend the money they get from their depositors (proven false by an experiment 4 years ago), like their model can ignore the effects of private borrowing as a result of that, like Gov. selling bonds to deficit spend crowds out private investment and raises interest rates [when the opposite is true*], like having a Gov. surplus is a good thing because it is the Gov. saving dollars for when it will need them in the future**, and many others.
In summary, the economics taught in 95% of economics classes is full of false assumptions. Even one would invalidate it but over a dozen or 2 makes it worthless.
.* . In the aftermath of the GFC/2008 it was widely reported that the big banks had $3 Trillion to loan but would not loan it. It was also widely reported the big corps. had trillions of dollars on hand. So, after 6-7 years of GW Bush deficit spending there was still plenty of money on hand. Private investment had not been “crowed out” by a long shot.
** . The US Gov. running a surplus (by accounting definition) always is accompanied by the private sector being in deficit (meaning it must be drawing down its savings or borrowing from banks). this is rarely a good thing to do. This is true as long as the foreign sector is in deficit.
Economics claims to be a “science”. Sciences all rely on numbers and mathematics for their rigor.
The thing is there has been a revolution in mathematics in the last 40 years. Chaos Theory was discovered on one of the first personal computers. Chaos Theory is all about 2nd order equations and iterative systems [like the populations of bugs]. Chaos Theory has shown that you CAN NOT simplify the equations without destroying the insights you get from solving them. It is the study of dynamic systems.
Economics froze itself just before Chaos Theory became widely know. So, economics needed to use simplifying assumptions to be able to prove things. They didn't realize the simplifying assumptions will often destroy the insights that you get from solving the resulting simpler equations. Economics needed to assume that the economy of each nation is in equilibrium [or at least close to it]. At the time there was no way to study systems that were dynamic.
. . . Let me illustrate this with water flowing down a channel. If the channel has smooth concrete walls and the slope is not too great you get “laminar flow”. This is like equilibrium. At any given time the flowing water in front of a point is pretty much the same as at any other time. However, if the channel is full of big rocks and the slope is steep you get turbulent flow. Now, the flow is constantly changing. I can tell you from my personal experiences in engineering school in the late 60s, that then they had no theory for turbulent flow. They used empirical solutions like the Reynolds Number to approx. reality good enough to get on with designing things. Chaos Theory and computers lets us now solve the equations of turbulent flow.
When economics assumed that the US economy was in or near a state of equilibrium it necessarily made a huge mistake [to be able to get any result], because the economy is one of the most dynamic and turbulent things in reality. By refusing to change their theory economists are doing the nation a great disservice.
Obviously, Mainstream or Neo-liberal economics has made a lot of other assumptions that they also refuse to change. Like banks can only lend the money they get from their depositors (proven false by an experiment 4 years ago), like their model can ignore the effects of private borrowing as a result of that, like Gov. selling bonds to deficit spend crowds out private investment and raises interest rates [when the opposite is true*], like having a Gov. surplus is a good thing because it is the Gov. saving dollars for when it will need them in the future**, and many others.
In summary, the economics taught in 95% of economics classes is full of false assumptions. Even one would invalidate it but over a dozen or 2 makes it worthless.
.* . In the aftermath of the GFC/2008 it was widely reported that the big banks had $3 Trillion to loan but would not loan it. It was also widely reported the big corps. had trillions of dollars on hand. So, after 6-7 years of GW Bush deficit spending there was still plenty of money on hand. Private investment had not been “crowed out” by a long shot.
** . The US Gov. running a surplus (by accounting definition) always is accompanied by the private sector being in deficit (meaning it must be drawing down its savings or borrowing from banks). this is rarely a good thing to do. This is true as long as the foreign sector is in deficit.