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economics as a discipline

by on June 11, 2010

Here is the crux. The following from Paul Krugman

Misplaced Optimism

I wish I could believe in this Macroeconomic Advisers claim that there is a zero chance of a double-dip recession. But when they say that this probability

is estimated as a function of the term slope of interest rates, stock prices, payroll employment, personal income, and industrial production

I immediately lose all confidence.

When short-term interest rates are up against the zero lower bound, a positive term spread tells you nothing; as I explained a year and half ago, it’s something that has to happen given the fact that short rates can go up, but not down.

Failure to understand this point led to excess optimism in late 2008. I’m a bit surprised to see Macroeconomic Advisers falling into the same fallacy now.

Note the tendency to think in terms of curves (slopes calculable with calculus) rather than structures (resources, corporations, who owns what, who gains, who loses, invention and technology, new management techniques, implications of the internet) it gets so abstract its only use is – interest rates (and cash flows and stuff financiers care about, not the real economy). This kind of large  number thinking is prevalent in the social sciences and we need to be aware of concepts without structure, such as “public opinion”.

Douglass Carmichael doug@dougcarmichael.com MAHB Millennium  Assessment of Human Behavior http://mahb.stanford.edu  Stanford Media X , Stanford Stratgey Studios and  Palo Alto StrategyStudios Book draft  at http://gardenworldpolitics.com  Palo Alto tues-thurs cell 206-388-7712 Russian River 707-865-0433

Posted via email from Doug Carmichael reflections

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