Monday, July 16, 2012

Faith and Finance: What Is An Economic Model?

My google search for economic model also returned What Is An Economic Model?, by Tim. Here is his opening:

Economics is built on a model that assumes people are rational. This means that people will act in a way that is to maximize something and also work to produce the most favorable outcome. Though it sounds simple in theory, finding perfectly rational people in real life is nearly impossible. This is where the economic man comes into play. He is the perfectly reasonable person who makes decisions based on costs, scarcity and a sound analysis.

Yeah, but not for me.

I don't care if people are rational. At work they say "It is what it is." I'm not sure what that means. But I know that people are what they are, and it's not up to me to explain their behavior.

I want to explain the economy. I want to explain that environment in which people go about their business: how the environment changes, and why it changes, and what drives the change. People sometimes kick this back to me, arguing that people make all the decisions, so the economy is just people. No.

Yes and no. Yes, people make all the decisions. But no, because it's not always the same world. Sometimes the environment supports a healthy and growing economy. Sometimes it doesn't. Sometimes (like shortly after World War Two) profits are naturally high. Sometimes (like 30 years after World War Two) profits have withered or waned or competed themselves away. Simetimes (like recently) profits are unnaturally high. These different circumstances are part of the economic environment, and they help explain why people behave differently in different times.

And profit is only one example.

// Part 3 of 4


Anonymous said...

Yah gotta wake up here with any model; it has to have Copula -- lots of F'ing Copula ...


The Arthurian said...

And not just Copula, but Gaussian Copula. Good link, DH.

It seems there are all sorts of economic models.

Clonal said...

You may also want to have a look at Lars Syll's blog and his latest posts there to get an idea of what macro models with micro foundations are about - and the controversy surrounding them.

The Arthurian said...

Thanks Clonal. I'm halfway into
The nodal point of the macroeconomics debate and agreeing and disagreeing and considering angles...