September 30, 2017 at 5:42 pm #21681
QUESTION #1: I wonder if there is ALWAYS economic equilibrium “by definition”, and if so, are there ways to find or measure any distortions that might be in play at the moment…..say, because of Central Bank attempts to “create” a particular condition? My personal thought is that the unfettered economy comes to what I might call a natural equilibrium, where the central bank “manipulation” causes the economy to come to rest at yet another equilibrium. Does that sound right, and are there any way to measure / know the difference between that natural and “manipulated” equilibrium?
QUESTION #2: STATIC VS DYNAMIC ECONOMIC ANALYSIS: As with any complex system with inputs and responses, changes in input conditions result in changes coming out of the system, and perhaps even with the system itself. This leads to my thinking that like with complex electronic systems, there are both static and dynamic affects and measures (equations) to define system response. (and components to shape those response) It “seems” to me that economics is mainly studied in a static plane….I don’t mean to say there is no insights that it is dynamic (eg: talk of velocity of money, sticky prices/wages, etc…) but it seems to be that policies like ultra-low interest rate policies that are instituted for a decade or more seem to be analyzed around their static affect (that are not happening we desired I guess), but not in their dynamic affect (like how they might be effectively winding up a mainspring which now with loosening will now perhaps start a move in another direction….but are there any standard measures of dynamic economic shifts….are there oscillations when these moves/changes occur…..do they dampen out, and what factors affect the resonant frequency of oscillation? Is there any notion of an unstable economic condition that might create a sort of uncontrollable economic oscillation? (Think of the “Galloping Gertie” Tacoma Bridge disaster – https://www.youtube.com/watch?v=XggxeuFDaDU) Perhaps that is what Hyperinflation is.October 1, 2017 at 7:57 am #21682
Going further off the deep end, I just wanted to speak further about where my line of questions come from. I am an Electrical Engineer, and we all need to realize that things in the world are seen through our own lens…..and to me, the economy can be viewed like a very complex electronic circuit. (and one that we did not design and that we use and so need to better understand through analysis)
I think the weather is another such system that we humans clearly have many models of, that look at many inputs (wind speed, pressures, temperatures, etc…) and attempt to predict weather. We can see that our abilities to predict weather are ever increasing, but far from complete…..and I think the global weather system is far less complex than the global economic system. Why you ask….well, I think the weather is let’s say three or four dimensional, and the economy more because of the more individual nature of humans. (but trust me, I know not enough of either to even make that more than just a WAG)
So like the electronic circuit, I wonder if people (deep thinkers with heavy computer power) are working to try and understand economic stability. In circuit design, you attempt to characterize all the “poles and zeros” in the systems in order to try and understand system stability and transfer response.
I am thinking an economic system can be analyzed similarly, and so we would at least more easily understand the sort of things that would be “shocks to the system” (Step function input changes…eg: military/trade war or sudden exploratory finds) and how they might play out.
My general theory is that our world exists as a multidimensional Fractal.
I need to learn more about this myself…..but are there any economists who think of their field this way?October 1, 2017 at 8:15 am #21683
I might be miss characterizing how knowledge in economics is found and then used….but it seems to me that people “witness” economic activity and “interpret” patterns of activity. These humans (call them economists in this case) will describe these patterns and with logic, work to find descriptions for what they noticed going on…..creating simple stories that show their idea in motion. At the same time, other economists work to come up with other situations to both support and tear down this economist’s theory by opening up and at times narrowing down the “test case”.
When all is said and done and the theory is proven (to that point) to be solid, it is incorporated into a “school of economics” where people try to perhaps boil it down to a mathematical representation so it can be used more generally and faster.
I assume all these “theories” / explanations are tested against many inputs to see how they respond…….then I assume the entire model (now implementing this new find) goes through the same “testng”.
Here is an example of one of the “tests” I refer to……this is in the electronics domain, but I think you can see the kind of “mental explanation” followed my math description I refer to above in this. (and the step function test for stability should also be very applicable to economics)\
Is this way of thinking too far off the plantation?October 2, 2017 at 1:17 pm #21684
I see that I have answered my own question about the term market equilibrium…..I tend to think of it as the place all forces match…..which is sort of the definition set-up by Investopedia, except that it seems to define it as a particular point that is “reached” and I question how a systems with so many interrelated variable will ever just “get” to a point…..so to me this is a bit theoretical. To me, like with an electronic circuit, unless the systems is unstable, then the circuit is always in equilibrium…..perhaps just transferring charge (current/voltage) from node to node, but in a way totally related to the conditions in the circuit. In a “stable” circuit, the “future” state is known (and can be predicted) given the current state and the parameters in the circuit itself.
Perhaps economics needs a bit more of an equivalent set of “components” similar to electronics with capacitors, inductors and resistors.
My mapping might be something like this:
VOLTAGE ==> Savings / Deposits (potential energy)
CURRENT ==> Spending (money flow)
POWER (IxE) ==> WORK? (force through a distance….production?)
RESISTOR ==> ???
CAPACITOR ==> VALUE ACCUMULATION PROCESS
INDUCTOR ==> Spending Modulator (resists and demands….wants constant)
TRANSISTOR ==> (tough one) FORCE MILTIPLIER OF SOME SORT
You get the picture…..
Sorry for going way off the rails…..I will just “shut up” and keep listening to the lessons. They are fascinating and very helpful to my appreciating how things work in this complex thing we call the economy. (though like weather, the “full story” is not yet understood though we at least know a hurricane exists before it come at off from out to sea)November 11, 2017 at 7:20 pm #21685bob.murphy.ancapParticipant
You have shared a lot of thoughts here. Let me briefly respond like this:
(1) When you ask, “Is there always an equilibrium?” it depends on the framework. For mathematical economists, they have “models” and in the model, there may or may not be equilibrium.
For Austrian economists, there are different categories of equilibria and one of them–the “plain state of rest”–comes to pass all the time. (I think Joe Salerno gets into that stuff in this article: 1994. “Ludwig von Mises’s Monetary Theory in the Light of Modern Monetary Thought.” Review of Austrian Economics 8: 71–115.)
(2) Regarding static/dynamic and electrical engineering: There are some economists who are turning to more sophisticated computer simulations. So rather than build a “tractable” model that can be solved analytically, they just populate a computer simulation with agents following certain rules (like “maximize utility” or “maximize profit”).
There are economists trying to make analogies with physics but I am skeptical of their approach. I think you throw out a lot of knowledge when you treat people as mindless.August 28, 2018 at 10:13 pm #21686
I don’t think of people as mindless, but I do think they tend to follow particular incentives that they are biologically biased toward. Akin to the seven deadly sins that Catholics talk about, there are certain common themes that all humans tend move to.
Human populations are too complex to be modeled in simple equations, and economies are probably almost as complex. But we so is the weather, and no one will say we will ever totally model our ecosystem so as to be able to predict weather with 100% certainly…but it can be very helpful to “try” because we do get something out of it.
Sliding into even further into an off-topic point, I believe strongly in God, and I think of God as a creator of great order. Even the disorder of the weather has a purpose, as does the disorder of humans. This is a crazy thought, but I think God created a system of wonderful laws, rules and equations. As we discover the laws of science and nature (and humans) we slowly lift the veil on those equations…..but I think they are so complex that we probably don’t fully appreciate the “truths” that we think we currently have mastered.
— SOAP BOX MODE OFF —- 🙂August 29, 2018 at 5:22 pm #21687bob.murphy.ancapParticipant
Yes I understand your perspective. What I thought was interesting is that the early models of “chaotic systems” (what’s called “chaos theory”) were deterministic. It’s just that slight perturbations in the initial parameters made the output fly off in “unpredictable” directions.
I think the first example of this was indeed a set of equations that were supposed to model weather. Anyway, the story is covered in James Gleick’s book *Chaos*.
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