
Defending Economics - paulpauper
http://greyenlightenment.com/defending-economics/
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nabla9
The layman attack against economists is that they can't do macroeconomic
predictions very well. But if you look at what it would require, I don't think
anyone can expect them to do so.

What macroeconomic modeling attempts to do is to look what are the effects of
policy changes in fiscal or monetary policy __if everything else would stay
the same__. Central banks use DSGE as reasoning tool, not as accurate
forecasting tool for the future. The signal (their actions) is mostly buried
in the noise (all other variables). Macroeconomic models exaggerate individual
rationality and foresight, and understate heterogeneity, because that's
correct thing to do with current level of knowledge. Knowledge reburied for
modeling limited rationality and heterogeneity at the level where predictions
become more accurate would turn economics into psycohistory in Isaac Asimov's
Foundation series.

One of the most important variables affecting the future is what consumers
think future will be. Consumer sentiment and its relation to changes in their
income and savings is accurate only to one or two quarters. After five
quarters it's just noise. Consumers don't have the data or reasoning ability
that macroeconomic models have. They only have gut feelings formed by events
around them and narratives in media.

Another important variable is what investors think about future investment
needs based on future demand linking their predictions to consumer
predictions. They are not very accurate either. Consensus forecasting and
other means are just hints.

To correctly predict the macroeconomic future would require that consumers and
investors could predict the future with more accuracy.

The best possible future model is agent-based computational macroeconomic
model that simulates collective behaviour of future predicting and speculative
agents who can read the predictions from the models predicting their own
behavior. It must include several empirically discovered mental models for
layman to model heterogenic agents.

Once the accuracy of the model becomes widespread, it would change the world.
Speculative agents would use the model as base of their actions and forecasts.
Saying accurate would require stable dynamic interaction between the model and
the environment.

