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What to read to understand how economists think (economist.com)
175 points by helsinkiandrew on Aug 27, 2022 | hide | past | favorite | 274 comments

Economics is .. mostly just not good as a discipline. Micro can be pretty useful to individuals, but Macro is literally no better than astrology, and perhaps worse because people have a better sense of astrology's limitations.

It's important to study economics primarily not because "it's good at predicting things," but more to understand how most everything is made up and then people use economics to back into ideas.

Roughly, the problem is not just "All models are wrong, and some are useful," but additionally that "many models are harmful and unchecked."

>> Macro is literally no better than astrology,


"Macroeconomics is a branch of economics that studies how an overall economy—the market or other systems that operate on a large scale—behaves"


"The divination of the supposed influences of the stars and planets on human affairs and terrestrial events by their positions and aspects"

Astrology is irredeemable. If current macroeconomics is no better than astrology, that is an opportunity.

>> Micro can be pretty useful to individuals

This is the crazy part. Micro relies on assumptions that just aren't true. Micro is much closer to astrology than macro. If you build an extensive mathematical framework on top of assumptions that are not just false, but sort of crazy, you've got nothing.

> Micro relies on assumptions that just aren't true

I'm going to assume this refers to the rational actor assumption? If so, it's like Econ 102 that this is an Econ 101 simplifying assumption, similar to our ignorance of friction and turbulence in Physics 101.

> I'm going to assume this refers to the rational actor assumption?

Yes. And:

* More is better

* Demand curves are smooth

* Demand curves are deterministic

* Everything happens on the margin

* Information is free

* Ethics does not influence behaviour.

* Nature allows steady states

That are the flawed assumptions just off of the top of my head.

If you spend years studying economics (like I did) then some these assumptions get questioned some of the time. But they all break down, regularly.

The micro economic models work in snapshots, but the interesting part is in the breakdown.

The models are useful when they are not very interesting.

“I love the observation that in Chapter 1 of an economics textbook, they'll say, 'We're just describing people as they are. People are rational, and this is how it goes.' And then, in Chapter 2, they'll say, 'And most people fail to'--you know, 'respect the sunk costs.' And they never even notice that there's a small tension there.”

— Mary Hirschfeld, discussing her book, Aquinas and the market.

She touches on a lot of the points you mention.

I guess what I would say on this is: Consider your average Microeconomics 101 and Macroeconomics 101.

Micro will probably give the average person a few useful tools for business, because it's pretty easy to see where the model is just a model, but basic supply/demand stuff might come in handy.

Macro, on the other hand, will literally make you dumber.

This seems exactly backward. Macro is the useful one based on data, micro is the hand-wavy made up stuff based on assumptions of human behavior.

Don't look at the inputs, look at the outputs. Good data in still equals garbage out if your models are no good.

Dictionary definitions? This observation suffers from the exact same problem that economics does.

Theory and practice are very often completely different.

Macroeconomics does work though. Central banks do a pretty good job of tuning the knobs that steer GDP or inflation towards the direction where they want it to go. You just have to recognize that these aren't and can't replace structural reform.

>Central banks do a pretty good job of tuning the knobs that steer GDP or inflation towards the direction where they want it to go.

We'll see.

We have. Look at the Wikipedia page on history of recessions as a place that makes it clear.

> Macro is literally no better than astrology

Pop economics is notoriously bad. But if the popular version of a science were its judgement, physics and climatology fare little better.

Concepts like unemployment, production and risk premiums were macroeconomic inventions. Would you prefer nobody thought or talked about credit crises, the relationship between mortgage rates and housing prices or business cycles? Because before 19th-century macroeconomic theorizing, concepts like inflation were colloquial [1].

[1] https://en.wikipedia.org/wiki/Inflation#Classical_economics

> Micro can be pretty useful to individuals, but Macro is literally no better than astrology

Macro brought a whole new dimension to the economic thought. Example: Due to leaving out the macro dimension when deciding the fate for Greece in the eurocrisis, they forced them to lower the income of all people by 20% or something. Because the neoliberal labour market theory (micro) assumes the labour market functions like a normal market. They assumed the lower wages would be subsidized by higher employment (lower price of goods = higher demand). The opposite was the case. Unemployment increased drastically. And it's very simple to understand why. The income is cut by 20% -> the demand is automatically cut by 20% -> companies don't have incentive to employ new people -> instead they let people go despite the low wages so they can maximize their profits. This chain of events does not exist in micro.

Another fundamental aspect is savings and debt. People don't realize, that every new savings in an economy have a debt counterpart in the same amount. So to say for example: "the government has to decrease it's debt" means nothing without explaining who should make less savings / more debt in return. This accounting logic can be used in cases like Germany with their export surplus: If everyone in Germany is saving (private households, companies and government), then who is the debt counterpart? The foreign countries. Then one should ask whether such a sitution is sustainable, were one country always saves while all it's trade partners always have to make debt. Obviously not. Micro economists would find ways to put a "everything perfect" stamp on Germany though. Because they are stuck on a micro level.

Honestly, you're doing a good job proving my point.

In your first example, you're just offsetting some ostensibly bad macro with different macro. And I see no compelling reason to strongly favor theory 2 over theory 1, given the same problem that's endemic to pretty much all macro, you can't treat this like a "scientific experiment." Change the variables a bit and you could probably come up with a different outcome.

To be clear, I 100% stand on my astrology point -- but I also say that to punch up astrology a little bit. For both macroeconomics and astrology, neither has very good predictive power of the sort that you should rely on, but both have the potential to kind of jog our brains a little bit to open up paths to interesting ideas.

They're equal.

I think the aggregate demand curve slopes downwards. I think this because of macroeconomic theory.

Because of this model, I can make predictions on how government spending/borrowing affects consumption and investment. There is good empirical evidence for this.

Do you not agree?

Why is this astrology?

A disproportionate number of prominent women in my life are Scorpios. There was good empirical evidence, then, that my daughter would be one too -- and lo and behold, that's what she was born as.

If you look enough you can find roughly equal solid empirical evidence in astrology, especially if you honestly include hits and misses.

Out in the world, the accuracy, and consequently the utility, of human beings advising one another on actions based on macroeconomic theory has been pretty similar to astrology.

"Roughly equal solid empirical evidence in astrology" feels like a very strong citation needed. Where's astrology's "you can reduce inflation by raising the interest rate" or "actually the Phillips Curve empirical relationship won't remain stable when used as a policymaking tool, here's why..."?

This whole argument is roughly "lol, these computer people call themselves scientists and yet my computer has bugs in it".

Ask the astrologists, I'm sure they will give you ones that are exactly as accurate as the ones the economists will give you.

There's a certain irony to critiquing the evidence basis of a discipline with "I don't know anything about this, but I'm sure it's exactly as accurate anyway".

I didn't say "I don't know anything." I'm telling you -- I am certain you could find it because astrologists and macroeconomists are all over the place enough such that you could cherry pick correct ones.

But whilst any idiot can cherry pick many many examples of economists (or physicists or biologists or computer scientists or meteorologists or basically any other field) predicting things with great confidence which turned out to be incorrect or using a model which didn't work very well, you can't cherry pick examples from astrology in which someone predicted a relationship between variables which turned out to be so robust even their greatest rivals consisted it was correct.

Fyi, modern macroeconomics is essentially a flavour of microeconomics. They call it microfoundations for macro. They share all the important formalisms like general equilibrium. Macro is just where the inadequacies of that formalism are most evident because it gets the most attention outside academia.

That is a style of teaching, and a wee bit ideological. Not a description of "modern macroeconomics"

> People don't realize, that every new savings in an economy have a debt counterpart in the same amount...

This is the model macroeconomists use, but they've repurposed the word "savings" to something that isn't a particularly good idea.

Someone who has $1,000 & invests it into - say - buying a solar panel doesn't have any savings but has made their future more comfortable through investment but has no savings. If they instead put the money into savings the evidence I've seen is it will go to some profligate spender who will likely make the future worse for everyone (like a money-losing Uber or a wormongering government).

This is why macroeconomics can reasonably be compared to astrology - the words have so little connection to what people understand that they are useless. People make the mistake of thinking savings are desirable, not understanding that formal language has separated the idea of savings (accounting identities) and investment (making life better).

S=I is tautological, from the definition of the model.

One guy had $1000 and no solar panels, another guy has $0 and 1 solar panel, maybe they trade.

What changes about your definition of savings and investment if they do or don't trade?


> People make the mistake of thinking savings are desirable

as compared to what?

> not understanding that formal language has separated the idea of savings

I assure you every economist knows the difference between putting money in a bank and manufacturing a car.

S=I says nothing about the usefulness, causality, or predictions about the economy. It would be like determining the state of a business by whether their assets equal liabilities.

If assets != liabilities, you have an accounting error, not an unprofitable business.

Oh yeah, I forgot the economists had repurposed "investment" formally to mean something useless too. I'm using the word in the informal sense of gaining control of capital, not in the sense of a flow in an economic model. Sorry for not being clear there.

I don't use the word in the sense of S=I because some savings go to things that I don't recognise as investment (because they are value-destructive).

> as compared to what?

Value add. As you demonstrate in your $1,000 example, if S=I the value of both is largely meaningless. The important part of what is happening is the value-add from the manufacturing of the solar panel and the trade itself, neither of which is being quantified by the dollar value.

We can also observe that until the person with the money spends it, the only person who has experienced a material improvement in their life is the person who ended up controlling the solar panel.

Too much capital at the moment is going in to activity that destroys value (I like to cite Uber as an nice example). People learning more about accounting identities just confuses them because they stop looking at whether activities add or destroy value. The technical terms for saving and investment aren't useful for improving people's lives and it doesn't matter if they get them wrong.

But the fact that people don't know about these simple truths, is not that the "macroeconomic theory" is not understandable to the average person, it's that they are never teached about it. All they are teached or hear about is the micro garbage from mainstream economists, because we live in a world of neoliberalism.

Why would they need to know technical accounting identities? What do you expect them to do differently if they understood?

Seriously? If these fundamental truths would be known, then politicians couldn't easily make stupid decisions against these thruths. Economies and peoples lives get in trouble by ignoring them.

Yes seriously. They aren't fundamental truths, they're variables in a model used by economists.

What do you think people would do differently? Which policies do you expect to change? The politicians already have access to the best economic advice they care to listen to. The most likely scenario where they make the same choices for the same reasons.

> The politicians already have access to the best economic advice they care to listen to. The most likely scenario where they make the same choices for the same reasons.

No they would not. I brought two examples: Greece unemployment and German export surplus. Under neoliberal advice, in both cases it led to a disaster. Not because some variables were wrong, but because the underlying theory is wrong. The neoliberal theory does NOT account for the fact that labour has to buy all the produced goods, which in turn means, supply and demand are NOT independent variables on the labour market (the wages one gets paid are used to buy things and thus have an effect on other jobs). Macro does account for this fact and comes to better solutions. Politicans did NOT get the correct advice, because micro is mainstream.

That example is poorly cited and, in all likelihood, an example of you misunderstanding how politicians make decisions.

I'm not sure what you think they do, but I guarantee that they do not sit down and start with questions about what is the most economically savvy policy. The outcomes are too economically unhinged for that to be the process.

Typically the decisions politicians don't make sense in any framework except asking if they might survive one more election.

In this case the so called "Troika" made the decisions. A cooperation between the european central bank, the european comission and the international monetary fund. I guess anyone would expect that these organisations have the best people at hand. And that may be true when it comes to the neoliberal theory.

Why is it so hard for you to accept that there are two contradicting theories with one of them being mainstream while the other is not? You know what the IMF did when they realized their theory failed? They essentially wrote that in future, it might be necessary to force companies to employ people when wages are cut at the same time. This proposal is in stark contrast to the neoliberal theory, because this theory is wrong and did not work.

Well I guess this leads to nowhere. I give you the last word if you want =)

I know of a number of astrologers, such as Ray Merriman (USA) and Christine Skinner (UK), who made some pretty accurate predictions about the markets and the economy in general.

There is a sufficient number of astrologers that eventually some will happen to individually make a certain number of accurate predictions.

Just like the macroeconomists!

ever feel like igneous rocks are just bullshit?

Back in the early '80s I took course in regulation from one of the leading experts in railway regulation. She was great, and the main idea I took away from it is "don't regulate if the market will naturally fix itself." So, the big question when deciding whether some issue needs to be controlled through regulation is whether the market will function well without regulation. (In most of the examples she gave, it would.)

Ah, that was pre-deregulation in the US. Now we know what happens with de-regulation. At first, there are lots of new entrants in the industry. Gradually, the new entrants go bust or consolidate. The industry reduces to an unregulated oligopoly with four or less major players.


- Wireline telephony. (AT&T, Verizon)

- Cellular telephony. (AT&T, Verizon, T-Mobile)

- Cable TV (Comcast, Charter, AT&T).

- Banks. (Bank of America, Citigroup, Chase, and maybe Wells Fargo)

- Package delivery (FedEx and UPS, plus USPS).

- Airlines (United, American, Southwest, and Delta)

Price competition seems to disappear at 3 or less direct competitors, from an EU study.

A corporate tax rate that increases with revenue would naturally disincentivize such monopolies/oligopolies (by making it easier for small companies to compete against them) without requiring the government micromanagement of deciding what is and what isn't a monopoly.

I don't think that'd work well: Companies would just split into smaller ones, led by the same people.

Could you split them while retaining the aspects of the business that made them a monopoly to begin with?

If I own 50 meat Packers totaling 50% of the market, I get taxed like one totaling 50%.

Cartels are already illegal.

Those all seem like fiercely price-competitive markets, with the exception of wired comms where there isn’t competition in regions which have been divided up between one provider or the other.

Also, they are all highly regulated industries, so it’s hard to disentangle whether any observed issues are due to market failure or regulatory failure.


Which is why breaking apart companies that form monopolies is so important. Break up Facebook. Break up Amazon. Break up the Warner Bros Discovery merger that just happened (why was that allowed in the first place?).

Monopolies are the one major failing of capitalism. Busting up monopolies is an important function of government. Unfortunately, all our congress is now bribed (they call it lobbying and PACs) and work for the monopolies or oligopolies. So that's how Warner Bros Discovery has happened to create this huge news and media organization. In any merger, I like to see who the new CEOs are and get a sense of them. David Zaslav is the new CEO. If you haven't seen David Zaslav, the new CEO, speak, here is a little video of him good little speech: https://www.youtube.com/watch?v=0i0v5GVZ30o

Because our US congress is being bribed, a main solution to monopolies is term limits. About 90-95% of representatives are re-elected to Congress year after year. And about 80-85% of the Senate. For example, Diane Feinstein has been a California Senator for 30 years, and I am almost convinced that they have put an android in her and there's just a thin coating of her skin over it. Why is this happening...why don't we have term limits?

Maybe 6 years for both, then the politician is OUT.


But why do you concentrate on "term limits"?

Surely it is campaign finance reform that is needed in the USA?

Term limits might be useful, it would strengthen parties and party discipline. Is that a good thing? I use to think so, but what has happened to the GoP is disturbing (from a distance - I am no expert on your USA politics)

Mono- generally means "one". When the lists being discussed all have a minimum of 2 companies we aren't talking about monopolies.

Those companies aren't monopolies either, they all compete with a large number of successful groups. Ticktok has been banned in some markets because they are too successful at competing with the existing social networks- it isn't from the US.

Google owns like, 90% of the market. If you are going to argue that there are other players, like Bing and ... whoever else there is, then I'm not buying that.

Amazon should be broken up, even though there are tons of other people with online stores. Amazon is a monopoly at what they do.

And even when there are 2,3,4 competitors, one has to have governmental regulators to make sure there's no collusion, which effectively makes a monopoly.

As far as tiktok goes, it is banned mainly because it is a Chinese company and they are collecting data on US citizens. And China is a dick, so that's why banned.

While this is somewhat off topic, as far as China goes, I'd put super harsh limits on everything that they do here. I'd make them follow the exact same rules that they make others follow in their country. China is ALL about forced partnerships, for example. with forced partnerships, so that they can steal IP. One of the conditions of working in China is FORCED transfer of technology. Foreign banking, telecom, payment systems are not allowed. China has banned Facebook and Google. China requires all foreign fund management companies to set up an internal unit for supervision by the Chinese Communist Party. So this applies to companies like Blackrock Fidelity, etc. So Tiktok isn't a particularly good example for me.

Wouldn’t it be easier to bribe short termers? Or prop up new ones with bribed money?

Breaking up any of the tech giants will require a new legal definition of monopoly.

Cool. Let's make a new definition, love your idea, thank you!

Also, I think that this type of argument, which I've seen before, is an attempt to split hairs and and engage in obfuscation. FUD. I'm not falling for it.

These are some of the most regulated industries in the US.

Regulated oligopolies.

Hardly market forces!

If you believe in the utility of markets then breaking up the oligopolies formed by market failure (unless price gouging monopolistic practises are not viewed as "market failure"...) is very important.

Regulating them is ineffective because the oligopolies get so rich they heavily influence, if not actually write, the regulations. By bribing the regulators.

However, the brewing and trucking industries have done the exact opposite. Maybe your model is broken.

De-regulation is a misnomer, and using it as a pejorative shows ignorance as to how regulation really works. Quality will always matter way more than quantity.


* Anheuser-Busch InBev - 45% of US beer market

* MillerCoors - 25% of US beer market


The big ones are FedEx and UPS, who of course dominate small package delivery.

For big loads, the big players are XPO Logistics and J. B. Hunt. Everybody else is considerably smaller. Full-truckload shipping has distance cost and is simpler than package delivery, so the network effects are not as strong and there's room for local and regional players.

[1] https://blog.bizvibe.com/blog/largest-trucking-companies

That isn't monopolization. There are over 8000 active microbreweries in the US, and they haven't been put out of business by Anheuser Busch. In fact, Anheuser Busch has been scared of their growth for decades now. In 1979, when the wave of beer de-regulation started, there were only 90 breweries in the entire US.

There are almost 1M independent public-carrier trucking companies in the US. There are some 300,000 independent owner operators.

Your model is broken. De-regulation doesn't inevitably cause monopolization, there is something else that does that. In fact, you already alluded to it: network effects. Along with high fixed costs (which overly aggressive regulation contributes to), they're one of the defining features of a natural monopoly.

I feel like your brewery examples doesn't support your thesis. In brewing we have a couple of mega breweries. There are thousands of upstart local breweries. They have trouble distributing beer because most states have enforced useless middlemen that control this, the liquor distributors. The distributors control whether the local breweries can get on supermarket shelves or into bars. The breweries can't just do this on their own in most states.

And guess who owns most of the liquor distributors. Yes, it is other mega breweries. In reality the booming beer industry would be far advanced if there wasn't the constant sequence of breweries selling out to big beer (because the monopolists limit the ability of the small breweries to grow and succeed). We need to break up the monopolists controlling the industry.

De-regulation of brewing took us from 90 breweries to over 8000. So at the very least at the local level brewing can thrive.

You're right that distribution inhibits smaller breweries from growing a national presence. But again, that is due to regulation. Alcohol distribution is heavily regulated, and there is tons of legacy regulatory capture, and larger distributors are constantly lobbying for more regulations to maintain their stranglehold on distribution.

Brewing - deregulated. Distribution - heavily regulated. Maybe you don't need to break up the brewing giants, just dismantle the captured regulation stranglehold they have on distribution.

You really want 100s of competitors. If they’re running advertisements they’re exploiting market power.

I need to find the reference, but an European Union antitrust study indicated that price competition usually disappears around when the number of real competitors drops below 4. Below 4, you tend get implicit collusion, where nobody wants to cut prices much to gain market share.

An efficient market doesn’t have price competition because MR=MC. Price above the margin and nothing sells. Price below and you’re losing money-and no one has money to lose for market power.

I realize I’m talking about markets people would have a difficult time looking for examples. This illustrates how wide spread concentration is. I’m not concerned with the N=M inflection points.

… and the internet overlords, like Google and Facebook.

Those were never regulated. Industries where the network effect is so strong it leads to monopoly used to be rare. In the early days of antitrust, only railroads, street cars, gas, and electric companies had extremely strong network effects. Competition didn't work. So those industries were regulated into common carriers or regulated utilities.

Today far more industries have strong network effects. But that's another topic.

>> Banks. (Bank of America, Citigroup, Chase, and maybe Wells Fargo)

This one is a pretty bad example. If I want to avoid Spectrum, I don't get cable. If I want to avoid FedEx and UPS, I don't get to order things online.

If I wan't to avoid Bank of America, Citigroup, Chase, and Wells Fargo (which I do, particularly that last one), I bank at a credit union.

But yeah, it's fun to imagine what it would be like to live in a world where any company with more than 4% market share gets broken up as a monopoly.

The EU is different than the US. The EU has country club culture of old families that stay off each other’s turf. That used to be the case in the US where airlines split routes, and the cable business is still a mess. Steve Jobs tried to pull that shit with programmer salaries. Frankly I have little issue with US monopolies as many you list only make a 10% margin. I’d rather pay T-Mobile $27 than the $30 I currently pay, but I am not all that upset about it. An Epipen is $600. That is due to the FDA only approving 1 device with $0.10 worth of epinephrine, when the EU has 6 choices all less than $100. Bad government policy can screw us. It would be really nice if the US government relaxed the regulations on a drug invented in 1910 combined with a spring.

I’m not disagreeing with you but I just feel like I am as likely to get screwed by regulatory capture as natural monopolies. Wild west entrepreneurial capitalism is a decent antidote to crony capitalism which thrives with regulation.

MBS, Putin, Biden, Trump, Xi all want power over industry, media, and education. I question how much I want a savior empowered by the law and a duty to save us from monopolies and tycoons. Elon Musk seems to be creating a monopoly on space access and he is high on the scale of douchbag, but he is unlikely to make my life worse. Even if he controls space.

From a monopolistic standpoint, you have to laugh at Zuck getting a Fuck from Chinese TicTok. It may not be good, but he isn’t cronies with Mr. Zhang.

It is also worth acknowledging that most of the audience here has benefited directly or indirectly from the obscene profit margins that the US tech scene has created. Complaining about monopolies is biting the hand that feeds. Ignore any negativity as the choir here gets the rich milk of profit margins which have historically only ever been created by monopolies.

What makes me laugh is that the US military and US fracking means we Americans get the good life and high programmer salaries because US tech is immune while Europeans hang their laundry outside.

That misses about 95% of reality. To mention just one key factor: without government intervention you end up usually with a monopoly or oligopoly.

Not to mention safety standards, labour protection, quality and warranty, ...

Without regulations and often intervention all goes to pieces.

to directly counter your argument: no railroad ever developed without government intervention and at least funding, guarantees and land grants.

natural monopolies are short-term, unless propped up by government

being propped up includes excessive copyright protections

At one time, Walmart and Microsoft were considered by some to be "natural monopolies".

>> At one time, Walmart and Microsoft were considered by some to be "natural monopolies".

Natural monopoly:

"A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors"

Newspaper headline, 1962:

"Can Tiny Wal-Mart Survive Against the Big Guys?"

Obviously, by Betteridge's law of headlines, Wal-Mart does not exist. Which is correct, since it is Walmart now.

(The Big Guys were Woolco, Kmart and Target. There are 21 Kmarts left in the US. I have no idea what Woolco was. Oh OK, looked it up, Woolworths.)

You could just as easily say that government causes 95% of monopolies. Regulatory compliance is almost universally a fixed cost to a business, and large fixed cost structures are the defining characteristic of a natural monopoly market. That's also the reason why small public IPOs disappeared after Sarbox...small corporations can't handle the cost of regulatory compliance.

Regulation can prevent monopolies, but it can just as easily enable them. And lack of regulation can allow monopolies to form, but they can also allow markets to commoditize. Quality of regulation will always matter more than quantity.

>without government intervention you end up usually with a monopoly or oligopoly.

I would love to hear your explanation of how government intervention is the only thing preventing a monopoly or oligopoly of plumbers, electricians, pet groomers, or halal carts.

no explanation needed, just look at medieval history where guilds had de facto monopolies on certain services or manufacturing and if you wanted to be independent... tough luck.

> where guilds had de facto monopolies on certain services or manufacturing and if you wanted to be independent... tough luck

This conflates too many historical threads to support the hypothesis. The guild era was one where most countries required official consent to start a business of any kind. That's how the guilds enforced their monopoly.

Corporations secure their standing through regulation. It prohibits upstarts from competing because of artificial overhead that only the largest and most well-connected (to government insiders) can handle.

It's practically dragging the ladder up behind them.

Unless you are claiming that there are no issues that don't need government regulations, I don't see how your argument contradicts the parent post.

Can you name an example of a monopoly that has developed in the last 50 years that didn’t occur because of crony capitalism?

lock-the-spock explicitly writes about reality, and within the real system we have, monopolies develop.

The problem is that it’s difficult to distinguish whether the government caused the oligopoly, or is mitigating its (often deleterious) impacts.

It very much depends what we agree monopoly means. Did Microsoft Windows have a monopoly on consumer desktop operating systems? Arguably Apple only survived because Microsoft bailed them out in 1997 to avoid being accused of having a monopoly. Does Google have a monopoly on search?

Tech naturally tends towards monopolies because almost everyone benefits from using the same tech as everyone else they know. The same messaging system, the same operating system running the same applications that use the same file formats.

As for crony capitalism as a source of monopolies, sure of course that can happen, but if we look away from capitalism basically the only other alternative anyone has come up with is pure unadulterated cronyism. Communism, socialism, they all end up being pure cronyist monopoly systems. At least with capitalism you have an outside chance of getting away from that.

> 50 years

The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914.

so yeah, you won't find many, because the regulation works.

You seem to have noticed the part where the parent comment says “don’t regulate”, but missed the part where it says “if the market will naturally fix itself”. Please, read it again, so that you can respond to what it actually says, instead of what your imagined version of it says.

Most disciplines evolved in the last 40 years (looking at you psychiatry), but economics has changed rather drastically. Methods for testing theory back then were Bad. Like, really bad. Ed Leamer's 1983 paper on this (http://www.econ.ucla.edu/workingpapers/wp239.pdf) is a good read if you want the details. Beginning in the late 80s, there was a movement toward study design and credible identification. Software like Stata (and nowadays there's R, julia and python) started lowering the costs of doing data-intensive work. The 90s and 00s are full of really interesting papers pushing the frontier on what could be done do gather evidence of causality: Angrist and Lavy in 1999 using Maimonedes Rules and RDDs to estimate class-size effects, Hoxby 2000 using rivers and county borders as exogenous variation on public school competition, Acemoglu, Johnson & Robinson 2001 using colonizer death rates to estimate long-term effects of colonization. The discipline has evolved and so has our understanding of minimum wages (https://academic.oup.com/qje/article/134/3/1405/5484905), gun violence (https://www.nber.org/papers/w23510) and nation-building (https://scholar.harvard.edu/files/dell/files/paper_combined....). Pretty sure Railway Economics has changed too.

> the big question when deciding whether some issue needs to be controlled through regulation is whether the market will function well without regulation.

All markets are regulated. Markets are defined by their regulation. You're talking about the calculation one should do when deciding when some market needs to be more or differently regulated.

And if the market doesn’t manage to regulate something just put those things in the Externalities bin.

Who was she?

This is taught in any Economics 101 class in college.

Government regulation = market inefficiency

  > Government regulation = market inefficiency
there are many causes of inefficiency, such as too many middlemen, monopolies, oligopolies, cartels etc...

I don't know people downvoted me. Take any freshmen econ 101 class. One of the first things they teach you is that government regulation/intervention means market inefficiency. And they keep pounding this idea over and over again throughout the course.

Am I the only one here who has taken Econ 101?

No. Other people took better courses or read more widely...

At the fundamental level, any regulation is a disruption to the free market.

An unregulated market is not a fair market. Companies will put the risk and externalities on others. That's why we don't let them dump chemicals into the watershed, or rather we incentivized them through regulations and fines.

Once the 1970s happened and Keynes was accepted, the Revolution was over, wasn't it? My macroeconomics courses in the 2000s basically said, "Yeah, stagflation happened. How bout that," and went back to the G plus E plus I whatever.

The most important thing to know about the field of economics is the only people who get funding are the people who tell the public that the government should do whatever it was the government wanted to do.

Example: you won't get funding if you go around saying there's no such thing as a labor shortage in a market economy, even though this is entry level economics. Why would that tank your career? Because big business has paid the government to pull the right levers to suppress your wages. The solution to a labor shortage is higher wages, but that can't be the government's response to their donors. Technically you can say the truth, but you better not be very loud about it.

"you won't get funding if you go around saying there's no such thing as a labor shortage in a market economy, even though this is entry level economic"

The Economics 101 answer is clearly wrong or at least incomplete in this case. Think about it this way: if people's wages increase in real terms by definition this means they can buy more with their wages. Producing stuff requires, amongst other things, workers. Suppose we're in a situation like the current one where unemployment is low and businesses across all sectors cannot find enough workers to keep up with consumer demand. What happens if they all try and solve this by increasing wages across the board? Well, their workers have more money to spend so this increases consumer demand even more - and remember, the problem we were trying to solve was that this was already too high compared to supply. What it doesn't do much for is the supply of workers, since there's not some big pool of potential workers who could be working but aren't. It's not going to encourage people to work longer hours either since when would they have time to spend the money? Basically, it makes the whole problem worse, and that's why the Fed and central banks around the world are freaking out right now.

Your analysis is also very simplistic.

A labor shortage is potentially an opportunity for the economy to re-rorient itself and for wealth to be redistributed. Companies producing goods that are more in demand will afford higher wages, while companies that produce less in-demand goods will not, and can ramp-down their production or go bankrupt.

To take an extreme hypothetical - let's say there was a massive shortage of food workers. As the price of food increases, so would the wages for food workers, until they will start pulling people from other industries, which can no longer offer competitive salaries. This could lead to something like ad-tech eventually start losing low-level workers to agri-business.

Essentially, the mistake in your argument is to assume that demand is high and inflexible around the board. In reality, certain industries have higher demand than others, and many workers can change industry, even in the short term, if incentives are high enough.

However, companies used to cheap labor and high margins are not willing to give up their profits and reduce their margins, so they are begging the state to find a way to force people to keep working for them for nothing.

I'm pretty sure your example just demonstrates the point that I was making originally though. Assume there is a massive shortage of food workers, food prices increase and the food industry starts pulling people from other industries like ad-tech which can no longer offer competitive salaries. This implies an aggregate shift in spending from discretionary consumer purchases (which are specifically what fund ad-tech and the advertising industry) to food. In other words, people have on average become poorer: they have to spend a larger proportion of their money on essentials like food and have less left over for other stuff. Which is, of course, just another way of saying that on average people's wages have shrunk in real inflation-adjusted terms.

(It's not like the other stuff can just become cheaper in order to make up for it either - remember, all the other industries are suffering the same underlying cost pressures as the food companies and the whole reason they're losing the competition for workers is because there's no longer enough people willing to pay the increased prices they'd have to charge.)

If I remember rightly, the proportion of a country's workers employed in food production is even pretty good approximate measure of how advanced an economy is, with more advanced economies employing a much smaller proportion of their workers that way and having much more doing other things.

The fed chairman recently gave a press conference in which he complained that workers had too much power in the market and were able to demand higher wages. He explicitly stated he was going to create policy to tip the balance of power back towards businesses. He didn't say exactly what he was going to do, but made his intent clear.

People express a lot of concern about things like how wages have not kept up with inflation for decades, how families have to have two incomes to survive, etc. Just when workers were maybe gaining some of that ground back, the fed chairman tells you he's going to fuck you with policy. The type of person who supports such policies and pretends that's good for you are the ones who get the positions, the funding, etc.

"The type of person who supports such policies and pretends that's good for you are the ones who get the positions, the funding, etc."

Exactly, and it's insane to see other workers support these policies instead of trying to push for alternatives.

> in a market economy

> to suppress your wages

Can't really tell where you're going with this. The solution to a labor shortage is higher wages. You seem to be suggesting that it should be an increase in minimum wage.

In a market economy, you absolutely wouldn't need this if you had a labor shortage...the market would resolve on its own. But we don't have that. We have an economy where millions are paid by the govt to do nothing. This then becomes what employers are competing with.

I don't completely understand.

Wouldn't that just mean that the employers need to compete with the government, i.e. raise wages? So than the market should resolve this on its own as well?

In past, president Reagan complaint economist have conspiracy, why all of them give same advice.

This is how the idea that raising the minimum wage would cause unemployment came to be and how the fact that (up to a fairly high point) it simply eats profits got suppressed.

Do you mean "and Keynes was over"? Keynesian economics got big in the 30s and was killed by the stagflation of the 1970s

Not sure why this is being downvoted. This is just well-estatblished history. Keynesian economics came out of the Great Depression of the 1930s and was the leading economic theory until stagflation posed a major theoretical challenge for it and monetarism took over instead

Strictly speaking it depends what you consider to be "Keynesian" economics (But yeah, your comment was a lot more accurate than the one it was replying to)

Stagflation killed the Phillips-curve "Keynesianism" which emerged after Keynes' death as wasn't actually in the General Theory: the idea that inflation was inversely proportional to unemployment so you could get rid of the latter if you had enough of the former. It didn't kill off the more generally useful idea of macroeconomic modelling or the assumption government policy could mitigate recessions. . Similarly, strict monetarism (the idea that the government could easily stabilise things by ensuring the money supply was at a certain level) didn't survive the realisation the banking system made the money supply flex and so the result was interest rates and other monetary aggregates bouncing around all over the place , but the basic idea that controlling inflation was possible and a priority for central banks persisted once governments switched to fixing interest rates instead.

Yeah that was a problem with Keynes, sure. Don't mention the oil crisis

70's stagflation UNaccepted Keynes

> Keynes was accepted

Yes, but for how long.

Until you can get a bullet in your head for questioning him, like always.

What are you saying? You know what replaced Keynesian economics in the 70s? Monetarism in the vein of Milton Friedman

The same Milton Friedman that, along with the rest of the Chicago Boys, guided the policies of Augusto Pinochet. Generally regarded as one of the most brutal dictators South America has ever faced...

Pinochet's economic policies were regarded as extremely successful, basically his turn around of the economy is what allowed him to be so brutal to his political enemies. Unfortunate, but it's hard for me to say the chicago boys actions in Chile can be regarded as failure.

What allowed him to be so brutal to his political enemies is that he commanded the army. The economic reforms came after the coup d'etat and suppression of the opposition not before. And they were far from smooth sailing: ironically Friedman coined the idea of a "Miracle of Chile" in an article at the beginning of 1982, shortly before Chile was plunged into a deep recession.

Either way, the comment further upthread ranting about Keynes was weird considering that Keynesianism really didn't involve shooting people, and whilst the ideologically opposed Chicago School policy didn't either, it was famously most faithfully implemented by a military junta Friedman himself had plenty of time for.

There have been plenty of dictators that have been able to be ruthless efficient with their suppression of their people that had nothing akin to free markets (Russian tsars, Genghis Khan, certain dynasties in Japan, etc)

An effective government isn't evidence of anything. You forget that the most productive economy the US has ever had was during WW2. When the government basically took complete control over almost every aspect of production to make sure everything went to the war effort. Does it work? Yes. Does it mean it's a "good economy"? I don't think I'd wanna live in such an economy personally

You know who became vegetarian because of his concern for animal suffering? Hitler. That's as relevant for dietary and ethics choices as your mention of Pinochet's brutality is for economic policies.

  > You know who became vegetarian because of his concern for animal suffering? Hitler
citation please (like, with non-hearsay evidence)

It is a brave soul who gets in the way of massive government spending.

"The Armchair Economist", Steven Landsburg


Extremely approachable book with fantastic examples explaining somewhat complex concepts.

One problem I have with economics books is that they tend to end with either “and therefore, government spending is bad” or “and therefore, government spending is good”.

What I’m really after are non-ideological macroeconomics books that will help a layperson have a better sense of where the economy is headed so I can invest better, not books that would help me make better decisions if I were running a country, which I’m not.

I think investing and economics isn't that well correlated. You need some idea of monetary and fiscal policy but as you say economics tends to get political quick.

https://www.youtube.com/c/RealVisionFinance is pretty good for anything that has the boss Raoul Pal, most other talking heads aren't that great.

Choose your heroes carefully. Raoul Pal lost his mind (and the respect of many) when he became a cryptocurrency shill.

Agreed avoid his crypto stuff. I'm just trying to think of a popular person to talk about markets and economy that isn't a bedroom expert like most of them.

There are plenty of professional asset managers with a public profile / content.

Most of them are boring or technical or not that good. I love Hugh Hendry but he's repeating himself all the time now. If you have someone you like I'm interested.

> One problem I have with economics books is that they tend to end with either “and therefore, government spending is bad” or “and therefore, government spending is good”.

Which economics book ends that way? I'm genuinely curious.

Anything associated with MMT.

That would suggest the problem is with MMT, not economics.

Even finance experts like Matt Levine use index funds. Unless you are mega rich and have connections, you almost certainly have no advantage against the many people who work 100 hours a week trying (and often failing) to beat the market.

This. Imagine the arrogance necessary to believe that you can understand economics, finance, geopolitics, and the vast arrays of industries and competing companies well enough by studying as a hobby in your spare time to get better returns than professional investors who literally spend their entire careers trying to beat the market, and fail on average.

Just VTSAX and chill.

You're correct but I'd like to point at that professional investors don't understand all of that either. They spend their careers focused on little niches in which they can find an advantage. So it's less, what are the mysteries of the economic universe, and more, why does the West Texas Intermediate futures curve differ from the Brent curve and how can I profit from the spread?

That and the goal of many (most?) professional investors is not to beat the market. For some they just need to have higher returns than cost of funding and anything positive is accretive. Others sell fund investors on things like low market correlation. Or others have more specific goals like hedging future fuel prices for an airline.

Point being, individual investors have completely different goals from most professional investors and as you point out, "VTSAX and chill" is the way.

For many professional investors (and certainly for a large class of asset management firms), the big incentive is to accumulate more AUM. Returns can be a strong marketing tool to do that, but they're not the only one.

People do beat the market, but the thing is if you can beat the market then you don't need to accept public money - you become a private trading firm and trade with your own money and keep all the profits.

That's the issue: successful firms which beat the market don't keep doing it on behalf of other people for very long.

The “active funds don’t beat index funds” studies showed they actually do - before expenses. After expenses the net return was lower.

If that's the case why bother taking external money?

Answer: because they make more money from the fees than they do by "beating the market"

The truth is if you beat the market by pure luck once you can market your shit fund and lure in thousands more investors for decades.

Because the goal isn’t to “beat the market” (most beat by a very small amount) - the goal is to make money selling their “services”.

> What I’m really after are non-ideological macroeconomics books

Not possible by definition.

Economics is about explaining things after the fact, and incapable of prediction.

Therefore, it's all ideology (rock fell on my head, must have offended god of rocks, only logical explanation).

> Economics is about explaining things after the fact, and incapable of prediction.

I would expand on this a bit.

The problem with economics is that it's the study of a type 2 chaotic system, where predictions about the system themselves feedback into the system and change the outcome. Contrasted with a type 1 chaotic system, like weather, where predictions are extremely difficult but can be made without affecting the outcome. Economics is chaotic because conscious actors are extremely unpredictable and change their behavior based on new information.

This is something you have to bear in mind whenever you hear an economist or government official make a prediction. The very act of making the prediction public often becomes a self defeating prophecy, because masses of people and money make changes to their future behavior based on the prediction. Also called the Prophet's Dilemma, https://en.wikipedia.org/wiki/Self-defeating_prophecy. A close relative of the Preparedness Paradox, https://en.wikipedia.org/wiki/Preparedness_paradox

This is why some of the best predictions are never made public. The best traders don't sell you their strategy. Because as soon as their prediction mechanism becomes too public, it gets absorbed into the system and arbitraged away to worthlessness. That's also why you always must take what government officials say with a grain of salt. They're often not telling you what they really think is going to happen. They're telling you what they think is going to motivate the population to behave in the most productive way given the current environment.

Making economic predictions is a grand game of "I know that you know that I know that you know". It's a game of mass manipulation rather than a technical pursuit of simple measurement.

It's an art, not a science.

> study of a type 2 chaotic system

The reason it's chaotic is not just because predictions about it feed back into it. It is also a weather-type chaotic system.

> It's an art, not a science.

That may well be.

However, he question that really matters is : is it useful at all?

As demonstrated time and again, this whole legend about hidden winning strategies may very well be utter and complete BS:


It has aspects of weather like behavior. Plus climate behavior in that chaotic systems can jump from one semistable pattern to another. And then point events.

A virus jumps from bats to humans. Some dictator decides for his own internal reasons to start a war. The pace of technology isn't predictable or even possible to predict.

Referring to something above. Economics would be a lot better if it focused on historical happenings and stopped trying to pretend it's a hard science like physics.

> Economics is about explaining things after the fact, and incapable of prediction. > > Therefore, it's all ideology

Can you give us an example of a macro or microeconomic model that is incapable of prediction and it's (therefore?) all ideology?

I can't think of none off the top of my head.

unlike physics, and somewhat unlike chemistry, there is no direct causal relationship, instead it is systems of systems with new, unpredictable events entering into most of the them constantly. The time window for a prediction is also crucial, because the same set of decisions and rules in one era have different results in another era. Economists preside over this cacophony with a lot of measurements and news items. Occasionally something really worthy comes out, but the daily arguing and posturing is quite a turkey show, IMHO. Thomas Piketty got a prize recently.

> give us an example of a macro or microeconomic model that is incapable of prediction and it's (therefore?) all ideology?

Generally, the more a theory talks about how the past actually happened the more it's ideology than falsifiable science.

Take Marxism. It's largely a history of class struggles. There are testable bits, e.g. the labor theory of value (which is wrong). But most of it is unfalsifiable. Similar to the barter-then-money origin of money story, which offers zero predictive value while also being archaeologically unsupported.

Theories of value are untestable, since value isn't price. The LTV can only really be argued to be wrong on philosophical and theoretical grounds, not on empirical grounds. This is because market prices are not necessarily the same as values. There are however plenty of arguments outside the empirical realm against it.

If you want a testable theory from Marxism there really only are two - the aggregate rate of profit to capital will go down in the very long term, there will be endogenous economic crises due to lack of demand/too much supply in aggregate. The rest are unfalsifiable as far as I'm aware. The issue is that both of these predictions seem to be correct so far - P/E ratios are going up and we have now had plenty more evidence that crises due to mismatch between demand and supply are inherent to capitalism.

However, it's still not a great tool at actually predicting the world, because the vast majority of predictions are unfalsifiable. But I agree with you that most of economics is moreso ideology.

Neither Marxism nor the origin of money are of any interest to most economists. I don't understand the point you're trying to make.

> Neither Marxism nor the origin of money are of any interest to most economists. I don't understand the point you're trying to make.

That topics of no interest to modern economists occupy the bulk of popular discourse concerning it.

When it comes to understanding how the economy (especially inflation) works i really like the NPR article about how Brazil fixed their inflation. It boils down to inflation being inflation expectation.

tldr: They invented a new theoretical currency. All prices were each month listed in the actual price in the old currency and the price in the new currency (that didnt exist yet). And each month the new currency was redefined so that stuff still cost the same in the theoretical currency. They did this for a few months till they declared inflation fixed and creating the new currency that had "proofed" its stability the previous months. And Abrakadabra, people believed and inflation was fixed through the introduction of the Brazil Real. Obvious when you think about it, its not called fiat currency for nothing.

>Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros.

>The idea was that people would start thinking in URVs -- and stop expecting prices to always go up.


That narrative is highly misleading.

Yes, that happened. But the government also did take the finances under control, restructured (literal "changed the structure of", not defaulted) its debits, added controls to the banking system, restructured the banks, pegged the currency to the dollar, made a campaign of price transparency, and a lot of other things.

They also, among other things, raised interest rates and taxes, severely cut public expenditure, legally enforced balanced budgets and cut tariffs by half. It was a pretty thorough plan.

>But the government also did take the finances under control, restructured (literal "changed the structure of", not defaulted) its debits, added controls to the banking system, restructured the banks, pegged the currency to the dollar, made a campaign of price transparency, and a lot of other things.

And how much of what you just listed worked the exact same way as the new currency trick, through being a frame to influence public perception? Thats the important perspective i took away from it, that i was thinking about economics wrong. In the end the way it works is through crafting stories to get the market participants to believe certain things. Because that is all the economy is, people and their behavior. And if you want to influence behavior, you have to influence how people think.

The educative campaign was also about people's mind. The others were very real changes and most people didn't even know they were happening.

If you go into your sibling that continued my list, all of his items are real, and only the balanced budget was even communicated broadly.

Yes, psychological factors are important for an economy, but they aren't singularly important. They are not even merely more important than the other kinds.

First off, thanks for your patience

>They are not even merely more important than the other kinds.

I might be very wrong here, but i dont think it is possible to source that. I understand that they did all those things, but unless its possible to articulate how it affected market participants behavior i would argue claiming causality is very difficult. How exactly does for example a balanced budget halt inflation outside of changing inflation expectation? There will be answers depending on which model you adhere to, but does that explanation still hold up and remain applicable today? Because if not you kind if have to explain why not.

With economics being focused on human behavior in a market, what fundamentally determines how good a model describes the economy is market participants believe that it does. Because their believe determines the behavior you are trying to model in the first place. For that not to be the case we would need to see some static structures emerging in markets independent of market participants motivation and their understanding of how the market works. And if i am not mistaken that hasnt been the case. All there is is peoples behavior and it doesnt seem to be static.

*There is of course stuff like interest rates which changes behavior directly through higher costs(forcing behavior instead of changing motivation), but as i said, most.

edit: Which again, is the change in perspective i mentioned above. Unless i am overlooking something obvious, economic models arent describing some intrinsic behavior of markets because there doesnt seem to be any. They are only able to describe behavior once market participants behave that way. Which would mean economic models work because people believe they do. For that not to be the case you would need to see some models that remain applicable throughout time.

I am sure i am overlooking something obvious, but the answer to that would be a link to a working economic model that identified some fundamental structures that isnt dependent on market participants motivation.

There were plenty of policies against inflation that focus only on the people's perceptions in History. Those are an easy and cheap thing to try, so governments do try. When that's the only focus, those policies seem to fail every time.

On the other hand, policies that focus on real aspects have a non-zero rate of success. A balanced budget by itself has a higher rate of success than any policy that doesn't include a balanced budget.

Brazil was in an exceptional situation in 1994, where any policy based only on real aspects would be expected to fail. But don't think this is a general case.

I am not arguing they dont work, quite the contrary, what i am focused on here is how they work.

And that is always through changing the behavior of market participants. There is no other angle or lever to pull, that is all the economy is, peoples behavior. The distinction between tricking people with a fake currency and real policies like a balanced budget is meaningless in this context because they work the exact same way. Both give reasons for a reduction in Inflation expectation. You can argue that its justified (or real) in one case and not in the other but i dont see the point.

“Pegged the currency to the dollar” is probably doing a lot of heavy lifting here.

It's really not. The Brazilian economy is very isolated, and was more so at the time.

I believe its impact was similar to the campaigns about price transparency. And lower than anything else on my list.

There are only two hard problems in economics: cash invalidation an naming things.

Don't forget depreciating land..

TIL, thanks for the fun read, quite enlightening

I can't read the fine article. I've read from economists that the key essay to answer this is "What is Seen and What is Not Seen" by Frederic Bastiat (1840). That introduces the parable of the broken window. Its arguments are reprised in Economics in One Lesson by Henry Hazlitt (1946). Are either mentioned in the article?

You can't steelman classical economics without groking these.

I really don't understand the appeal of The Worldly Philosophers. Maybe it's just me but I found the explanations of the ideas of each philosopher to be rather muddled.

I found it stimulating in high school (compared to most social-studies stuff). But from recently sampling it in the library: I don't think it mentioned the marginal revolution at all. E.g. Alfred Marshall did get a couple pages, but only as some kind of Victorian eminence who made some technical contributions not worth explaining.

(https://en.wikipedia.org/wiki/Alfred_Marshall#Theoretical_co... for what I wish the book had told me.)

I read The Worldly Philosophers a long time ago (I was young) and I loved it. I remember really liking the narrative and the historical background.

Among the few econ books I read I most enjoyed Modern Principles of Economics[1] by Tyler Cowen.


Milton Friedman - Money and Inflation - https://www.youtube.com/watch?v=B_nGEj8wIP0

I think is under rated talk which explains complex stuff in layman terms.

You know, there are plenty of undergrad and graduation level textbooks, whose goal is exactly that article's title.

Nothing wrong with specialized, focused studies on one subject or another, and popular press. But they won't do what the title says.

I am an Economist and I don't especially love my profession, so I'm not going to defend its many, many flaws, because it has a LOT. But this comment section is just a dumpster fire of opinions from many people that you can clearly see that never really touched or studied Economics, beyond some article, book or ideology... You know, Gellman Amnesia and all that.

It's fascinating to me how tech-related discussions are on point here and this site is a gem, but regarding other topics, they tend to get off the road fast and hard, especially social sciences.

I visit HN every day because I am a geek at heart that loves machines since childhood and then I studied people (Economics, Psychology, etc). We know that technology is queen right now and you are on top of the world. Almost everyone here is way, way smarter than me and I know that, but knowledge in one field, no matter how important or powerful it is (like tech right now), does not translate into others, especially social sciences, human behavior, and the like. Despite that, the hubris and the "I'm better than you" attitude on these topics are astonishing.

I love this site, it's really a gold mine of very sharp people and responses, just not on some topics.

This collection of papers may be more appealing to the HN crowd. They give a more technical critique of the practice of economics.

Alfred S. Eichner. (1983). Why Economics is not yet a Science.

1. Introduction.

2. What do we mean by asking whether economics is a science?

3. Modern empiricism and quantum-leap theorizing in economics.

4. Ideology, methodology, and neoclassical economics.

5. A behavioral theory of economists' behavior.

6. The development of contemporary mainstream macroeconomics: Vision, ideology, and theory.

7. How economists misuse mathematics.

8. Institutional analysis: Toward progress in economic science.

9. Why economics is not yet a science.

The unifying theme of the papers is that there is no empirical support for the foundational propositions of the dominant theoretical framework. They argue that for economics to become a science, it must shift its focus to testable claims.

I think the best chapter is 7. The author's field is optimal control theory, and he argues that it is misapplied to economics.

How to Think about the Economy: A Primer [0] - is a great starting point.

[0] - https://mises.org/library/how-think-about-economy-primer

The economist acts as a pretty good contrarian indicator. What would really help is look at some of the bigs, compare them with each other, follow them over time, see who was right and who wasn’t, and come too your own conclusion. Bonus: chat or follow some old school, based interest rates traders, see what they have to say. Compare them to economists. Then look into the Eurodollar system, and be prepared for a shock.

>chat or follow some old school, based interest rates traders

How do you find someone like this?

>look into the Eurodollar system

Suggestions for a first foray? Too much financial conspiracy stuff out there.

Made an account only to suggest checking out Perry Mehrling‘s work. He has a Coursera course for free which will change the way you look at economics entirely.

I‘ve studied economics and political economy for years and never seemed to be able to tansfer the micro/macro models to the real world. Perry‘s work doesn’t have to be transferred b/c they come from the world of banking in the first place.

Perry is best consumed in lectures. Here one on Eurodollar [1].

[1]: https://m.youtube.com/watch?v=tUi-xTmOCUE

Isn’t this the same as whether a fund manager can do well in one year and bad in another? I.e just randomness?

> Economics has a reputation as a dry, heartless subject, full of boring equations.

Not if you have any training in a hard science: then you think of economics as something largely devoid of equations and made up of lots of ad-hoc regression analysis and hand waving. This might not be the fault of the economists but of the difficulty of the subject matter of course. But economists really should learn to accompany their predictions with error bars as every undergraduate physicist must.

As a mechanical engineer (not a hard science), economics has always looked more like history than science. As in, you can build models to show what happened, but not what will happen.

Edit: I think Ive had my mind changed enough in this thread to edit this. It's obviously a very deep subject and I've been convinced it has predictive qualities. I definitely dont think of dry equations though, more like psychology, and politics. But I'm looking forward to learning about it and possibly having my mind changed yet further.

Econ is great at predicting the future. Let’s say your uncle tells you about his new stock trading strategy that’s guaranteed to make him 10% returns per month. Will he be rich two years from now? Econ’s efficient market hypothesis predicts he will not.

Or let’s say the president of Japan announces a plan to beat deflation once and for all. He says that next year, he’ll fire their central bankers and hires the ones from Venezuela, give them a 100% annual inflation target, and promise them millions of USD in bonuses if they meet or exceed that target.

Even though this plan is going into effect next year, what will you see the next day? (Assuming people believe the president is serious.) Econ predicts you will start seeing inflation immediately. And we see effects like these all the time when looking at how the actions of central bankers effects the economy – if Powell says he’s going to change interest rates, there’s a reaction in the markets when he makes the announcement and not one when he makes the actual change.

These are not predictions, they are assumptions. The difference being they are in no way quantifiable. Econ has lots of equations, but it can't actually predict anything beyond some broad directions like you show, and even those are sometimes wrong.

There was even a story (no idea if true, so maybe of limited relevance...) of a reverse bank run happening in Japan, with people rushing to deposit money to save a failing bank.

So a bit of psychology in there, eh? Pretty neat field, if you ask me.

>Let’s say your uncle tells you about his new stock trading strategy that’s guaranteed to make him 10% returns per month. Will he be rich two years from now?

That depends on whether the stock he bought was GME.

There's a big difference between micro and macro. Macro is basically predictions as you say because in the end it's largely underpinned by market expectations which are not always rational. Micro on the other hand looks at the choices of individuals, which are by definition at least somewhat rational. Individuals will always make the choice that they believe will maximize their utility, so the whole thing is really just equations whose derivative you set equal to 0 in order to maximize/minimize.

> which are by definition at least somewhat rational

Or can be demonstrably arbitraged to take advantage of the irrationality in a tangible, quantifiable and repeatable way. Put-call parity, substitution, et cetera.

> But economists really should learn to accompany their predictions with error bars

Virtually all published papers in economics that use regression analysis which you mention include "error bars." The discipline calls these standard errors and confidence intervals. If a paper is non-parametrically estimating functions rather than single parameters, they might also report confidence bands.[1]

Standard errors may be calculated analytically (resting mostly on asymptotic theory) or numerically (using a bootstrap estimator for them). There is a large literature on the appropriate standard errors for various contexts, with clustered errors being mainstream in applications.[2][3] These are taken seriously in peer review, and published papers come with long lists of robustness checks which turn papers into book-length publications when you include the appendices.

[1] https://cattaneo.princeton.edu/papers/Cattaneo-Crump-Farrell... is one example.

[2] See https://economics.mit.edu/files/13927 for a recent discussion.

[3] See https://gregoryeady.com/ResearchMethodsCourse/assets/reading... for bootstrap-based methods.

I stand corrected. Thank you.

This. The subject is definitely not the rigorous science that its practitioners would like you to believe. They mostly just fit some sort of regression model and analyze it, but rarely is there any serious work to demonstrate that reality actually obeys the model. I understand that proving the real world actually conforms to theory is very hard, but that is what makes science what it is, and why science is really hard.

Out of curiosity, could you give a few examples of published papers that uncritically reported regression estimates?

No I don't want to read through that crap anymore, I had enough in grad school helping econ friends. What I'm talking about is that they always make a bunch of simplifying assumptions about the world and then fit their model and analyze. But what they almost never do is seriously justify the assumptions. One popular paper is to do "Assuming the world follows theory X, we propose this tweaked version of model Y from paper Z and show how it better predicts this dataset of 600 points from the world bank." I knew numerous people in grad school who played that game. There is no way the tiny little dataset they had could justify any of this, but that's what publishes in econ. And if you ask them about this, they will tell you that they only had this tiny little dataset because that's all that is publicly available and so on. That's fair, but also gives them a huge dodge to hide behind. That's what I saw of the field and I came away thinking that it stank.

"error bars" are only relevant if you have a reliable model and theory. Economists buying into their own models of humans is the problem

Economists have "hard science" models but those are empirically unreliable.

Honestly the boring answer is that e.g. liquidity is the ability to change your mind instantly, which also means that any prediction can become invalid at any given moment.

If you want to increase predictability, you would have to encourage people to make decisions as soon as possible and stick with those decisions for as long as possible.

Before you lay into an entire academic discipline, it would help to understand it a little better. Fine if you’re just bagging on DSGE models, since they really are garbage (although I would argue that it is because of all the equations involved). But the vast majority of economics is concerned with causal analysis where there are no predictions. And everybody reports standard errors and has for decades.

Do the standard errors actually hold up empirically?

Freakonomics?! It's a clickbait book. Wild headling-grabbing claims, bogus data, and dubious methods. It's like saying to learn investing you should watch Jim Cramer's Mad Money.


The article states: “Some of the studies discussed in it have been called into question. But the overall lesson is a useful one: incentives matter. ”

Another suggestion in the same vein is Why Nations Fail: The Origins of Power, Prosperity, and Poverty

Regarding Freakonomics:

Some of the studies discussed in it have been called into question. But the overall lesson is a useful one: incentives matter.

This seems inherently contradictory. How can we draw lessons or inferences if the data is wrong or not what it purports to be?

Lol it's because most folks mistake economics for a science when it's actually just a grouping of mostly wrong hypothesis. They'll believe any shit their fed.

From my non-economics perspective, they seem to have a genius for ignoring externalities (CO2 anyone?), that, and anything they don't want to consider. I can't have any trust in a model/framework that can pick and choose so freely.

Economists talk constantly about implementing policy that neutralizes externalities. Carbon tax and LVT are among the most cited policies they want to implement. Economists don't write the laws though, and people generally aren't interested in paying their externalities so it doesn't happen.

The Age of Uncertainty if you'd like a good overview to start with.


His The Great Crash: 1929 remains amazing.

And his son (James K.) is also an economist, pretty good.

I will look in to the younger. I am hoping that he has the same droll, dolorous, dare I say, ghastly demeanor

Is anyone keeping track of how often economists are right versus wrong?

There's really no point. If there are any successful economists other than Jim Simons they keep real quiet.

As anonporridge points out in a sib comment ( https://news.ycombinator.com/item?id=32620572 ) economies are too dynamic for a naive economics to work.

There's something to it. But I don't believe the "type 2" dynamics point: if it were the case, then surely there must be some fixed-point you can reach if you take into account that your predictions become public.

> there must be some fixed-point you can reach if you take into account that your predictions become public.

Yes, in a few different ways I think. You have to make predictions or, equivalently, employ strategies that do not depend on secrecy.

E.g. "evolutionarily stable strategy" (ESS). A strategy that does well in the presence of copies of itself (and mutants.) https://en.wikipedia.org/wiki/Evolutionarily_stable_strategy

Any business that does not depend on secrecy could be considered an example. (There's an old hippie business book "Honest Business: A Superior Strategy for Starting and Managing Your Own Business" by Salli Rasberry and Michael Phillips https://en.wikipedia.org/wiki/Michael_Phillips_(consultant) "a founder of the Briarpatch Network. As a banker in 1967 he organized Mastercard.")

You can e.g. buy a fax machine and encourage other people to get them too. The classic network effect: "the phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products. Network effects are typically positive, resulting in a given user deriving more value from a product as more users join the same network" https://en.wikipedia.org/wiki/Network_effect

The thing about making a prediction is that you don't really have much control over your experiment. I would bet that most rigorous predictions end up invalidated by some stated or obviously implied caveat.

The closest thing that I know of is Philip Tetlock, he made a 20-year-long experiment where he asked a variety of "experts" about political events like the fall of the Berlin Wall, and recorded the results.

I went there to see how economists think... and they showed me a big tracking consent form that doesn't label the toggle buttons for whether I'm opting-in or opting-out.

Not sure what the article said since it's locked, but I recommend Steven Landsburg's "The Armchair Economist". It's one of my favourite books of all time.

Also look into Capital: A Critique of Political Economy


Note: Capital is available to read for free here: https://www.marxists.org/archive/marx/works/1867-c1/

The beginning of Capital is quite dense (establishing the basic definitions of a study often is, and Marx's dialectical approach takes some getting used to if, like me, you never could understand Hegel) so I would recommend reading it along with David Harvey's lectures available on Youtube. However, the book does open up from there and becomes very much more concrete: working day lengths in the factory, increasing automation of industry, transition from feudalism by expropriation of land from farmers, ...

It is of course important to understand the works that Marx was critiquing or building on. Smith's Wealth of Nations, for example, is available for free from Standard Ebooks (https://standardebooks.org/ebooks/adam-smith/the-wealth-of-n...). This translation is very readable so I encourage you to take a look.

Hot take: Capital is not about economics. Reading it will in no way help you understand how economists think.

A cursory look at the table of contents of Volume 1 turns up various topics such as:

- the length and regulation of the working day for factory workers

- the division of labor

- the economic impacts of increasing automation/mechanization

- wages (the factor payments for labor)

These are all topics that I think reasonably fall under the umbrella of economics. Certainly Capital is not a book on positive economics. It is, throughout, quite normative, and expressly interested in the combination of politics and economy.

Reading Capital may not help you understand how modern mainstream economists think, but it will definitely get you thinking about the same kinds of problems that they deal with. For example: how regulations might be used to enforce a 40 hour work week. Of course, capitalism has quite outgrown Marx's mid-19th century conception of it. It's an old book. But I find it difficult to understand how a book critiquing the work of the first economists is not a text about economics.

Well you labeled it a "hot take" so that at least shows you understand how absurd this take seems on its face. So what's the part I'm missing? Why is this a good take?

Marx was a political scientist, not an economist. He thought about how greed effects decision making and power corrupts. He was interested in a political revolution because he believed capitalist systems are unable to solve market failures. Economics is generally less interested in the politics of how to implement solutions and more interested in what the optimal solutions are.

> Marx was a political scientist, not an economist

This is probably as pointless of a statement to argue against as it is to make in the first place. But, Marxian economics is still considered one of the main schools of economic theory today and comprises several other schools within it

> He thought about how greed effects decision making and power corrupts.

This is not really something he wrote about. Maybe you're confusing him with the anarchist Bakunin who believed anyone with any amount of (unequal) power would inevitably become corrupt. But given that he believed you could have a "dictatorship of the proletariat" to usher in revolution, he clearly didn't share this view.

> He was interested in a political revolution because he believed capitalist systems are unable to solve market failures.

I guess in a vague, broad sense this is sorta correct... But he actually believed capitalism was a necessary step towards socialism. So much so that Russian Marxists like Lenin specifically tried to bring Western-style capitalism to Russia. They thought it necessary for the advancement of society

> Economics is generally less interested in the politics of how to implement solutions and more interested in what the optimal solutions are.

Karl Marx was specifically interested in "Scientific Socialism". In his time he was hailed as "having done for economics what Newton did for physics". He developed a pretty in-depth and rigorous theory that provided really useful tools to study and analyze society. And he and his followers believed that his conclusions were a result of this rigorous and scientific approach to social analysis

Mind you, this is not really unlike modern economic theory. We have tons of tools that had never actually been tested. In fact, I'd say that the past 15-ish years of economics are revolutionary precisely because it's the first we're actually being data-driven about things. Things like the Phillips curve are still taught in Econ 101 classes around the country but it has thoroughly been debunked using actual real-world data

You can argue that Marx's theories had issues but they were just as "scientific" as modern economics has been up until very very recently. (That is, not very)

> But, Marxian economics is still considered one of the main schools of economic theory

By whom? Can you point to a single aspect of modern mainstream economics that is influenced by Marx?

For example, University of Cambridge economist Ha-Joon Chang defines the 9 main schools of modern economics as

1. Classical

2. Neoclassical

3. Marxist

4. Developmentalist

5. Austrian

6. Schumpeterian

7. Keynesian

8. Institutionalist

9. Behavioralist

With behavioralism obviously being one of the newest. Anyways if you'd like to read more about contemporary impact of Marxian economics:


Economics is mostly political economy. It's based on ideology more than anything moral or actually scientific. Neoliberalism has been the dominant theory since Keynesianism. It's been an abject failure, but nobody has come up with anything to replace it yet.

> Economics is mostly political economy.

I'm sorry, what? Look at the curriculum for any economics degree, look at the winners of the Sveriges Riksbank Prize. How much political economy do you see there?

> based on ideology

Krugman and Manikw are on the opposite ends of the ideological divide. But the economics textbooks that they each wrote will not contradict the other.

How is neoliberalism different from keynesianism? Who was the big neoliberal writer/ what is neoliberalism's "general theory of interest"

Sorry but it actually is about economics and it is a pretty good description of capitalism but he makes some glaring errors about money by assuming that it is just a medium of exchange. Making such a grave error means that his proposed solutions to end capitalism are doomed to end in failure.

To expand on this (and hopefully not mangle your original idea), the key feature that makes a capitalist economy efficient is the use of a price mechanism to distribute the hard problems of decision-making to people who are reasonably well-informed and well-incentivized to make good decisions. These decisions will benefit society as a whole when (A) property rights exist and are enforced, (B) there are low barriers to entry, (C) transaction costs are low.

(There will be failures otherwise. Pollution ends up under A, monopolies under B, and a whole host of modern stupidities ends up under C — e.g. just for instance, no one at a minimum wage job is going to afford a lawyer to negotiate their employment contract: transaction costs are too high; the bigcorp employer, by contrast, only has to draw up the contract once. Instant structural unfairness follows.)

Orchestrating both information and incentives like this is really really hard. It's hard enough at a mid-sized project at a mid-sized company, where management spends hours and hours hammering on the idea of "alignment". At the scale of the global economy it's utterly intractable.

it appears that yout descruption equally applies to ancient rome - property rights were neforced, including on people. Price mechanism was used.

Was ancient Rome capitalist?

Ancient Rome, famed for its commerce, had a variety of capitalist features, though with significantly less productive use of invested capital, as one would expect of a pre-industrial society. Most people, however, would consider Roman slavery with people-as-property to be an abrogation of property-rights-in-the-self rather than just enforcement.

You could say the same thing about every other economist at the time or even much more recent ones. Things change and evolve.

Marx identifies 5 functions of money in the 3rd chapter of Capital Vol 1 called "Money," not to mention the expanded treatment of money by Capital Vol 3.


It's unclear what you think Marx said on "how" to end capitalism and how this relates directly to his theory of money.

Reading the first chapter alone (in particular the section on commodity fetishism) will tell you all you need to know about how economists think, because it tells you why economists think. This is a domain of inquiry that is necessary for any science, but that the economists since Marx have ran from for reasons Marx exposed in Capital itself. Notice that the OP article doesn't even try to justify its categories. How do economists think? Marx responds very simply: ideologically, dogmatically.

Could you please expand on this?

Not original poster, but

Economics is about making decisions when your decisions have trade-offs because you have limited resources. Everything has a price, but the prices aren't always measured in a nice money-based price tag for your convenience, they're ultimately measured by the next-best alternatives. Decisions and policies don't just have consequences, they have second-order effects and third-order effects and you need to chase those down too, because excluding anything makes you understand the costs wrong (e.g. add highway lanes to relieve congestion -> now there is more traffic, because of "induced demand", not sure that was a good idea -> but why was there even induced demand? where are those trips coming from and what was the cost of the previous configuration? is this a housing-policy thing now??). You also learn to worry a lot about how decisions are actually made by self-interested decision-makers, rather than by abstractions-seeking-the-greater-good, and you examine what the decision-makers' incentives are....

Whereas a work like Das Kapital tells you very little about how to think this way. It's not intended to; it's more about the relative influence of various actors within a political-economic system, while raising tough questions about the meaning of private property.

>Economics is about making decisions when your decisions have trade-offs because you have limited resources.

But land isn't limited in the sense that there isn't enough of it for everyone, there is a fixed quantity of land on this planet but more than enough for everyone. Somehow some people got this absurd theory in their head that once there is abundance there is no need for economic allocation mechanisms. This completely ignores that even if there is enough land for everyone, a single person may have more land fenced off than he needs for himself, meaning that someone else ends up with less land than he needs for himself. Despite abundance of land you still need to allocate it properly and you still need economics to do that but economists shrug and do nothing. Artificial scarcity is the new normal.

Since all producable goods tend toward market saturation you will have this problem in more and more sectors in the economy as your country gets wealthier. In fact the problem isn't poverty, the wealthier we gets the worse things get.

Why is that the case? Why does the economy fail to allow abundance to happen? Why did economists put on a brain cage that tells them that scarcity is absolute and that if something isn't scarce it should be made scarce?

Reality is quite boring. Assume that there is a floor on capital yields meaning the income share in labor can never reach 100%.

Since economic activity gets siphoned off into the pockets of the owners of capital aka the rich get richer and they don't spend their wealth back into the economy, the rest of the economy must shrink. A game of musical chairs starts. There must be a loser and people will do absolutely everything to not end up as the loser. To prevent the non rich economy from shrinking and shriveling into nothing, we must keep up this farce of endless economic growth so that living standards don't get worse.

> But land isn't limited in the sense that there isn't enough of it for everyone, there is a fixed quantity of land on this planet but

You have assigned an economic value system and denied doing it - that someone can have "enough" land and someone else does not have "enough". By who's pricing model and oops - guess we're back to plain old economics.

> But land isn't limited in the sense that there isn't enough of it for everyone,

1. How much land is enough for someone?

2. Is land fungible?

> economists shrug and do nothing

What exactly do you want economists to do here? Redistribute land?

> if something isn't scarce it should be made scarce?

Which economist is advocating for this?

we create scarsity of purpose with NFTs

Kapital is extremely interesting from the point of view of understanding Marx's very singular view of the world, but doesn't tell you much about how modern economists think about modern economies even from a contrasting perspective since neither existed at the time of writing...

“Modern economists” aren’t really a thing, at least in the sense that a consensus or collective understanding of economics is shared by a group denominated as such.

There is vigorous disagreement in the field regarding just about everything. The title of the underlying article may more appropriately be, “Popular Economics for Non-Academics.”

There is vigorous disagreement in the field regarding just about everything, but some of the few things they agree on (and the key fault lines for what they disagree on) didn't exist at the time Kapital was written.

What are the few things they agree on?

Krugman and Manikw are ideological adversaries. They both wrote Macroeconomics textbooks which fully agree with each other.

krugman and mankiw are adversaries in the sense one prefers the current world neoliberal order designed for the benefit of the us to be led by democrats and the other prefers it to be led by republicans

to the average citizen of the world they are indistinguishable

Subjectivism vs Labour theory of value is a pretty easy one.

Most of Econ 101, as a sibling comment notes, from basic approaches (definitions, deductive reasoning from models using algebra, testing of models with data) to detail (marginalism, "new consensus" macro modelling).

Macroeconomics and econometrics are two major subfields which literally didn't exist in Marx's day: economists may disagree significantly on conclusions and somewhat less significantly on certain assumptions models make, but they're focusing on the same variables (interest rates matter and fiscal policy somewhat matters, inflation is a thing which can be reduced, boosting employment and staving of recessions is more difficult) and doing similar maths.

For modern topics, read the Monthly Review ( https://monthlyreview.org ).

This article on the 2008 financial crisis has lots of interesting references to government data. Then you can see if you reach the same conclusions as the authors.


As a fairly big (philosophical) Marxist, it's important to recognize that Marx is much like the Bayesian Statistics of economics.

For me personally, it was Marx that first made sense when I read it, very much like Bayesian statistics first made sense to me where I found Frequentist stats very confusing.

That said it shares the same problem: If you learn Bayesian statistics the Summer before Stats 101 in college, it will likely hurt your performance in that class. Likewise, while Marx makes a lot of sense, understanding Marx will mean you have an even more difficult time communicating with mainstream/orthodox economists.

However from a Marxist perspective this is no accident. One of, if not the most, important ideas coming out of Marx is the idea of ideology. The idea is that even our most basic thinking and views about the world are formed around the idea of maintaining existing social relations in favor of the ruling class.

An example of this (my own) is the way that Christianity in Medieval Europe quickly evolved into a belief system where the natural order involves an all mighty ruler that must not be questioned. The idea that the natural order of things involves a strict monarchistic hierarchy was fundamental to the Medieval European world view. Clearly this is a beneficial world view if you are a ruling monarch. You still see the impact of this today in the way we tell stories about princesses who, even when their identity is either unknown or hidden, are innately superior to other around them, or in other narratives where justice is satisfied only when the "true king" sits on the throne.

Orthodox economics, from a Marxist perspective, is referred to as bourgeois economics. That is, at a fundamental intellectual level, orthodox economics exists to reaffirm a capitalist worldview, in a similar way to medieval theology evolves to support monarchistic rule. An example of this is the way that the role of labor in the creation of value is fairly hidden, the economic inputs and outputs are all framed in a way to distract from the very idea that the worker creates value.

Another good example of the difference is the "business cycle" vs Marx's crisis theory. In orthodox economics the business cycle is a borderline supernatural process that we just accept as "how things go". For Marx periodic market crises are because Capitialism is filled with unresolvable internal contradictions (one example is the incentive for Capitialist to maximize the exploitation of the worker while simultaneously depending on that worker for the creation of surplus value). Marx spends a good chunk of Capital vol III developing this idea. For Marx the big concern is that deep contradictions in the foundations in the logic of Capitialism will ultimately lead to it's collapse.

So while I do recommend nearly everyone read Marx, it will likely hurt, not help, you understand mainstream economic theories.

> So while I do recommend nearly everyone read Marx, it will likely hurt, not help, you understand mainstream economic theories.

Solved by reading Atlas Shrugged in the interim.

The Wrecking Crew by Thomas Frank is good for the lay public.

Much denser is The Road from Mont Pelerin by Philip Mirowski.

Marx's theory of surplus value, as expounded in Das Kapital, was what really opened my eyes when studying Economics at university. After reading about his labour theory of value I realised all the textbook economics I'd been spoon-fed from Lipsey's "Positive Economics" during my 2 years of A-levels (UK) was just an apologetic for the prevailing capitalist system.

How does the Labor Theory of Value account for the value of art?

Marx was primarily addressing the value of commodities, ie. economic value, but extending it to works of art: the number of socially necessary hours required to create a piece of work. That's not the same as market value though both exist. Art creation isn't really addressed by this as the labour pool for a piece of art is exactly one whereas the Labour Theory of Value is about social production.

> the number of socially necessary hours required to create a piece of work.

Who decides how many hours of work spent on a piece of art are socially necessary?

> Art creation isn't really addressed by this as the labour pool for a piece of art is exactly one

This is definitely not true of things like films and novels.

Socially necessary is an averaging concept and is an essential part of the theory. Look it up in Das Kapital. Marx was concerned with social production, not individuals.

So it's a political idea, as opposed to an economic one.

Not really. Most economic theories deal with the social dimension of production. Then again, we tend to forget that Economics for a long time was known as Political Economy as it's difficult, if not impossible, to divorce the two.

Except, as an economic theory, it's superseded. People only hold to it out of politics.

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