November 4, 2014

With Models anything is possible

      I came a cross an article that I felt would be perfect for this blog. It gives the mindset of most economists today where they spend most of their time making theoretical models and forgetting how it relates to the real world, where you can't represent everything as numbers especially human nature. The article deals with aggregation, econometrics models and data, math/statistics and computer science and how to use these “tools” to try to predict and stop the next financial crisis. But nowhere did it talk about the theory of human action.
       The article talks about Robert F. Engle a Nobel economist and his plan to avert the next financial crisis. He plans on using the aforementioned econometrics, aggregation, and computer science to try and model to likelihood of the next financial collapse and to try and stop it. He believes that his models will give him an accurate picture of the economy and specifically the financial market, he then thinks that he can use these models and info to try and prevent another crisis. He seems pretty sure that his aggregations give him a true picture of the financial market, I guess he thinks he can model all of human action in them and nothing is hidden from his view and models. A somewhat scary idea.
       He seems intent on the idea that once his models can accurately predict the financial market that he/they can start on moving the market in the right direction. That governments can then steer the economy to its most efficient outcome, with the help of government interventionism like the Dodd Frank regulation. Engle seems confident that with his models governments the world over can make sure a crisis like this never happens again. We'll see.
       The first thing that comes to my mind is haven't they tried this before? Haven't economists used these methods before to try and predict how the markets will react? But almost none of them predicted the 2008 crisis, so you would think that they might catch on to the idea that maybe they can't predict how the economy will act even with their mathematical models and computers, but I doubt it. Another thing I picked up after reading this article and many like it is that NEO's seem to dominate the academic econ world. I see so little attention payed to Austrian economists and their theories. Maybe its time we see some more diversity of though in the academic economic world, but I also doubt we will see it any time soon.


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