Prometheus 6: Psychohistory

September 02, 2003

Psychohistory

I should finish Chapter 2 of Professor deLong's macroeconomics textbook tonight, so I'll be checking out the answers to Problem Set 1 tomorrow morning.

So far, it's clear, which means well-written, and I'm told I have the right reasons for being interested in economics; the three reasons given boil down to self-interest. Knowing something about this stuff lets you respond more intelligently to national events.

Thing is, Professor deLong is also clear that this is not precise. For instance there's a table that lays out the difference between microeconomics and macroeconomics

The Two Branches of Economics
Macroeconomists	Microeconomists
Focus on the economy as a whole.	Focus on the markets for individual commodities and on the decisions of single economic agents.
Spend much time analyzing how total income changees, and how changes in income cause changes in other modes of economic behavior.	Hold total income constant.
Spend a great deal of time and energy investigating how people form their expectations and change them over time	Don't worry much about how decision makers form their expectations.
Consider the possibility that decision makers might change the quantities they produce before they change the prices they charge.	Assume that economic adjustment occurs first through prices that change to balance supply and demand, and only afterward do producers and consumers react to the change prices by changing the quantities they make, buy, or sell.

These are two views of a single system that are as different as that a driver and a mechanic will have of the same car. How do you reconcile them? Do you have to? There seems to be a gentlemanly debate about it, but not only do I think it's not necessary I don't think it's possible beyond macroeconomics saying "these are the forces at play" and microeconomics saying "this is what I do when these forces come into play."

Then there the GDP. The Professor says:

Real GDP

The first key indicator is the level of real Gross Domestic Product, called "real GDP" or often just "GDP" for short. "Real" means that this measure corrects for changes in the overall level of prices. If total spending doubles because the average level of prices doubles but the total flow of commodities does not change, then real GDP does not change. Economic variables are either "real"--that is, they have been adjust for changes in the price level--or "nominal"--that is, they have not been adjusted for changes in the price level. "Gross" means that this measure includes the replacement of worn-out and obsolete equipment and structures as well as completely new investment. ("Gross" measures contrast with "net" measures, which include only investments that add to the capital stock. "Net" measures are better than gross measures, but the information needed to construct them is nor reliable.)

and

Real GDP divided by the number of workers in the economy is the most frequently used summary index of the economy (see Box 1.3). It is a measure of how well the economy produces goods and services that people find useful--the necessities, conveniences, and luxuries of life. It is, however, a flawed and imperfect index. It says nothing, for instance, about the relative distribution of the nation's economic product. And because it measures market prices, not user satisfaction, it is an imperfect measure of material well-being. Nevertheless real GDP per worker remains the best readily-available economic index.

If economics is a science. it's in the state chemistry was in immediately after it emerged from alchemy...except chemists of that day had no idea of the debased state of their knowledge. We do (or can...you need to get this stuff and read it). I'm not saying it's not useful. I'm saying people who make plans like their economic theories are revealed wisdom are full of shit...and were probably unreflective students to boot.

To me, though, the most troubling thing is the goal of applied economics: perpetual growth.

That's not even possible.

I need to figure out an intelligent way to ask what the hell that's about.

Posted by P6 at September 2, 2003 04:08 PM | Trackback URL: http://www.prometheus6.org/mt/mt-tb.cgi/1517

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