A short reflection on economics

Economics in Transition

This is a great read on the state of economics. As most people are aware, economists have been bludgeoned for not predicting the financial crisis. Though, this is ridiculous because it is not an economists job to regulate banks. And, more importantly, many economists warned about the pending crisis. They were ignored.

The good news is economics is changing. The changes are for the better because economics needs more human behavior and less modeling. This is not to say economics need to steer away from computer models and mathematics, but rather that we need to begin with the human aspect (fear, greed, culture, storytelling, imagination) and build a model based on these characteristics.

How do you do this? Well, this is the tough question economists need to answer. Some argue we can use history to model out these traits, with the rationale that past human behavior will repeat under similar circumstances. But this is not true. Humans react different to the same circumstances. And, to be perfectly honest, history never repeats itself precisely. Meaning that human behavior changes based on where the agents are in their life at the time of the event. And previous events can influence the behavior during the current event. This means that a computer model will never be able to remotely forecast behavior during an event. In short, we need to respect radical uncertainty. This is one example of how economics and changing and I think we will get to answering this question sooner than later.

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