Michael Battalio

Friday, October 17, 2014

Discussions on Wealth (part 3): Chapter 2 discussion

This discussion on wealth is an offshoot of Serious Conversations parts 53 and 54. We are considering the book The Origin of Wealth by Eric D. Beinhocker. (I do not profit from clicks). (Ed.: we will be taking the general format of outlining the major points of the chapter and then discussing what we believe to be important or intriguing points.)

I am struck by how the author faults the assumptions in economic theory for the problems in his examples rather than the implementation of those theories or the mistakes or the people implementing them.  He hints at it in places, but mostly he seems to fault the underlying math for the breakdown in theory.  I’m not saying they aren’t mostly at fault (I obviously have no idea.), but I try to never underestimate human incompetence.  

Interesting point:  economics is a science.  I have never thought of it as such, and I feel a bit stupid for not realizing it earlier. I always lumped it in with the nebulous schools of business and accounting, but I suppose it is.  This might lead us to another large question (what is science?)  By a strict definition science could be simply experimental knowledge that makes testable predictions built within a theoretical framework based upon logic and mathematics.  In that definition economics is certainly science.  

Smith:  wealth is created by improving the productivity of labor and the distribution of that labor is made by individual assessments of happiness for each person.  And efficiency is key to the maximum happiness of all individuals.  

Leon Walras (pg 29) is made to sound like the instigator of all of the problems with the mathematical side of traditional economics.  If only he had not been drawn to physics and statics, we instead might have an economic theory built upon chemistry instead.  Instead I think his assumption of the “godlike auctioneer” is his main fault.  Individuals trade, not entire communities.

It seems in the struggle to bring in physics and mathematics to economics the primary struggle was in modeling human behavior.  All of these physics principles of equilibrium might be completely correct if there were such thing as a perfect human.  This might seem easy if one assumes all humans are infallible and perfect judges of their own happiness.  Neither of these are true, so it seems to me that the failure of traditional economics can be traced to the difficulty in modeling human behavior and not in the implementation of physics analogies.  Perhaps this is why the author will be suggesting evolution as a new foundational economic principle.  

I laughed when I got to Pareto superior trades (pg 36) and the fundamental assumption that people aren’t stupid.  Hilarious.

Growth has always been puzzling to me.  I’ve mentioned it previously.  I don’t understand why growth is such a desirable attribute.  Why can’t production just remain constant? I am intrigued by Romer’s positive feedback loop of growth (pg 42).  Growth begets more growth (i.e. the richer a society gets the more there is to invest in greater technology and that greater technology yields greater growth due to its more advanced nature).  I suppose I understand the endogenous growth more than exogenous.  The question becomes just as with the bicycle rider on a high wire example, where is the point where outside forces drag on the greater input?  What is the frictional force that slows growth?

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