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Tuesday, March 13, 2012

A Plateful of Rational

Had your your fill of crazy today?

English: DH Hill Library at NC State Universit...
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Related source » The Aleph Blog » Blog Archive » Economics is Hard; the Bad Assumptions of Economists Makes it Harder: 'via Blog this'
[This related source is recommended in its entirety.]
“Yes, economics is hard. Much harder than most economists think. They need to abandon Keynesian, Chicago, and Neoclassical thinking, and aim for something that fits the data more closely. That may not be the Austrian School, but it will be closer to that than the Neoclassical School. We need an economic paradigm that is willing to tell the politicians that their actions will do no good, and will likely do harm; that central banks can’t create prosperity. Governments exist to enforce justice, not goose the economy. When we are in the bust phase of the economy, there are no good solutions, except to take the pain, realize the losses, and come to a quick end through a painful “big bang.” This is the solution our central bank and politicians are fighting. The “Japan solution” that is being followed refinances assets that are in oversupply at progressively lower rates, allowing bad assets to survive, and encouraging unproductive investment. Real progress comes from accepting that there is no easy solution, and allowing the economy to liquidate bad investments without hindrance from the government or central bank. The solution comes in preventing booms from getting out of hand, and always letting recessions be hard enough to liquidate bad investments. We can’t do that now in the midst of the bust, but after the bad debts of our economy are liquidated, much as the Depression ended in 1941 when Debt/GDP reached 1.4x due to compromises and payoffs, and not due to the government or Fed, there can be real growth again, because less-indebted consumers and businesses are ready to act.” [emphasis added]
— David Merkel, 2010/06/30 (

I am not an economist. I have been a professional physicist. But now in my retirement, I have resumed with renewed passion the activity I have always indulged — student.

I have always been a good student, and on the scale from irrational to rational, I lean heavily towards the latter, if I do say so myself. In recent years I have audited several courses in economics taught by the very prestigious department at North Carolina State University (Raleigh). I have also read a number of classic books on the subject, and regularly peruse several blogs I admire.

So far I have been convinced by various sources that, above all, macroeconomics is hard. Economic policy is highly prone to unintended consequences; periodic downturns can not be avoided; and, efforts to cushion a downturn frequently exacerbate and prolong it. If any class of individuals, who prescribe policy for "turning an economy around" [other than allowing the cycle to run its course], is to be trusted less than that of economists themselves, it is politicians.

The above excerpted post by David Merkel about our society's current economic malaise is one of the best explanations I have come across recently.

Post 1,780 A Plateful of Rational
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