Do Economists Know All There is to Know About Economics? No!
Monday March 10, 2008
Facebook friend Fabio Rojas on the state of economics:
An example - the majority of medium- and large-sized firms operate in an oligopolistic market structure, where each firm in the market sells somewhat similar, but not identical, goods and has some pricing-power as the ability to alter their prices to changing economic conditions and in response to their competitors.
What do we know about this market structure? What canonical models do we have to explain how prices are set in such a framework? Well, we have very simple models such as Bertrand competition that tells us that even in a duopoly we will see firms price at perfectly competitive levels. Then we have Cournot competition where the price the firms charge end up somewhere between monopoly and perfect competition. We could go through a number of other simple models (Stackelberg, etc.), but do any describe any realistic testable hypotheses on the prices charged by real-world firms in an oligopolistic market? Do any give any realistic normative recommendations on the prices firms should charge? I simply do not see it.
The study of market structure, in my view, is one of the most important topics in microeconomics. And we really don't know all that much about it. I haven't even gotten into macroeconomics which is probably even less understood than microeconomics. I think we have a long way to go until the field is "played out".
Economics, as understood for hundreds of years, has played out. The major problems of econ 101 have been solved. We know about supply and demand, marginal utility, choice under uncertainty, and budget constraints. We have a wide variety of tools, ranging from game theory to econometrics, that help us identify these processes in situations ranging from war, to car sales, to dating. We are also seeing how these processes plug into classic macroeconomic issues, such as growth and international trade.I wholly disagree with this idea. Economics is not played out, but if it is, it is because economists have given up on the hard questions. It is not because we have fully understood economic behavior.
An example - the majority of medium- and large-sized firms operate in an oligopolistic market structure, where each firm in the market sells somewhat similar, but not identical, goods and has some pricing-power as the ability to alter their prices to changing economic conditions and in response to their competitors.
What do we know about this market structure? What canonical models do we have to explain how prices are set in such a framework? Well, we have very simple models such as Bertrand competition that tells us that even in a duopoly we will see firms price at perfectly competitive levels. Then we have Cournot competition where the price the firms charge end up somewhere between monopoly and perfect competition. We could go through a number of other simple models (Stackelberg, etc.), but do any describe any realistic testable hypotheses on the prices charged by real-world firms in an oligopolistic market? Do any give any realistic normative recommendations on the prices firms should charge? I simply do not see it.
The study of market structure, in my view, is one of the most important topics in microeconomics. And we really don't know all that much about it. I haven't even gotten into macroeconomics which is probably even less understood than microeconomics. I think we have a long way to go until the field is "played out".
Comments
Mike
I could not agree with you more. Economists don’t know everything because everything has not been invented yet.
Sometimes people forget the basics. I think Charles Dickens said it all in David Copperfield–paraphrase–income twenty pounds a year, expenses nineteen pounds, nineteen shillings and sixpence–result happiness;income twenty pounds a year, expenses twenty pounds and sixpence–result misery.
The basics of economics are fine, as long as we remember them; however humans are so inventive that they continually class liabilities as assets, and in due course pay the price!e.g. the Sub Prime debacle, the South Sea Bubble etc.
Theodore Roosevelt was supposed to be a “Trust Buster” but much of the imperfect competition he strove to eliminate remains today, because it appears profitable to those who control it.
I suspect economists will always have a good job ahead of them!
Of course in any subject there is always more to know and to learn and economics is no exception. So the question should really be are we getting wiser in our knowledge and does it help us to keep up with the latest changes going on in the economic world? The answer to this is no. If, for no other reason, it is because with all of our technical ability and know-how there is not yet invented a cure for “business-cycles” and the rise and fall of a country’s place within the international trade situation.
However there is one way of finding out that has not seriously been tried by the economisists themselves and that is to make the subject as scientific and calculatable as possible. The present-day excuse for this is to replace the lack of reason and logic by statistics and the econometric mess that results does nothing to help.
When this subject is taken seriously and all the basic factors are included (as I have indeed done in my somewhat personal analysis of general and consequential macroeconomics, yet to be published) it will be found that this problem of trade cycles can be stopped and the national economies stabilized, but to achieve this will indeed take a miricle due to the stubboness of present-day pseduo-science economics to get their ideas straight. When will the time come when they can become truely intellectuly honest?