Saturday, July 18, 2009

The Art of The Stimulus and Economics

From the I Told You So Dept., the "Economics is dead. Long live Economics" desk.

Brief Summary: How do we develop tools for governments to take decisions on the economic crisis? Create Socio-Economic Anthropological models that not only leverage standard parsimonious economic models and capital market inefficiencies, but also incorporate people's behaviour, potentially through market research tools. International finance and relative "behavior" of economies needs to be considered as well- stay tuned.

The Economist has an interesting article (yet again- thanks to Lori Sullivan for sharing) on how economics needs to change to adapt to the real world:

It wraps up with a wonderful line-" the end economists are social scientists, trying to understand the real world". You can read the backgrounders listed at the end of the post, so I will refrain from an I-told-you-so-last-week.

Can Economic Models Actively Help Generate Solutions and Make Decisions?
The honest answer- I don't know. However, analytical approaches need to "improve". Referring to Public Enemies in a previous post was only a half joke.

Economic models need to incorporate additional variables as proxies of elements of the economy. This is more than economics learning from finance and vice versa.
This is more than economics
acknowledging capital market inefficiencies via economic models incorporating the inefficiencies in some way.
People's behavior is also an element of the economy.

Socio-Economic Anthropological Modeling? Or,
How to Get a Context to an Economic Environment?
1> The elements that make up the economy today are different than those in the 1930s. The U.S. economy today has a large services component.

2> The people that make up the economy today broadly differ in age groups, education levels and skill sets. The sectors you may want to stimulate to revive "animal spirits" need to match this demographic structure of the population.

3> People today may also behave differently than those in the 1930s. At the risk of throwing in a *seemlingly* vague commentary, here is an article that attempts to characterize an entire
generation of young Japanese:

4> Would we go so far as to say that the "animal spirit" of the 1930s was different that the "animal spirit" today? To throw in a little more science into the art, could we utilize market research (say clustering) techniques to characterize behavior of populations?

5> Can we then build Socio-Economic Anthropological models that bring in the "animal spirit" aspect of the economy to more accurately reflect the economy? Then, can we potentially predict the impact of actions meant to improve the economy?

What do you think?

The Background
From the I Told You So Dept., the "because I-have-been-telling-it-so-for-a-couple-of-years, and the-jury-is-not-out-yet" desk
So what am I talking about? Previous posts give you some background:

1> Economic Crisis and the Art of The Stimulus- To Boldly Go Where No Man Has Gone Before?

2> Financial Transactions, Trust and Keynesian "Animal Spirits"

3> Financial Markets, Economic Crises And Global Co-ordination

4> There is an international finance component that needs to be analyzed as well. A case in point- the global impact of the Lehmann collapse. Stay tuned.

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