Stanford Progressive

Letter from the Editor

By Ross Raffin, published January, 2010

Economics is a discipline of models. When many people hear economic theories, they ask questions like “but what about all of the other factors?” For instance, how can a “rational actor” model of the stock market, where all investors are omniscient cost-benefit machines, predict the psychologically-driven and irrational choices of actual stock-holders? How can models of supply and demand competition make accurate predictions when they ignore the ulterior and sometimes irreconciliable motives of CEOs, chairman, and other important individual actors?

The simple answer is that, at the end of the day, no single model in economics is entirely accurate. This is purposeful, since any particular event has an enormous number of contributing causes. Models simplify events by picking out specific ranges of contributing causes in order to better understand their effects. The problem is that sometimes economists ignore reality in favor of these models. This affords a sense of academic legitimacy hereby allowing self-motivated politicians to advance potentially disastrous economic policies under the guise of intellectualism.

For instance, when analyzing government policies, some economists might focus on the effect of tax cuts on business while another might focus on the effect of tax cuts on government revenue. A proponent of tax cuts might cite models which show the positive effects predicted from tax cuts. The opponent could champion the second model.

Thus, economists are entrenched in the generally unfathomable wars of Keynesians vs monetarists, neo-classical economics vs Minsky’s Financial Instability Hypothesis, and other dichotomies which almost no one other than economists understand. Politicians and pundits then pick and choose among these models to satisfy their ideology before bombarding the public. These political elites conflate models with reality to the detriment of uninformed American citizens.

This issue of The Stanford Progressive focuses less on evangelizing a particular model and more on describing and inspecting the state of the American and world economy. One article focuses on a technological innovation, Cloud Computing, which promises to vastly decrease the barriers stopping many entrepreneurs from starting their own firms. Another article emphasizes that an answer to the growing deficit lies in health care reform. Other articles challenge some more fundamental assumptions about economics, such as whether economic growth necessarily leads to increased happiness. Another explores unemployment from a personal perspective. Each writer brings to the table a different economic and world perspective. However, none of them are the “correct” means of interpreting economics. No model or perspective is entirely accurate. Be wary of any politician, pundit, or panderer who claims otherwise.

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