[ExI] Psychology of markets explanations

dan_ust at yahoo.com dan_ust at yahoo.com
Tue Jun 2 13:03:58 UTC 2009

--- On Mon, 6/1/09, Damien Broderick <thespike at satx.rr.com> wrote:
> At 12:19 PM 6/1/2009 -0700, Dan wrote:
>> This is how laws work in economics.  And they
>> don't, as I've said before, have predictive value in the
>> same way, say, chemical laws do -- because there are no
>> constant relations in human action -- at least, none we know
>> of.
> Unless it's the phases of the moons of Saturn that control
> these human action variables, I'd guess that you're pointing
> directly to what Stathis and BillK and I mean by
> "psychological" components of economic behavior. Whew! Glad
> that's resolved.

I don't think they and I mean the same thing by economic laws here.  It seems to me, and either can correct me, that they see economic laws as provisional or not laws at all, and reduce economic phenomena to psychology -- hence my subject line.  Earlier, it seemed to me that Stathis was offering up a psychological explanation of the current crisis -- the "animal spirits" of a lot of people suddenly got scared of buying homes.  I actually think that type of explanation (if that does justice to Stathis's position; I believe I might have misinterpreted him here, but he can correct me) is actually wrong and close to useless.

What I meant by the lack of "constant relations in human action" was in the example I used: no way to tell beforehand if a 10% decrease in supply will lead to a 5% rise in price.  Instead, economic laws are explanatory -- not predictive.  Attempts to make them predictive must presume some constant relations.  And granted if you torture enough statistical data, you'll find what look like such constants.  (Since Stathis brought up technical analysis, this is kind of a financial version of torturing the data.  And we see in technical analysts getting it right up until they go bust.)  Out of such constants, mainstream economic models are built and recent history shows, to me, the folly of this endeavor.  The models predicted, right up until the market fell, that everything was okay.

Many Austrian economists, however, were warning all along the problems of low interest rates and one of their gang, Frank Shostak, had the dubious distinct of "predicting" the week of the collapse.

All of this is not -- and perhaps I've gone too far in stressing economic laws here -- to say psychology plays no role in markets.  It does, but it doesn't play the kind of explanatory role that Keynesians and psychology of markets explanations would have us believe.  (Add to this the Oedipus Effect: if someone found out that people in markets have a certain psychological tendency, someone might exploit that, making it costly to evince that tendency, and, perhaps, ultimately quashing it.)




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