[ExI] Psychology of markets explanations

Dan dan_ust at yahoo.com
Tue Jun 2 18:24:37 UTC 2009

--- On Tue, 6/2/09, painlord2k at libero.it <painlord2k at libero.it> wrote:
>>> The supply-demand curve work perfectly with
>>> rational agents.
>> I disagree.  The law applies to all agents.
> I agree with you.

I also meant to add -- and hope you'll agree - -that the supply-demand curve is a didactic tool and an idealization.  All we can know in the real world is the actual price; the rest is theoretical conjecture.  Such conjectures can be more or less helpful, but I don't think there's a means of proving them in any consistent way.  (This doesn't mean the Law is just a conjecture, but that the particular curves are.)

>> (This is in contradistinction to the use of "rational"
>> by Mises and
>> Rothbard.  Their use in this context is not to
>> describe someone as
>> following the rules of logic, but rather as someone
>> who acts
>> purposefully.  In this sense, all agents in a
>> market are rational:
>> they are all acting to advance their goals.  As
>> economists, we cannot
>> judge their goals, but only explain their actions in
>> terms of them.)
> Exactly. If they have goals and they act purposely to
> realize them, they are "rational".

Yes, though it seemed from your usage that you were calling irrational certain goals or values.  Economics can't judge goals or values.

> My take is that agents
> without purpose or unable to act purposely to realize them
> are "irrational".

Yes, but we usually don't see that.  We see people acting for goals -- goals which we might not completely know or they might completely articulate...  And these goals might clash between people or within the same person.  But actual actions can't clash per se.  This is why, e.g., the goal of saving some (for tomorrow) and of consuming all today can clash, but the action can't: one can't eat one's cake and have it too.  (And this applies to the example of inflation: inflation creates the perception that one can both consume more and invest more.  This perception, however, doesn't match the actual amount of goods and services available or likely to be available.)

> They have not any priority in their goal, if they have
> goal. In this, they are simply random machine.

See above.  I think very few people would fit that model.

> What I was criticizing is the concept expressed that
> psychology can govern directly the outcome of the market,
> when it can indirectly govern (at best) the interpretation
> of the data gathered and the goals chosen.

Well, it can govern the demand side -- as when people might demand a good for one reason and not another or they change their demand for something.  On the latter, think of how someone might want a designer shirt -- that's his goal -- but suddenly, when finding other people in his circle already have it, no longer wants it.  Psychology might provide insights into why this is so.  But from an economic standpoint, this is merely a change in demand.  Why it happens is not really germain to the Law of Supply and Demand -- nor do such changes nullify that law.

With my subject line, too, I was trying to hint that psychological explanations of the crisis -- "animal spirits" -- don't explain anything.  Why did the animal spirits shift in 2008 and not in 2007 or 2009?  Why in 1929 and two years earlier or ten years later?  Why, too, did the downturn in 1920 not lead to a decade long depression, while the downturn in 1928-9 did?  Animal spirits and similar explanations -- greed, for instance -- don't really stand up to this criticism -- at least, not without adding more auxiliary hypotheses.

I feel forced to add, too, that mainstream economics suffers from making predictions that fail mainly because it makes assumptions that are unrealistic -- like perfect competition, completely liquid assets markets, instantaneous adjustments, actors who all behave the same and are aware of the same opportunities, general equilibrium.*  (Often too critics of mainstream economics believe that whiule real world markets are imperfect in so many ways that somehow economic theorists and policy makers can will away these imperfections -- that theorists and planners will somehow do better at choosing the best prices, the rights quantities and qualities of goods and services, make the correct investments, and so forth.)  A lot of market psychology arguments seem to me to be merely accepting that economics must make these ridiculous assumptions and then trying to patch them up with explanations of why the assumptions fail -- as opposed to just throwing out the



*  Why this is so is a bit topic and I don't think I can weigh in with much scholarship on this.


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