[ExI] Psychology of markets explanations

[Stathis Papaioannou]

2009/6/2  <dan_ust at yahoo.com>:

[It annoys me that gmail doesn't automatically add "wrote" when I
reply to emails. Does anyone know how to change this?]

> 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.

Yes, and I don't see how this could be a point of contention.
Economics *must* supervene on the interaction between human behaviour
and the physical environment, just as the mind *must* supervene on
brain processes, unless you believe there in a magical spirit that
animates the mind or the economy.

> 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.

You can come up with a deeper explanation, such as an excess of
liquidity causing asset price inflation, but in the end it is still
peoples' reaction to the excess liquidity (or whatever it is) that
drives the economy.

An analogy from physics might help illustrate my point. We know that
there are billions of gas molecules all jostling each other in an
extremely complex way, but the relationship between pressure and
volume for the gas as a whole can be approximated by the very simple
Boyle's Law, PV=k. But we know that Boyle's Law *must* be due to the
complex behaviour of the individual molecules, even if it's useless or
impossible to try to follow those individual molecules in order to try
to predict the behaviour of the gas.


-- 
Stathis Papaioannou