Study the Shocks
A system in motion stays in motion. A system at rest stays at rest.
Good so far.
But: our question is a little more interesting. We want to know how the system began to move. We want to know about those moments of change. When you think about it, or when you’re not a mainstream economist, it is precisely those changes that attract your attention.
In this context it is always hilarious to be reminded of the way in which mainstream economics sees the world. It postulates an economy chugging along merrily following a path smoothly, fully determined by a combination of where it came from and a number of internal factors, and hermetically sealed off from the hurly burly around it.
To make sure that the path is smooth, mainstream theorists get rid of all the nasty stuff that could cause things to misbehave. Like people. Real people are an inconvenience, so they’re kicked out and replaced by a single representative chosen, presumably, for his or her astonishing likeness to economists. Business firms are tossed out as well. They too are represented by a single suitably cleansed and correct representative. The single firm and the single person then interact. Well, that is they interact within the confines of mainstream theory. This means they behave according to a few very simple and specially chosen rules that preclude any cheating, conniving, cooperation, or generally demeaning activity that would discredit an economist. They are also endowed with astonishing powers of calculation. This is probably why they were chosen. I know its why I wasn’t chosen. I don’t know enough, and I am hopeless at all those lightning fast calculations. Were I the representative person inside the mainstream model I would probably send it hurtling off track so quickly it would explode before we all moved more than one time period forward. I am just clueless at knowing my preferences and trying to keep them consistent with what they were a few years ago, or with what they will be a few years hence. And I have a hard time keeping track of my taxes so I have no clue when I should stop buying food in order to save enough to pay them in the future. I think.
Goodness it makes my head hurt just thinking about how hard it must be to be a representative person.
I’m glad they found a volunteer.
Anyway.
Someone must have noticed that actual economies don’t plod along as smoothly as the mainstream models do. Presumably that’s because our actual people are a bit like me and don’t act like economists all the time. Sometimes they even change their minds.
This wobbly behavior of real economies doesn’t sit well with mainstream models, so in order to make the models look like the real world economists came up with a clever trick.
Shock therapy.
They zap their models now and again to make it deviate from their eternal precision. They bash them on the sides of their heads to see what happens. The source of the bashing could be anything. A common source is technology. Apparently technology changes every so often. Who knew? Economists didn’t. Not when they set their model up, and now it’s too late and too complicated to make technology integral to the model’s smooth trajectory. Whoops. Besides our representative person and firm are so knowledgeable they don’t need new technology to keep on plodding along. They have to be forced to accept it. Hence the shock.
You’d be surprised at how many shocks the poor representative person and firm have to endure. I am shocked, if you pardon the pun, that they don’t quit. It’s a testimony to their fortitude, endurance, and all round public spiritedness they they don’t send one of those shocks right back at the economist responsible for introducing it.
The headline would be fun: “Economist shocked by model” or “Model tosses economist a brick”.
Actually I am shocked by those models. They’re stupid.
They’re stupid for one simple reason: all the interesting stuff about the economy has to be pounded in as one of those afterthought shocks.
But maybe there’s a lesson here after all.
We could just study the shocks and forget about the models. After all, if the economists have to bash their models with shocks in order to make them a tad more realistic, then all the realism resides in the shock not the model.
That’s it! Study the shocks.
