CDR: Re: Re: A famine averted...
James A.. Donald
jamesd at echeque.com
Sun Oct 15 12:18:52 PDT 2000
--
> I freely admit that I have absolutely no authority over things
> economic. But I do think you too have an overly simplified view of
> the theory - you do not seem to distinquish between the derivation
> of some of the parameters (e.g. price) of a dynamic system which is
> assumed to be in equilibrium based on known ones (e.g. measures
> of/related to demand, availability etc.) from actually working with
> the time evolution of the system (none of the variables are known a
> priori and the solution consists of complete time functions).
Economists do that all the time. It is called modeling. Lucas and
Lawrence Klein won nobel prizes for doing it. I expect that other
economists that I am not familiar with have also won Nobels in it.
> For instance, in the basic example given above - price formation of
> a single good in an ideal closed market (i.e. given the normal
> assumptions of independence of participants, continuity of
> variables, perfect knowledge and so on) - can you cite a single
> understandable source with the rigorous derivation of bounds for
> over/undershoot in price upon rapid fluctuation in supply?
I doubt that I could provide any source on economics that you would regard
as understandable.
You are asking for a prediction of the behavior of human actors, predicting
what people will do. One can only derive "rigorous" results if one makes
assumptions about how people think and what they want. The most rigorous
attempt at that is known as "rational expectations theory".
Rational expectations theory (for which Lucas got his Nobel) assumes that
people will make the best guess they can about future behavior of the
market, then base their present behavior on that best guess, and the market
will then reflect that present behavior.
This of course produces inaccurate results for obvious reasons, and
economists attempt to model people more accurately but less rigorously by
using "rational ignorance" and "bounded rationality." All these are major
areas of study in economics.
--digsig
James A. Donald
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