Term Paper: Economists it Is Practically Impossible to Distinguish

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Economists

It is practically impossible to distinguish whether Augustin Cournot or Maynard Keynes are more correct in their view of determining the direction within causal-result relationship of economic theories and players within economy. Economists typically study the past performance of the society and the economy and base their economic theories and thus try to predict the future performance of the society based on these economic theories only with empirical evidence from the past. Otherwise, the theory would not have any significance and would not be proved. Many of the theories are derived based on natural behaviour of the people who make their economic actions without purely distinguishing them and fully realizing their reasoning, meaning and all the effects.

Many actions are typical behaviour of the majority of population rather than each action being well thought over with in depth analysis of causes and effects, and thus can be considered "the slaves" of the economists. On the other hand, knowledgeable players in the market who influence the market movements on higher levels, such as authorities influencing governmental economic policies, stock market players, corporate governance people make all their economic actions having thorough knowledge to all the economic theories and thus themselves influencing the future economic shifts in the theories and deviations from them, and can be labelled as to "co-workers of the economists" and to some extent economists themselves. Just as grammarians can economists and market players can introduce new practices to the economic rules and shift the typical behaviour of "economic slaves," thus having enormous impact on the economy and giving grounds for evolution of old economic theories.

1.b. James Buchanan argued within his public choice theory that government officials and politicians in general are self-centralized agents and their actions are rational maximizing their personal utility. On the other hand, these actions contradict the general wealth maximization and interests of the society which are referred to as pork barrel policies. Keynes believed that with the help of government the market inefficiencies can be corrected as the market power is not sufficient to adjust in the short-term to supply or demand shocks. Cournot was one of the first scientists to discuss the idea of free markets and that the market is efficient to adjust and price away any irrationality. On the other hand, he criticised the idea of personal utility maximization and did not give any reasoning for human rational actions. In this light, James Buchanan views are closer to Keynes views where government had an impact on the free market. At the same time, Keynes and his followers believed as the future is rather difficult to predict, thus no expectations and actions of economic agents can be considered as rational. Thus, there are several milestones where Buchanan views are similar to those of Keynes, and some are similar to those of Cournot.

2.a. Thorstein Veblen is known for his view of the economic society development as of being influenced more on social level rather than determined by each individual, also, he believed that the society and thus the economy was constantly evolving. He suggested that the evolution was driven by main human instincts, such as curiosity, parental instincts, predation and others. These believes are contrary to the milestone of neoclassic economists who argued that the market is made up of rational individuals typically making rational choices, while Veblen suggested that many economic actions are done out of wish to signal to the society the status and income of an individual, and these desires are often satisfied by predation. Conflicts between the old producers and new engineers with evolutionary ideas lead to shifts in the economy and thus in the society.

Extrapolating from this, Veblen developed a sophisticated theory contradicting views of essentialists which believe that any driver for personal performance is derived within the core of the person, while Veblen valued "nurture over nature."

2.b. Generally, current trends in behavioural economics which emphasize market inefficiency are to a certain extent come back to the Veblen's views of irrational behaviour of people driven mainly by the way the person was brought up in the society. Also, he believed that capitalism and generally the model of USA economy development, are driven by not economic growth due to capital accumulation, but due to capital relocation as some people tend to be able to hunt better than the others, they are able to "shift around" the goods produced by others and receive the profit for that. Currently, as more and more scientists turn to behavioural economics, these views are becoming alive again and in light of no industrial shifts and reserved innovations in the production sphere for several decades.

Dubner Stephen and his colleage Levitt Steven in their article "Monkey Business" describe a set of experiments carried out to test economic behaviour and decisions made by monkeys and the results are different from those typically suggested as rational equally possible to happen behaviour by economic books. In a gambling experiment, the monkeys chose the chance of getting one more subject in addition to one they have over the chance of remaining two subjects they were giving at the beginning / or losing one of them as the result of the gambling. In this way the scientists proved the risk aversion of monkeys and the irrational decisions when gambling, while making rational decisions as respond to typical situations, monkeys did not learn to save and stole when they had a chance to do so. A striking finding is that quite fast monkeys learnt to exchange money for food and even sex, thus having the same behavioural features as their brothers human beings.

In the article "Why logic often takes a backseat?" The authors quote findings of several researchers who prove that during economic shocks people start feeling unfair and a specific zone within human brain activates which makes human beings forget that there is rational reasons for any happening in the economy and react irrationally to such economic shocks. This happens as human beings have such negative emotions as lack of self-confidence, being shortsighted and overreaction to any loss, emotions which win over rational decisions of the brain. Another finding is the "time inconsistency" phenomenon, where different parts of brain are responsible for long-term and short-term decision making. For this reason, when thinking for longer term, decisions are typically more rational, while when a human being is faced with necessity to make an every day choice, emotions take over and he typically makes an impulsive decision as the brain "demands immediate gratification." Furthermore, findings in motivation reveal that when a human being receives a stimuli, he expects the stimuli to continue and the marginal utility of each new stimuli decreases. Only new innovative and more importantly unexpected stimuli can make the brain produce happiness and satisfaction hormones. These findings contradict to some of other researchers which suggested there will be yet many years of contradicting human behaviour theories.

The author of "Mind Games" article in the Economist, January 13, 2005 quotes findings of researchers that emotional part of brain is activated when a person is thinking about a short-term gain, while a more sensible reasoning part of the brain is triggered when a person is considering a long-term gain or loss. For this reason, a person would prefer U.S.$100 today to U.S.$115 in one week, but would be indifferent to receive U.S.$100 in one year or U.S.$115 in one year and two weeks. So, government policies to stimulate saving "could be one remedy."

As the result behavioural economics plays a major role now in learning the human behaviour and understanding the economy in more details thanks to this new body of knowledge. This can improve the economy efficiency, but on the other hand, capital accumulation is possible only where there are some market inefficiencies.

3.a. Economics has benefited greatly from application of mathematical methods and analysis techniques which helps to work out Historically economics development has been complimented by a number of well worked out modelling techniques and methods, and many choices of important market players have been determined by application of these models and methods. Many researchers argue that this improves market efficiency greatly in all its spheres: production forces, human and capital resources allocation. But with current shift to psychological economics, the importance of the mathematical tools will decrease tremendously and they will be applied only to a certain extent.

3.b. Paul Krugman in his work "Two Cheers for Formalism" argues that the current trends of accusing formalism being too reliant on arcane algebra, deductive methods and free markets are irrelevant and not fully correct. The author names that out of all recently rewarded economists in the U.S.A., the majority do not follow the free markets and generally formalists approach to economics and are on the contrary working in the fields of proving market inefficiencies. Another important argument within the article of Paul Krugman is that currently much capital circulates within emerging markets which are very inefficient and capital inflows there in spite… [END OF PREVIEW]

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