best books to learn economics

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Dragline
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Re: best books to learn economics

Post by Dragline »

Frosti85 wrote:
Tue May 16, 2017 3:42 am
Ok, so I decided I want to learn some austrian economics.

But I want to be open minded, and also learn other schools.

What would be the opposite of austrian economics ? keynesian ?
This is why its important to read the history of the subject -- Austrian economics is a left-over from a 19th century intellectual debate. Specifically, Austrian economics is a sub-category of Von Mises's' social science theory he called praxeology, which was developed in reaction to the Positivist movement of the 19th Century (a/k/a German School), which grew out of the natural sciences. And the debate between them is like a broken record that has been playing for the last century. Here is more than you want to know about it written from the Austrian perspective: https://mises.org/library/philosophical ... -economics

The Positivists believed that with enough knowledge/data, etc., life could be perfectly predictable and managed on a grand scale. The modern version of this is scientism. Look up La Place's Demon for more on the origins of this. On the economic side, this was first picked up by Marx and others who viewed "state management" of the economy in a scientific manner as a laudable goal.

Von Mises posited/assumed two important things: (1) the human mind is a black box that is inscrutable in its working, but that Aristotle's description of humans as "rational animals" is essentially correct and we should just go with that; (2) the empiricism associated with science is essentially doo-doo and everything we need to know about human interaction can and should be deduced logically from our assumptions in (1). Basically, Austrians claim than logical deduction is "real science", while empirical work is a mere placeholder. Again from the perspective of the Austrians self-reported history:

"Another Aristotelian theme exercised great influence on the Austrians; and this one, fortunately, is easier to document. The characteristic method of Austrian economics, carried to its culmination in Mises, is deduction. One starts with a self-evident axiom ("man acts") and with the aid of a few subsidiary postulates, deduces the entire science of human action.

Where does this notion of science originate? Although, as earlier mentioned, it is very difficult in intellectual history to demonstrate direct influence, I think it is no accident that the idea of a deductive science is found in Aristotle's Posterior Analytics. Aristotle argues that a complete science must start with a self-evident axiom and, by the use of deduction, exfoliate the entire discipline. Often conditions force the use of mere empirical hypotheses, but this is a mere expedient. 10

Empirical science exists as a placeholder for true science, which must work through deduction. When Brentano and others revived the study of Aristotle, this view of method became available for study in Austrian universities."



Both of these ideas (Positivism vs. Praxeology) have proved to be intellectual failures in the latter half of the 20th Century and 21st, largely because they are overly simplistic and do not account for either modern complexity theory, or what we now know about the workings of the human mind, which is that it is "Predictably Irrational" in the words of Dan Ariely, but best described and discussed for the lay person in Kahneman's "Thinking, Fast and Slow". Basically, we ought to know better now based on the good work of many who have devoted their careers to "looking under the hood" of human behavior and complex systems (like even simple economies) since the 1960s.

Yet both Positivism/Scientism and Austrianism/Praxeology still attract considerable followings, which Kahneman would explain as a System 1 heuristic -- attractive narratives that are cognitively easy to grasp and are readily aided by confirmation biases. The internet has aided this, along with the Dunning-Kruger effect; everybody can claim to be an expert in economics now with a few clicks and pick up a few basic slogans/memes/stories. Others have noted that these competing ideologies could be viewed as substitutes for religion. (In fact, they are mimetic rivals -- compare the plots of "Atlas Shrugged" and "The Jungle" and you find the same damn story/plot told from two opposing perspectives, and both pretty much ripped off from the story of St. Paul -- but I digress.)

As Max Planck once said "Science advances one funeral at a time." IMO, the process is even slower in the social sciences. We may have a long way to go before these ideas are finally abandoned and remain only of historical interest, like the Physiocrats and Mercantilists of the 17th and 18th centuries. I doubt it will happen in our lifetimes.

jacob
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Re: best books to learn economics

Post by jacob »

Frosti85 wrote:
Mon May 15, 2017 7:29 am
like, if I want to become a global macro hedge fund manager... what would I have to learn ?

or maybe no one really has a clue ?
A crucial first step is to unlearn the notion that investment practitioners derive their insights from an expert-level understanding of the academic field of economics. They don't. While there is some mutual exchange of insights, the two fields have largely split apart. I've mentioned this before in several investment-education threads, but practitioners and academics really have diverged into people who focus on making money and people who focus on publishing theories using whatever research methods are available. (The available methods also explain why certain theories came about to be at certain times.)

It certainly helps to be able to read economic news in under to make good investment decisions, just like it helps to be able to read an accounting statement, but those are not the same thing. Kinda how reading books about aerodynamics doesn't make you a pilot---but it certainly makes it easier to be a pilot if you understand what turbulence is.

The global macro people I've known generally spend most of their time reading news (bloomberg, reuter, ...) and reports (FAO, IEA, ... ) while building weird spreadsheets to support their thinking about the "world system".

Here's a loose overview of what's important this week:
https://www.bloomberg.com/markets/economic-calendar

Tomorrow at 10:30EST, there may be some interesting moves on energy prices. It's likely that this info is already flowing around the backchannels. This week we've seen a rise in the oil price combined with a drop in the dollar.

So what you'd have to learn is small bachelor degree for the basics, and then, perhaps look to join a group that trades or advises on commodities to see how it's actually done. Alternatively, read the equivalent curriculum and find out where (I don't know) the commodity amateurs (or secret pros) hang out on the internet. Keyword: http://www.investopedia.com/terms/c/cta.asp

tl;dr - If global macro is the end goal, just read the standard textbooks. Then focus on the news and reports. There's really no point in getting bogged down in discussions about "which economic theory is best". The only reason why an investor or trader would care about that is when/if a major force in the market becomes convinced that a wrong theory is actually best. This rarely happens. LTCM vs Taleb is a famous example. Whereas major market forces become convinced that a wrong thesis is correct happens every time people starts talking about "new eras".

BRUTE
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Re: best books to learn economics

Post by BRUTE »

Dragline wrote:
Tue May 16, 2017 8:03 am
As Max Planck once said "Science advances one funeral at a time." IMO, the process is even slower in the social sciences. We may have a long way to go before these ideas are finally abandoned and remain only of historical interest, like the Physiocrats and Mercantilists of the 17th and 18th centuries. I doubt it will happen in our lifetimes.
brute would suggest this is not merely due to slowness in spreading of correct information - the newer theories failed to incorporate major parts of the old ones, and therefore lack, or are simply wrong about, a lot of explanations the old ones had. combined with the fact that they seem extremely biased, as Riggerjack observed.

AE can be said to be too abstract and not predictive enough, and therefore not "useful". but most of the "useful" stuff has been court jestering, where intellectuals concoct theories that politicians want to hear or want to sell to the populace. what Greenspan (former Austrian) and Bernanke were doing at the end was pure political demagogy, not economics.

brute believes that economics is the dismal science because it is so easily used as a political propaganda tool.

as for the part about empiricism vs. logic being "the real science", brute isn't convinced there even is a "real science". clearly empiricism is extremely limited by technique, biases, coincidence, confounding factors, and so on. and clearly, logic doesn't always lead to the desired results - e.g. Praxeology is useless for day trading. brute is on the fence if logic is "real truth" in that sense, or if there even is such a thing as real truth. so for brute, the choices are either "there is no truth", or "there is logical truth, but it can be useless often times, and sometimes it's nice to verify something empirically".

Dragline
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Re: best books to learn economics

Post by Dragline »

Of course there is real science. It's defined as hypotheses that are tested for accuracy through the process known as the Scientific Method, which involves the empirical collection of data. However, many metaphysical topics are not testable in this manner, which Popper observed.

Most other "sciences" are largely logic applied to assumed facts (e.g., Christian Science). Much of economics, including AE is just that, although only AE makes the rather extraordinary claim that such reasoning is preferred to empirical testing.

But the Scientific Method has come a long way since Newton predicted the world would end in 2060 based on his interpretation of the Book of Daniel. Some things just need to be left in the past dustbins of history.

ThisDinosaur
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Re: best books to learn economics

Post by ThisDinosaur »

Dragline just said everything I was thinking, but more articulately and with better references. Logic is an awesome tool, but its almost useless if your conclusions are never tested against reality. Science is full of discoveries that are counterintuitive. Einstein and Schrodinger were very skeptical that real objects could behave the way quantum mechanics described them. These were some of the greatest minds in modern history and logic deceived them.

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Re: best books to learn economics

Post by fiby41 »

Dragline wrote:
Tue May 16, 2017 11:04 am
Most other "sciences" are largely logic applied to assumed facts (e.g., Christian Science).
I was curious so I looked it up. It was not what I thought it was. :shock: homeopathy without the placebo?
https://en.m.wikipedia.org/wiki/Christian_Science
Last edited by fiby41 on Wed May 17, 2017 1:13 am, edited 1 time in total.

Riggerjack
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Re: best books to learn economics

Post by Riggerjack »

As Max Planck once said "Science advances one funeral at a time." IMO, the process is even slower in the social sciences. We may have a long way to go before these ideas are finally abandoned and remain only of historical interest, like the Physiocrats and Mercantilists of the 17th and 18th centuries. I doubt it will happen in our lifetimes.
Even slower, as old ideas get rebranded as new ideas. Modern money theory is just chartalism, rebranded. Keynesian economics is still taught, as though the last 80 years hadn't happened. I like Keynes, his writing is great. But if there is confirmation of his theories, I haven't seen it. If anyone can explain stagflation from a Keynesian perspective, I'm all ears.
Dragline just said everything I was thinking, but more articulately and with better references.
Yup. I know that feeling.

I was introduced to economic theory by Milton Friedman, in his series " free to choose ". So, I started reading his books, but the math was distracting. So, looked up von Mises, his teacher. Von Mises writes in abstact duductive reasoning, which I found a natural fit. (I have his pic as a signature, because he was a legendary curmudgeon, both notoriously cross and critical. So a pic of him grinning giving a big thumbs up, still, to this day, puts a smile on my face.) I have said elsewhere, I think deduction alone is bound to lead down false paths, and I think this applies to AE as well. However, for getting a working knowledge, a basic grasp to apply to the world as a whole, I think it is an excellent starting point. That is why I recommend it as a starting place.

In particular, I like the black box approach to motivations. You really can't predict the causes of human actions, even among friends and family. So, rather than getting tied down to exactly why person X made choice A, and person Y made choice B, AE focuses instead on how many people made choice A, and how many made choice B, then how those numbers change based on changed options.

So, whether person X knew ahead of time that he would make choice A, or if he made up the story after the fact, has no bearing.

As BRUTE so clearly put it,
"humans are irrational" is no more an attack on Misesian Praxeology than "but it's cold outside" is a counter to physics. not even wrong. irrelevant.

ThisDinosaur
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Re: best books to learn economics

Post by ThisDinosaur »

So, if humans are a chinese room, how is this insight useful? Are the rest of the assertions in Human Action dependant on this understanding?

Taleb wrote something about Minority Rule, where he said the reason behavioral economics could never be predictive, is because it works by measuring the *average* behavior of laboratory humans, and economic systems can be lead by distinctly outlier behavior.

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Re: best books to learn economics

Post by jacob »

@ThisDinosaur - It's not humans who are in black boxes ... it's each human brain that's in a black box insofar others are concerned.
https://en.wikipedia.org/wiki/Subjectiv ... y_of_value ... From a scientific perspective, this is one of the "cleaner"/more fundamental approaches compared to e.g. "intrinsic value" (the original/historical). In particular, the currently accepted marginal theory of value follows from the aggregate of the subjective theory of value.

In physics terms, it's like saying that value is a hidden variable (just like probability functions in quantum mechanics) and all that really matters is relative choices which only become apparent once we measure them by asking a person to make a choice. Pricing follows trivially by asking people to ranking $5, a beer, 4$, $0, and $10...

When we ask lots of persons, we get market prices. A liquid market is a way of asking this constantly.

Austrian economics is an unusual combination of deduction and phenomenology.

Behavioral economics show that humans aren't very good at keeping their internal subjective lists of value rankings rational. However, this is actually in accordance with subjective value theory. E.g. "50% of winning $10" and "10% of winning $50" can be subjectively ranked very differently in accordance with behavioral economics (and Austrian economics) whereas BE is famous for destroying or at least hurting the assumption of "rational expectations" theory.

Those two are a combination of psychology and statistics and math and statistics respectively.

For many many more pages on this, I'd suggest https://en.wikipedia.org/wiki/Man,_Economy,_and_State instead of Human Action as a starting point.

But for the record (and the OP), I would focus on seeing economic theories more as a bunch of frameworks individual humans think ... not a true/not true model of reality... at least insofar as behavior is concerned; because humans are quite free to imagine, for example, "that they can have their cake and eat it too" ... whereas reality has more constraints. This is particularly important when it comes to macro.

Sun Tzu said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle.

This applies here ... if I know that most people (my enemies) are using rational expectations theory and I know something they don't; I will have alpha. If you're uninformed but disciplined (hello index investor!), your performance will be average; if you're uninformed but confident; you will be imperiled ...

Hence my advice about the futility of arguing "best theory" ... at least from a practitioner's perspective.

Frosti85
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Re: best books to learn economics

Post by Frosti85 »

Thanks for the recommendations so far

To clarify, what I really want, is to understand the world.

Example, in the news: "oil price has fallen and dollar increased and as a result the fed raised the funds rate"

I want to have a mental model so I can understand why this could happen and for what reasons

Also for my private investing I want to have correct models.

I also like to fantasize about how a perfect economy should work... So a theory can still be interesting even if the real world doesn't work like that (example a system without fractional reserve banking)

@ Jacob: what are the standard textbooks you would recommend?

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Re: best books to learn economics

Post by jacob »

I have a blog post on it. It was recently mentioned in another thread. Also see the ERE wiki.

Riggerjack
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Re: best books to learn economics

Post by Riggerjack »

Example, in the news: "oil price has fallen and dollar increased and as a result the fed raised the funds rate"
Well, headlines make these things seem connected, but they simply aren't. Kind of like headlines on stocks. Media has to have content, but the content generated is mostly nonsense. I vaguely remember an experiment where they fed false market data to market journalists, to see if they noticed that the market reactions didn't match the news " causes".

Headlines like you mentioned are storylines we make up to explain the market after the fact.

If you really want to see what is happening, you would either be watching oil or the Fed interest rates. Neither necessarily moves the other.

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Re: best books to learn economics

Post by Riggerjack »

An interesting tidbit I ran across from kotlikoff, when he was talking about Samuelson:
A simple rendition of Paul’s story takes place on a very hot island with very tall cocao trees, which only the young can climb. At the top of the trees grow the only source of sustenance -- Hershey chocolate bars. The young climb the trees, harvest the bars, and eat them immediately for they won’t keep in the heat. The earth-bound elderly grovel for chocolate, but to no avail. Their elevated kids see no quo for their quid, have no Up in their Uc, and experience no qualm in watching their parents starve. This unfortunate state of competition continues year after year until some enterprising generation of oldsters offers to swap chocolate for pink sea shells that have washed up on shore. The young could not care less about sea shells, but they make the swap in order to have shells with which to swap when old. Voila! The economy moves from brutish to blissful. People no longer starve when old, everyone is better off, and the young and old celebrate the economy’s Pareto improvement by washing each other with melted chocolate. Now what determines the price level – the rate at which shells swap for chocolate? The answer is expectations. The price today depends on what people think it will be tomorrow. But what it will be tomorrow depends on what tomorrow’s people think it will be the day after, and so on. Nothing in the economic environment pins down these expectations, so nothing limits the number of paths the price level and, thus, the economy can take. In particular, nothing says the price level will change in line with population growth or, if this does occur, when such a steady state will arise. Moreover, since the public’s expectations of future prices determine the course of chocolate transfers, such transfers, which might be termed fiscal policy, are endogenous. Since the change in the price level determines the rate at which one can swap consumption today for consumption tomorrow, the dynamics of the price level are also those of the implicit interest rate. When prices move in line with population growth, the interest rate equals the population growth rate (the biological rate). But when they don’t, the interest rate can go its merry way, including fluctuating wildly. So our little chocolate paradise can have lots of what some would describe as “financial instability” along any given equilibrium path or, indeed, across paths, if the economy jumps equilibria. Regardless of what path the economy takes – what equilibrium prevails -- birds (nonedible ones) perched in the cocoa trees will take notice. They’ll no longer hear the moans of starving geezers or watch the young pelt the old with candy wrappers. But while the birds will all agree about the amount of chocolate being passed from the young to the old each period, they’ll vehemently disagree as to the policy in place. Some birds will claim that monetary policy is at work and that the shells are money. Others will see a pay-as-you-go social security system in which the chocolate handed over when young constitutes a tax and the shells simply represent bookkeeping for one’s future claim to chocolate social security benefits. Yet others will claim the shells are bonds that are purchased when young and sold when old. And there will even be some birds who’ll claim that the shells are irrelevant – just a shell game, if you will – and that the chocolate eaters must have drawn up a constitution forcing each generation of young to make transfers to the old. After the birds spend several centuries arguing and forming societies call the Monetarists, the Socialists, the Keynesians, and the Strict Constructionists, a young bird named Paul points out that the argument isn’t about economics, but about language. This stops the fight for a full nanosecond, after which it proceeds apace. Like this island, our society contains a lot of bird brains, many located in Washington, who constantly mistake linguistics for economics.
Most disagreement in amateur economics I think is a disagreement in linguistics. But it is good to see it isn't just about amateurs...

Riggerjack
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Re: best books to learn economics

Post by Riggerjack »

Which is not an endorsement of kotlikoff (consumption smoothing, and intergenerational transfers, though oddly we agree on a fair tax) or Samuelson (efficient market hypothesis, intergenerational transfers, and welfare economics. In fact, he was talking about how great an example of a command economy the USSR was, in 1989. Though, to be fair, nobody really saw that coming.)

Dragline
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Re: best books to learn economics

Post by Dragline »

Kotlikoff is very much a believer that economists are special people who, if people listened to them, could lead them to a promised land. He does not really believe in uncertainty or unknown unknowns. He epitomizes the overconfident theorist.

Have you ever read "Spend until the End?" Also listen to his EconTalk interview, but focus on him and not the content: http://www.econtalk.org/archives/2014/0 ... otlik.html

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Re: best books to learn economics

Post by BRUTE »

Dragline wrote:
Tue May 16, 2017 11:04 am
Of course there is real science. It's defined as hypotheses that are tested for accuracy through the process known as the Scientific Method, which involves the empirical collection of data. However, many metaphysical topics are not testable in this manner, which Popper observed.
seems like Dragline is confusing the "Scientific" Method with science. bait and switch, it's just a name. brute likes to call it "empiricism". it's merely one of many methods to arrive at knowledge or science. it in no way defines it.

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Re: best books to learn economics

Post by BRUTE »

ThisDinosaur wrote:
Tue May 16, 2017 3:14 pm
So, if humans are a chinese room, how is this insight useful? Are the rest of the assertions in Human Action dependant on this understanding?
the chinese room is a thought experiment designed for listeners to intuit that a "dumb machine" can pass the turing test, i.e. "fake consciousness". apart from the fact that Dennett has debunked it pretty well as an intuition pump, it is also irrelevant to Praxeology. Mises is not saying humans are a chinese room, he's saying that it doesn't matter what goes on inside the room, as long as the outcomes (actions, i.e. Human Action) are observable.

simple example brute likes to use: if ThisDinosaur eats a chocolate bar instead of an apple, it doesn't matter if he "really" wanted the apple but was being irrational, it doesn't matter if he has a strict diet plan, and it doesn't matter if he was born with an apple allergy - all that matters to Praxeology is that he expressed his preferences for a chocolate bar over any other action at the time.

it is more of an abstraction than an understanding.

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Re: best books to learn economics

Post by ThisDinosaur »

The Chinese room also comes up in discussions about consciousness-free decision making in the cephalopod nervous system. Each arm has a mind of its own, and they can often be seen pulling the animal in opposite directions. A loose association of ganglia around the esophagus works like a committee voting on what the arms should do, and sometimes they disagree. The upshot is that the human nervous system works the same way, except our decision making aparatus is crammed together in the skull and spinal cord instead of distributed, net like, throughout the body. Consciousness is like a passenger, fooled into thinking its responsible for everything the system is doing and confabulating explanations.

I get now why an assumption of intentional, goal directed behavior is necessary to make sense of catallatics. I remember that the description of interest rates as a result of averaging the population's time preference for money or whatever as an "aha" moment for me in ManEcoState. My only objection is that defining *all* behavior as intentional and goal-directed seems kind of like an trivial tautology.

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Re: best books to learn economics

Post by Riggerjack »

Nobody lives in the aggregate. But economics studies human actions in the aggregate. Worrying about motivation and consciousness is like studying trees, rather than forests.

Where you focus your attention determines what you learn.

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Re: best books to learn economics

Post by Riggerjack »

Kotlikoff is very much a believer that economists are special people who, if people listened to them, could lead them to a promised land. He does not really believe in uncertainty or unknown unknowns. He epitomizes the overconfident theorist.
I agree. I stumbled upon his site early in my retirement planning. He maintains a site with a pay calculator for consumption smoothing. I mentioned where I got the Samuelson's story because it is hard to find any reference to the original, as it was part of a set of letters written over 50 years ago.

I do like the story, as it makes clear how much the terminology is subjective, and the strife is a product of perception.

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