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Why is the understanding of Real Economics so limited?

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In my view the understanding of real economics is not widely shared. I recently wrote down a simple coupled differential equation model of the real economy. Four dependent first derivative variables (C_p, C_i, P_p, P_i) which are respectively Physical Capital, Intellectual Capital, Physical production, and Intellectual production. Physical capital includes both things produced (food, houses, …) and things consumed (forests, oil, fish, …). Physical capital is both consumed by production (including feeding people food etc.) and lost through entropic decay and increased through physical production. Intellectual capital increases the rate of production of physical capital (developing a plow increases physical production of food) but it’s not consumed by production although it also has an entropic loss term (figuring out how to make arrow points from obsidian was very important at one time but that value has decayed to zero). There are also terms for decreasing marginal utility as a function of capital (the first wheel was a huge development for production rate, the carbon fiber wheel on my bicycle not much, both have physical capital and intellectual capital components). A more complete model includes choices on labor force distribution between physical and consumption of physical capital vs. saving it. However you choose the loss parameters you reach an asymptotic limit dependent on the choice of parameters. However for any choice of these parameters you can dramatically change the time to reach the limit by changes in the fraction of labor devoted to intellectual capital (which doesn’t have a consumption loss, only entropic and marginal utility losses) and by the fraction of production of physical capital devoted to consumption instead of savings. There is no money in this and all of the variables are single values representing the mean. It’s really a very simple model, 4 differential equations, each of which can be written on a single line. It’s what a scientist who has cherished the Feynman Lectures comes up with. What is the simplest set of differential equations that describe the relevant physics?

You get pretty much all of the history of real human economics from this. Increase your consumption of physical capital and production goes up until you reach the limit where production matches consumption and loss. Assuming a physically limited supply of capital (forests, oil, iron ore, …) you reach a limit. But because intellectual capital does not have a consumption loss term you reach limits which are far higher with intellectual capital and the fraction of labor devoted to intellectual capital.

The dominant factor in the long run is the fraction of labor devoted to intellectual capital (which includes all students who could be capable of physical production) but also people who write blogs like PragCap.

I haven’t yet included financial factors but I have thought about it. For instance because intellectual capital is a non-rival good we devote an increasing share of intellectual labor to making it rival (e.g. patents and copyrights and all the lawyers to support the financial capture from this) but this fraction produces nothing of real economic value. Instead of increasing the amount of intellectual capital (more education, more research) at the mean we choose to increase the value of our situation at the expense of the mean.

So why don’t we teach people the fundamentals of real economics? The economics of the mean, without any finance, without any distribution functions over distribution, just the real physics of the issue? I had to take Econ 101 in college. I was a math and chemistry major. I never bought the book (a housemate had it, a 2 hour read), I only went to class a few times. I went to the professor and said this is a waste of my time. He agreed, so I never went to class again. On his tests I wrote down mathematical derivations and solutions of the problems, which were all phrased in financial economic models. It was the easiest A I got in college. But most kids at an elite college like this didn’t figure it out.

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Posted by John Daschbach
Posted on 12/02/2016 9:30 PM
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Its because economics is a social science and not a physical science. And anything social inevitably involves insanity, delusions of grandeur and violence-cum-politics. What can you do? Treating economics as a physical science using maths and econometrics as justification isn’t the right way to convey the benefits of economic’s “moral principles” in terms that ordinary people can relate to. Take a less from Freakonomics.

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Posted by MachineGhost
Answered on 12/03/2016 1:02 AM
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    I think this is part of what makes economics so inaccurate about things. Much of economics views the financial world as a “veil” over the “real” economy. So it’s not that economists misunderstand the real world. It’s that they understand the monetary world. And we live in a real world with a monetary world which means that you can’t understand the real world without understanding the monetary world….Economists said the financial world wasn’t important. Then the financial crisis happened and they’ve since started to wake up.

    Yeah, it’s true – we’ve created this weird almost fake world of financial assets and liabilities trying to reflect our real world. So you can’t live in a modern world without understanding both….

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    Cullen Roche Posted by Cullen Roche
    Answered on 12/05/2016 4:49 PM
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      I understand that the financial world of assets and liabilities is intertwined with the real world of production, consumption, and real capital. But basically Kalecki in his famous Political Aspects of Full Employment was using mostly a real economics argument. They are intertwined but real economics is the physical manifestation of the core components and thus has to be the basis for any scientifically valid model. It is simple to conceive of alternate abstract structures coupled to the real physical variables. Socialism is an easy one because in pure Socialism there are no financial assets or liabilities, just the allocation of real Production, Consumption, and Real Capital. But we can easily construct a valid model where the real variables are exactly the same at every point in time with either abstract system, sort of like a Turing Machine for economics. If an Alien was able to accurately measure the real components and they were the same they couldn’t tell if the underlying abstract system was capitalism or socialism. People get very tied to strongly held views on the abstract part even when they are not backed by the data (e.g. see some Senators strong stated anti-Keynesian proclivities while revering Reagan, who initially was very Keynesian [increasing government spending vs. GDP, primarily on high multiplier weapons jobs, and cutting taxes]. They hate Keynes but loved the Reagan tax cuts. But the real economics was probably that the weapons spending had the larger impact on growth than the tax cut. I’ve probably posted the following figure before, but I find it interesting to add the delta of the Reagan government spending (vs. GDP) to the private sector GDP (each data series takes the subtracts the government component and then adds the Reagan government component to all) (standard data sources, Fed FRED versions of GDP and NIPA data). So you do have to understand both, but in today’s ideological world in the US a Reagan “revolution” would never happen.

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        Posted by John Daschbach
        Answered on 12/08/2016 12:09 AM
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          You mean Trump isn’t gonna advocate fiscal spending like a drunken sailor as Reagan did? It’ll be interesting to see how Trump reconciles “unacceptable spending” with military expansion. If 4 billion for a new Air Force One is a huge problem, pray tell, what is going to happen to the Pentagon.

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          Posted by MachineGhost
          Answered on 12/08/2016 2:35 AM
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            I found some stats. Under Reagan, total federal revenues increased 28% inflation-adjusted; income tax revenues increased 25% inflation-adjusted. But federal spending increased 35.8% inflation-adjusted; military spending increased 50% inflation-adjusted and transfer payments sans Medicare and SS rose roughly over 100% inflation-adjusted.

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              Posted by MachineGhost
              Answered on 12/08/2016 2:44 AM
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                This is interesting too.

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                  Posted by MachineGhost
                  Answered on 12/08/2016 2:55 AM
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                    Transfer payments are very complicated to get a good statistical handle on. Direct spending vs. GDP on aid to the poor has remained nearly constant, and actually gone done on a linear regression, since the mid 1970’s. But there are many other transfer programs that are hard to get all the data for, but mostly these appear to be transfers from rich states to poor states through the federal government. But gross federal receipts vs GDP have been roughly constant (with fluctuations) since 1946. See https://fred.stlouisfed.org/series/FYFRGDA188S

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                    Posted by John Daschbach
                    Answered on 12/08/2016 6:35 PM
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