Very interesting. The author claims to have proved that markets can be informationally efficient or competitive, but not both. The implications for policy and regulation are significant.
The fact that free markets don't exist, and that supply and demand is not a natural law that implies efficient markets has never stopped people acting like both are true and stuffing fingers in their ears.
But, both free markets and supply/demand are useful enough concepts to talk loosely about processes to understand the interest that I'll enjoy digging into this.
They're not just useful concepts tho, they're how every business operates, and the concepts cover the vast majority of situations.
The behavioral economics/Freakonomics thing was like "Hey, here's this thing that might if you squint real hard fall outside of efficient market theory" and then for a decade people took that to mean that that the base concepts were worthless, which was a severe overcorrection from people that didn't understand economics.
The vast majority of real world businesses create prices based on cost plus systems, not on supply/demand, which are generally impossible to measure directly. Another good chunk of smaller businesses simply copy the prices of larger businesses, at least in b2c markets. Sure, if their goods are not selling, they might reduce price, but they might try other tactics as well (marketing, targeted discounts, etc).
I always thought of supply and demand as more defining a limit that the price approaches as the number of transactions and the size of the market approach infinity, barring structural obstacles or persistent information asymmetry to prevent it than as something that was supposed to happen immediately on any given transaction.
Businesses generally follow the rule "price is set to whatever the market will bear". Which is just an indirect way of setting price by supply and demand.
these "other tactics" are just attempts at increasing demand. Cost plus is how many business set prices but that is entirely separate from what the market decides. If cost plus is not an attractive price, it won't sell, because the demand is not there.
> If cost plus is not an attractive price, it won't sell, because the demand is not there.
Sure, but that only sets a cap. The market might bear twice the initial price, but few businesses actually take the time in practice to explore things at this level
Knowledge accumulation seems to have cyclical patterns where general observations are condensed into "laws", and common wisdom is to treat these as unassailable truths. As exceptions and contradictions are found, the popular wisdom is to entirely dismiss the overwhelming universal conformity with the earlier principles because it sounds smart to common people. A lot of normal people see the basic problems with most methodological maxims but are led to believe that the maxim is truth. It takes a podcaster with a "study" to then "debunk" the "myth" they were yesterday defending as unimpeachable. People are generally not well informed enough to know anything and the podcaster class is the worst imaginable vector for knowledge dissemination or popularization. Just clickbait garbage monkeys with foreign money and vicious antisocial tendencies.
There are many ways that free and competitive markets can fail other than behavioural economics! Monopoly, informational asymmetry, externalities… All of these are plausibly pervasive.
Well yes, market forces as theorized are the very premise we've structured our entire economy around. Or, more bluntly, the desire to purely encapsulate political-economic power in capital. How else could an economic process operate without being attacked by the state? But this is also why our market behaves so irrationally—these concepts have very obvious predictive limits that investors are struggling to grapple with and our politicians (and largely our electorate tbf) have blind faith in
Economics is one of the scientific sore spots for liberal ideology. If you are liberal and mostly swim in liberal circles, you probably believe that economics is mostly bunk pseudoscience. Akin to conservatives and climate change
To be fair, macroeconomics can hardly be called science, though. It is incredibly hard to falsify a lot of the theories given the lack of possibilities for experimentation. It is far closer to philosophy than to any of the even remotely hard sciences.
Nothing to do with ideology, but with the nature of the field. Take epidemiological research in the areas of food and medicine: incredibly hard and expensive to get right and even then with often tenuous results. Now try doing that with ridiculously heterogeneous nations influenced by potentially almost everything on the planet.
It's a small miracle that economists manage to get some useful insights out of the data, but we should definitely be aware of how weakly most of them are supported (don't start talking about "error bars" with economists).
An argument of the last couple of decades is that videogames have built incredible labs for macroeconomic experimentation. So far mostly what we learn are failure cases (mudflation, being such a big learning from videogames that the term itself is named after a type of them), but we are learning things (some of them exploitative, but that's a different ethical question).
You are overstating this. Mudflation does not transfer to the real world well, if at all. Very few skill-capped bits of DLC for real world activities.
These games do not include many of the complexities of the real world and can thus provide few insights that generalize to the real world on a macroeconomic level. They are toy universes. I'm not saying they are useless, far from it, but they are not "incredible labs for macroeconomic experimentation".
Try determining the effect of raising the central bank interest rate within a game of your choice. Or changing the minimum wage. Or the effects of investing in education. Etc.
They are incredible compared to "no labs at all" and "no way to run experiments" as the above poster lamented.
Mudflation aka hyperinflation aka situations where "the money printer goes brr too fast" have happened in the real world. Sometimes at "extremely" small scale (for macroeconomics) such as company town scrip, but they've happened and affected real people's lives.
But also, if Bitcoin is real then videogame economies are very real. You can trade USD for most in-game currencies. Sometimes directly in game as micro-transactions today ("diamond" or "platinum" middle funging currencies that convert to other game currencies), sometimes on trading platforms that are certainly against game terms of service and possibly illegal in some states, but that doesn't really stop them existing or people living in low wage countries making ends meet by grinding game currencies to sell for "realer" ones.
(Mudflation is also the answer to the why the book I read of "Ready Player One" was better than the one the author wrote because it seemed obvious the economy in the book was a textbook mudflationary one and much of the dystopia outside of its central game could easily be explained by how much of its economy was tied into its in game mudflationary currency. I appreciated that Hank Green's book "A Beautifully Foolish Endeavor" did a better job of doing that on purpose.)
> They are toy universes.
So are most experiments, fundamentally. You model the real world as best you can. You do what you can to eliminate variables. You learn from your experiment and you improve your model. You can't test the entire universe all at once, that's too many variables, you find the interesting toys that seem to look enough like our current understanding of our universe and then you play them until you break them (assert either the null hypothesis or the alternative hypothesis). Repeat until done.
Your examples seem easy to build toy universes for. The Animal Crossing series has decades of "research" in the effects of raising a central bank interest rate. (Look for Tom Nook memes, they alone are a modern study of macroeconomics and teenagers' direct relationships with them.) Many MMOs have "trades" and "crafts" that need to balance a minimum wage to get players interested and/or invested in them versus opportunity costs in other systems in the game. Funding Education is a similar problem explored in various RPG mechanics by sometimes direct analogies such as investments into player attributes and skill levels and skill trees.
And so on and so forth. The boundary between "real" and "virtual" economics seems nearly nonexistent, they are the same thing (and currency always wants to flow between them). In this case the map seems to be the territory. In this case the analogy seems to be the real thing. Because people are involved and people are ultimately irrational, but start to do really interesting economic things the more people you put in the same "place", whether virtual or real. Which is what macroeconomics has always been about.
> They are incredible compared to "no labs at all"
That is a nonsensically low bar. You basically destroy the entire scale by labeling the bare minimum as such.
> Mudflation aka hyperinflation aka situations where "the money printer goes brr too fast"
That is not what mudflation is at all.
>> They are toy universes.
> So are most experiments, fundamentally.
Nonsense. Most experiments are performed on actual real world stuff rather than an analogue of it: something like looking at how actual food affects actual humans rather than what happens when feeding virtual characters virtual apples. Limited or narrowly scoped real world experiments != toy universe experiments.
An inbetween category would be (human) drug experiments on mice, which are real world and where the results still don't generalize to humans often.
> Your examples seem easy to build toy universes for.
Yeah, no shit. My point was that those are horribly incomplete and don't generalize:
"These games do not include many of the complexities of the real world and can thus provide few insights that generalize to the real world on a macroeconomic level."
Your examples are incredibly inadequate compared to the real world and have exactly 0 predictive power in said real world. In recent decades, the entire field of economy has been dumbfounded by the (lack of) effects of quantitative easing and the central interest rate on inflation in the USA and the EU. Maybe try telling them that they should look into the economy of Animal Crossing /s.
> > They are incredible compared to "no labs at all"
> That is a nonsensically low bar. You basically destroy the entire scale by labeling the bare minimum as such.
Ah, yeah, I wasn't using it for "scale". "incredible" also often connotes "in ways that you wouldn't believe". Your long posts disputing me are somewhat validation that I used the right turn of phrase there.
>> Mudflation aka hyperinflation aka situations where "the money printer goes brr too fast"
> That is not what mudflation is at all.
No, I think it is more that you are used to the more straight-jacketed post-EverQuest form of the term rather than the original circumstances that gave rise to the term in the first place. MUDs didn't have "expansion packs" or DLC. The original form of the term had more to do with infinitely printable currency ("grindable" drops from game spawned enemies) and its effects in trying to balance a larger economy. EverQuest did help to popularize the term in the way its expansions packs particularly badly handled that inflation, but those expansion pack balancing woes were never the cause of that inflation, only a symptom. The cause was (and has always been) "grinding" and "grinding mindset".
> Maybe try telling them that they should look into the economy of Animal Crossing
That is exactly what I'm trying to do. We have some good science from videogames but not enough of it. Dismissing videogame economies as "toy universes" that don't matter doesn't help science. Animal Crossing has inadvertently demonstrated some of the symptoms of that economic question. Imagine if a game was designed to intentionally simulate that as a lab experiment.
I don't think we're going to agree on that, but I think on the spectrum of "macroeconomics isn't a science because it has no laboratories and isn't reproducible in experiments" to "macroeconomics is a science but its laboratories are videogames and we have under studied them and especially aren't building enough reproducible studies", I am happy to be on the side of it that sees hope in better macroeconomic science even if it isn't currently taken seriously enough.
"Hyperinflation is a very high and typically accelerating inflation."
"Mudflation is a term for the type of inflation found in MUDs (Multi User Dungeon) games. MMORPGs, these days. It's caused by fluctuations in the game economy, caused by player exploits or poorly designed patches. Mudflation almost always kicks in after a major patch or an expansion, when new, better quality items are added to the game economy. These generally have the effect of greatly lowering the value of all pre-existing items."
2.
> Dismissing videogame economies as "toy universes" that don't matter doesn't help science.
Straw man. I never said they did not matter, nor did I say that research of them isn't useful. I said that research is severely limited due to the lack of complexity and you have provided nothing to disprove that.
I would argue that your way of communicating about this is actually a bit of evidence that this kind of research is probably going to be detrimental to policy making: Overestimating the value and use of such research is exactly the same thing that happens with traditional macroeconomic research, with policy makers and the general public treating the theories and hypotheses like laws of nature.
In fact that there's both a liberal and conservative economics ideology, and what could form a scientific discipline in between is unfortunately cornered and sorely lacking visibility.
The distinction between liberal and conservative political labeling in america is entirely cultural. There is precisely zero ideological, ie political-economic, difference. It's just culture wars all the way down while we get pickpocketed together.
I see what you mean, but I'd disagree with the idea that there's “precisely zero ideological, ie political-economic, difference”.
That's true that since at least Clinton, the Democrats as a political party have mostly embraced the business-friendly view that is also the conservatives' position on the subject.
But the Democrat's leadership are only a (very) imperfect mirror of their electorate and of the intellectual left, and there is definitely a significant set of left-wing economists (Polanyi, Stiglitz, Piketti to name a few of the most prominent, in chronological order).
You can't look at Cochrane and Piketti and say there's no progressive vs conservatives divide in economics.
I was being deliberately facetious, I suppose, but because of our campaign finance problems any policy of major economic import has coordinated bipartisan pressure.
I think exactly the opposite: adherence to market economics, even to the extent of calling it a science, is what defines a liberal. In this sense conservatives are just angry liberals.
Tbf, most americans just sort of skate along on vibes and don't have many concrete values or material understanding of our society at all, regardless of how they identify.
Cf any argument over rent control: people either want it out of some sort of justice for inhumanely priced rents, or people bought into some kind of idea that it doesn't work because some think tank they put faith in pushed that messaging. Few people actually study the literally thousands of ways that almost every other society manages to house their population more effectively. It's all just vibes.
I've been picking up a different feeling that economics is sort of in a pre-calculus moment that conservatives/libertarians and liberals/progressives have sort of been building two different sciences of economics and are missing the "calculus" to reunite them (or at least choose the winner between them).
I mention calculus specifically because it does feel like more of the progressive movements in economics are focused on rate of change rather than point in time. I personally often tend to get into electrical circuit analogies that current/resistance/impedance are more useful than steady state voltage. I find I especially bring these metaphors up a lot when discussing cryptocurrencies (and why I distrust them: inflation/deflation is the wrong axis, in my opinion, some inflation is a useful sign of "impedance" in the circuit, the trick to a healthy economy is not "deflationary" [most of real world history states that the deflationary economies are the worst to live in] but carefully managing the rate of change of inflation).
That progressive science of economics is happening, slowly (this paper seems relevant), but so much of conservative discussions get trapped in (misreads of) Adam Smith still. From a progressive point of view it does seem easy to dismiss conservative views of economics as bunk pseudoscience if they begin and nearly always end with Adam Smith, ignore some of Adam Smith's own warnings (for instance, relevant to above conversation: Adam Smith was also often the first to admit that the "free market" is an ideal/a model and unlikely to ever be a reality because humans are messy and ultimately irrational as individuals), and also ignore centuries worth of work since then, especially a lot of the "pre-calculus" stuff.
The vast majority of cash transactions are fired by a computer model so the implication are significant. It goes a long way towards explaining why increasingly financialized countries aren't experiencing noticeable real world improvement while also becoming increasingly extractive.
Hmm. I am not so sure about that statement. There are many models at play in the market, not one model. What mechanistic patterns are driving those models that are falsified by this paper and lead to the outcome of increasingly extractive/stagnating economies?
Neoclassical economics is based around the idea that markets are 100% efficient. If they are only 99% efficient the whole thing falls apart, because the standard defense of neoclassicals against exponentially growing defects in the economy is that they never happen in the first place. The moment you permit a 1% defect rate, the cascade starts and it is only a matter of time for things to go wrong.
Well, for better or worse, markets are becoming increasingly dominated by "non-biological utility maximizers" - mostly hft bots, but now also llm-based reasoning agents.
"Ahkchually the paperclip maximizer isn't maximizing [human] utility, just a dumb metric" isn't a particularly useful observation to make in the context of the world being gradually consumed by an army of nanobots.
I'm thinking of an earlier time when computers ran on "facts and logic" and you could probably stop the machine by giving it a logical conundrum. Vibes-based systems are a lot more resistant to this, but can still be distracted.
The author looks credible:
https://philipmaymin.com/about-philip
Thank you for sharing this on HN.
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To the mods: The title needs to be edited to replace the equal sign with not-equal.