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Most of us, most of the time act in our own short-term interests as opposed to interests of the community as a whole or even our own long-term interests. This is probably the case for those European unions protesting austerity measures by their governments.
For an explanation of why this is probably not in their long-term interests see the previous post in this weblog on Economic policy, least squares and the Elliott wave.
When I studied economics I learned about least squares regression. Later when I took an interest in market behavior I learned about technical analysis and the Elliott wave theory. It may be that the Elliott wave theory is better at explaining our economy and may provide better guidance for economic policy.
The least squares regression takes a series of data points and draws the best fitting line through them. Once you know the formula for the line it is easy to project the trend into the future. This technique is used extensively in economic forecasting.
Here is a chart from Wikipedia and its article on this.
This approach assumes (ass u me) economies will grow continuously and forever. Economic policy then should try to smooth the data points so that they are all on the line.
I am not a total believer in the Elliot wave theory but I do like that it shows markets as being fractal and moving in a series of ups and downs. Here is a chart from Elliot himself and the link to the Wikipedia entry.
It seems to me this is a more realistic way to view the economy. Clearly the economies with which we are most familiar have had ups and downs and this has been happening for millennia with the rise and fall of civilizations. It would be nice if we could be the exception but probably our turn will come.
One of the features of these waves are that they are fractal which means that with in each trend there is another whole series but on a shorter time scale and each trend itself may be just a small part of a larger trend.
This fractal nature of markets, and the economy, make forecasting extremely difficult although there is a concept of fractal dimension which can be calculated. Noting when fractal dimension changes for different time series may help with predictions.
Now to economic policy.
If one can accept the least squares method of forecasting the policy is easy. When there is a down trend you apply lots of government stimulus spending and when there is an up trend you try to slow things a little.
Policy if one accepts the wave theory is more difficult. We may be able to detect some of the turning points but we don’t know which fractal we are on or how severe the down trend is likely to be.
The policy during a downtrend depends upon the severity of the trend and should be a generally cutting back of living standards. The question is who should make the cutbacks. Generally it should be everybody except me. The sad thing is that cutbacks apply mostly to the poorer segments of society. If you happen to be a government employee you don’t have to worry too much – yet.
The danger is that if we apply stimulus going into a major down trend, we are likely to bring forward and make worse a major crash.
Wouldn’t it be nice if the least squares approach were the one?
Here is a link to an excerpt from a new book which HuffingtonPost describes as an “important new book” and “A masterpiece. An iconic and defining book for our time.” To me it sounds like just another attempt to talk ourselves out of economic problems.
The authors say current problems are because “The world is broken and the industrial economy and many of its industries and organizations have finally run out of gas, from newspapers and old models of financial services to our energy grid, transportation systems and institutions for global cooperation and problem solving.” and because of “misguided policies and approaches.” They go on to recognize the seriousness of current and future economic problems.
However it is not clear to me their solutions deal with the realities. How will “a new modus operandi based on new principles like transparency, integrity and collaboration” solve food or fiancnaial crisis or problems of resource depletion?
There’s an old line that the first public knowledge of a good plan should be its execution. However, the premier of British Columbia is currently discovering that this isn’t always true. Then tranferring some of the tax burden to from buisiness to ordincary tax payers and increasing the tax take masy not have been a good plan.
The link is to an article in The Vancouver Sun by the Information and Privacy Commissioner for British Columbia. As a former newspaper reporter I am very much in favor of the public’s right to know.
Economists are the theologians of the late 20th and early 21st centuries. Some of their debates are as relevant to the real world as the medieval debate over the number of angels that could dance on the head of a pin.
The main function of economists is not so much to solve economic problems as to provide us assurances that the economic things we do are legitimate. We are fast using up resources and we need to believe that there is some good from this.
The Libertarian Buddhist, another WordPress blogger, uses the example of Robinson Crusoe to show how saving can allow the time to make equipment which allows more saving and makes life easier in that he can more efficiently knock the coconuts off the trees.
It is an interesting argument although I have two concerns.
The first is that rather than working all the time Crusoe might want to and might be wise to take time to lay on the beach or create some art work or sing a song.
The second concern is that eventually he will knock down and eat all the coconuts and then he has a serious problem.
It could well be that current economic problems are because we are near that situation ourselves. We have been using up a lot of resources, some of which are non-renewable. As we use the resources which are easiest to harvest, it takes more time and energy to get what is left. With an ever-increasing population we may have a problem just as serious as the one facing Crusoe.