Thursday, November 15, 2012

Market Power - I, Pencil

There is nothing simple about the science of economics. Worse yet it's very difficult to predict using ordinary mathematical principles commonly used in science.

For example in chemistry it's fairly straightforward to predict the products and their quantity in a particular chemical reaction or even a set of reactions if the starting materials and conditions of the chemical reaction are known beforehand. Using stoichiometry, "the rules of chemical reactions," its simple enough that high school students can do the calculations and make the predictions.

Economics, is very different. There is something called econometrics, the application of math and statistics to economics. It's very useful in showing economic trends and events in the past, but predicting the future, not so much.

In the 19th century, Thomas Carlyle called economics the "dismal science" in response to the grim predictions in the writings of Malthus in the previous century. Malthus was wrong, he could not predict the scientific and agricultural advances that changed the lives and economics of Western civilization, the apocalypse did not happen as Malthus envisioned.

Malthusians in the guise of environmentalists are still around today, predicting doom and gloom. It makes for great news stories because of the hyperbole involved, the books written, movies made, and the creation of an army of charlatan scientists predicting doom and gloom. Malthus would have been proud.

In economics, more often than not, the past does not predict the future because human actions are far too complex. But because humans are incentivized to act for their own well being, what seems chaotic and spontaneous often has wonderful orderly results, and what seems destructive, ends up being very creative.

The following video is a perfect example of a seemingly chaotic and spontaneous interplay, creating order.           


If you didn't understand that, here it is explained.

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