Lots of food for thought here -- my favorite is the 5th reason economists often get their predictions wrong: that many of assumptions of classical economics are conservative by nature and to opt for market solutions over government ones -- and that most economists assume that the unfettered market will almost always yield better outcomes -- and any evidence to the contrary, they fail to self correct for.

Hartgal

Customers don't just stop buying goods that they need from local companies, particularly if they have more money in their pockets since their wages just went up.

The thought that inflation would go up is countered by the fact that we now buy our goods from foreign countries that don't necessarily have a minimum wage themselves.

These two statements are contradictory. If foreign goods are less expensive, consumers will indeed stop buying those goods from local companies.

Poor people tend to spend all the money they earn. They don't hide it under the mattress like the wealthy do.

Wealthy people do not hide their money under the mattress unless you consider investment in productive assets the mattress.

Economists mostly suck at prediction and understandding of human behavior because they are not psychologists. Kahneman and Tversky wrote a whole series of papers in the 80s and 90s about the FRAMING of an economic proposition and it's effect on behavior. Prior to that, there was very little influence of psychology in economics. Admittedly, the behavior of capital markets often does not depend on individual psychological factors, but it does sometimes.

Economists long for the day they are half as accurate as weathermen!

Good piece.

"Wealthy people do not hide their money under the mattress unless you consider investment in productive assets the mattress."

He may be overstating things to equate investment with hiding money under a mattress. It however does not come close to providing stimulus to the economy equal to consumption.

[W]e misunderstand incentives. To be specific, we exaggerate them. Economists will predict large labor supply or investment responses to marginal tax cuts, and visa versa...

[T]he responses never reach the advertised magnitudes.

This is completely baffling to me. In the sciences I'm familiar with, when you keep finding your predictions are too high, you adjust your predictions.

There's plenty of economic data out there. Sure there are plenty of effects, and good model-building to get the major confounding effects in place (and isolate the remaining ones of interest) is tough. But isn't that model-building what economists get paid for?

Or, if the effect of an incentive is really so hard to discern under examination of the data, can it actually be that large?

Interestingly, some economists are longing to be part of the psychology dept.  So-called behavioral economics (BE) is getting more attention these days. 

Broadly speaking, it relaxes the pervasive, underlying assupmtion that humans are rational economic actors, responding to incentives in predictable ways.

I think BE is a real advance, but one could easily say "whatever took you so long to get there!?"  You must appreciate, however, that it wasn't that long ago that economists recognized that some of our models didn't work because of "assymetric information," ie, the used car dealer was able to rip you off because he knew more than you about the junker he just sold you.

I'm a psychologist with a BA and part of a postdoc in sociology. I'm a history buff and a long time research collaborator with anthropologists. Of all the social sciences, the one that has never made much sense to me has been economics. The basic assumptions--that money supply drives behavior and that decision making is utilitarian never made much sense to me. Economies exists without money and there are many ways to provide great "elasticity" to the economy through services, organized crime, etc. Economists have suddenly discovered that decision making is not utilitarian and that simple economic incentives don't drive behavior---essentially they have recognized the work of psychologists that was largely established 30 year ago. Daniel Kahnemann, one of the key players received the Econ Nobel a few years ago.

A simple understanding of society and psychology makes it obvious how economic forces fall apart. People at different income levels have diffe4rent strategies for using money, if only because they have different options. Market often appear competitive but usually seem to be distorted by virtue of cartels or monopolies that constrain supplies and supply chains and the influences of financiers (think Wall Street analysts who ruin businesses with strategies for short term gain that have negative long-term consequences like trimming staffs and selling real estate).

The practicing economists I know have been in the policy and public health spheres. Despite having their feet in the real world, they often seem constrained by orthodoxy and get angry because people and organizations don't really inhabit their world.

Weather prediction has gotten better over time, but frankly, anyone who looks outside and can read a barometer does just as well as the weather man in the short run. Someone who can read a map and understands which way the wind blows can do almost as well in the long run. Economists can recognize when a recession is already well on its way, but they can't see how money markets and human behavior change over time. The effort to gain precision in prediction, as in the case of econometrics in the 70s and 80s was doomed because it has relied on simplistic assumptions that don't model actual behavior very well.

Mankiw has disappointed many, including somewhat contrarian economists like Max Sawicky. I think, like most Bushies, he has to tow the line or no one will listen to him. Of course, towing the line means that his influence on the administration is marginal at best. He's pretty much destroyed his academic career, although he may have opened up doors for himself for future prostitution in the wingnut sphere and in corporate America.

Your use of the word "classical," by analogy to physics, evokes another major failing of economists. They do not understand nonlinear models; they think of the world as an interlocking system of partial differential equations.

The old notion was "simple models, simple behaviors." If you picked up a complex behavior, you needed a complex model to explain it. It turns out that this is far from true. You can't blithely assume that the "invisible hand" will guide a system to a stable equilibrium, because in a lot of cases, it won't: there are a lot of simple models that, for certain ranges of parameter values, either oscillate periodically or just behave chaotically.

If something like fluid dynamics, with its simpler feedback mechanisms, requires this to be taken into account, how much more must a working economy, with all its informational feedback loops, require it?

Religious issue? I'm fascinated. What religious issue? (But admittedly for the likes of Milton F. laissez-faire capitalism more closely resembles a religious experience than a mundane, workable economic theory.)

I'm not so sure a Marxist Utopia is a pipe dream. Russia after 30 years of two wars on her soil and a revolution to boot was a seriously flawed candidate to test any economic theory.

All said, any cure-all theory of anything must always require the raising of red exclamation points.

Most economists don't deal with facts, or even actual experiences. They have little to back up what turn out to be pet theories or, even worse, feelings. When someone actually does research, and looks at facts, there is a chance that an economist's predictions may have some accuracy. Otherwise, it's like the pundits on the Sunday Talk Programs.

Eh. What is a science anyway? I used to think it was defined by the scientific method, but a few grad school courses covering paradigms and epistemologies got me off that wagon. Even in the hardest "sciences," the disproving of hypotheses never really happens, and the statistics that stand in for it now are better read as persuasive text than immutable data.

Economics' real problem, in that regard, is that it has an enormous case of physics envy. It so desperately wants to find Newtonian laws from which it can axiomatically extrapolate predictions for the universe of human economic exchanges. While I could rant on about the lack of respect for valuable concepts in Keynes, Marx, Veblen, Weber, and a host of others that get routinely ignored in neoclassical economics, the main critique I would say of economics is that it just needs to get empirical. If you can't back up your theory with empirical examples, you shouldn't be published in high level journals.

Sadly, economists seem to regard empiricism as some sort of quaint trinket for more lower forms of study.

the main critique I would say of economics is that it just needs to get empirical. If you can't back up your theory with empirical examples, you shouldn't be published in high level journals.

I would say that is the essence of science. Sure, we can have a lot of philosophical and post-modernist discussions about the scientific method and meta-narratives or whatever, but when it comes down to it, economic hypotheses are rarely if tested against the world.

For what it's worth, even Kuhn didn't think that the products of the "hard" sciences were social constructs.

Most people get economics wrong by misapplying micro thinking to macro problems. Thus, what Wal-Mart does is just like hiring little 12-year-old Jimmy next door to mow your lawn. Who are you to tell poor little Jimmy he can't cut grass for 10 bucks? Jimmy WANTS to cut your grass. He LOVES to ride your power mower.

Of course, Wal-Mart executives WANT people to confuse their behemoth corporation with little Jimmy's kindly neighbor. Vested interests facilitate all sorts of confusion.

The proper way to think about the minimum wage was laid out (if I remember right) by John Kenneth Galbraith. To paraphrase heavily, demand for Double Sloppyburgers is the price people will pay for one, which is a measure of how badly they want it.

If that market price is too low for the burger flipper to earn minimum wage,  that means people don't value Double Sloppyburgers very much. Therefore, who cares if that burger joint goes out of business. Nobody really liked their Sloppyburgers anyway.

How about we change this to:

6) Economics is not a science yet.

There is no reason economics cannot be a behavioral science. Economics could become a science if economists simply begin using tools already used by psychologists to experiment on human behavior. The reason it isn't a science is simply that it is not approached scientifically and empirically, with studies done to prove each hypothesis. But economics is not inherently an unscientific field. All that must be done, is that economists should be trained more in the scientific method. Meteorologists don't have enough data or computing power. Economists by and large refuse to scientifically analyze their own.

How to become a hyperforecaster:

1) Get 1024 clients.
2) Predict a bull market to 512 and a bear market to 512. Advise them accordingly.
3) Lose half of your customers.
4) Predict a bull market to 256 and a bear market to 256. Advise them accordingly.
5) Lose half of your customers
... and so on ...

After a certain point you will have a customer base that thinks you are god.

Yes, I know, this is an old joke, but it is better than "flucted again".

I've always had a lot of respect for the New Dealers, and I've made good money on the market following their precepts. The simple fact is that the less money you make, the larger fraction you spend. Eventually. rich people get all the money, and the economy winds down with the poor just scraping by and a static power curve of wealth. This describes much of the third world today.

The problem with supply side economics is that rich people are not necessarily stupid. Why should they invest if no one has money to buy their products? If society, and people, are to get even richer, something has to pump a lot of money from the top down to the bottom again. Few rich people will do this voluntarily because it would place them at a disadvantage with respect to other rich people. Once again, saying rich people are stupid is poor basis for an economic theory or investment strategy.

The market generally goes up when:

- taxes are raised, and I'll consider the minimum wage a tax,

- government borrowing and spending increase, but a lot depends on what the government is wasting the money on,

- the economy tanks and there is no place to invest productively so people buy stocks.

It doesn't make much sense, but it works.

From an earlier post that seems to fit

When an economist is chanting the mantra "On the one hand, but on ...."
and raising and lowering each hand what is actual happening
is a display of free market auctions at work.

The economist is trying to bring forth a
higher bid by the opposing side
wanting their answer to be "The Answer".

If asked in private about his actions, the economist would say,
using the free market brought forth the best answer.

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Today, are we searching for I deals or Ideals?
-Thinking