Josefin Malmqvist

Do they really care?

4 kommentarer

Seriously, I’m sitting here in a mountain of books and papers trying to explain in equations how firms decide how to set prices, according to a theory hardly anyone believes anymore.

How could anyone seriously think that a firm would use such Keynesian-wierd notation? I understand that to explain and understand reality, we need the help of equations and graphs. But isn’t reality complex enough to make it even more complicated in theory? I thought theory was supposed to be a simplification of reality, not the other way around. But that was perhaps just me.

Time to return to the equations.

4 tankar om “Do they really care?

  1. The problem of Economic Theory is that no matter how complex it seems, it’s not complex enough to describe reality accurately.

    Theory means different things to different people. In Natural Sciences, Theory is supposed to describe reality as accurately as possible, using the simplest possible models. Physics is extremely successful at that. Economics tried to be like Physics, but failed so far. The reality in Economics is not a natural one, but rather a man-made one, which complicates things beyond what our limited human minds seem to be able to grasp.

    When I was 18 and tried to study Economics, I went through the same frustration. Then I abandoned Economics until the field developed itself enough to the point of being less nonsensical 😉

  2. Firms don’t actually use the notation. They just act (in ideal theory) *as if* they use it. Likewise, you don’t have to do complex differential equations everytime you catch a ball, but you act as if you have done (ie. you catch the ball).

  3. @ Peter

    I really like that example of catching a ball without solving differential equations. Humans can do it because they are trained, their experience allows them to predict. Doyne Farmer explained it marvellously in this article: Cracking Wall Street.

    The problem of applying the same rationale to economics, is that a company can’t afford to make mistakes until it’s able to predict the future. It will go bust before it’s wise. The difficulty is simple: where the ball will land depends on Physics, and it’s irrelevant of what people in think. In Economics, say Microeconomics, the future is not determined by the laws of Physics, and the future will be dictated by the opinions of all players in the market. If you are able to predict what others are thinking, you will do well. Economics is an Information Science, not a Physical one.

  4. Ok, so my sarcasm obviously did not come across. Theory will most certainly never, at least not in our lifetime, be refined enough to give an exact mirror image of reality.

    As far as companies are concerned, of course this Keynesian theory wasn’t meant as a detailed ”instruction book” of how to run a company or anything of the sort, that was meant as a joke from my side as that is self-evidently not the case. Especially since none actually adhears to a lot of these theories anymore, as they are deemed too far from reality. I was simply expressing my frustration, when late at night trying to work out theories that are no longer in use.


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