ABOUT
This weblog is written by Cyrus F.
You can contact him at email
RECENT POSTS
Suicide on Donated Rope
The Blame of the Crime, Again
Take Action for Syrian Activists
Capitalism from Epistemology
Rationale of Tyranny
Wish Come True?
Targeted Arrests: Scare Tactic
Hostages in Their Own Land
Happiness
Nudging the Nudgers
CATEGORIES
@ del.icio.us/libiran
WEEKLY ARCHIVES
13 August 2006
20 August 2006
27 August 2006
03 September 2006
10 September 2006
17 September 2006
24 September 2006
01 October 2006
19 November 2006
03 December 2006
25 March 2007
01 April 2007
08 April 2007
15 April 2007
29 April 2007
13 May 2007
20 May 2007
27 May 2007
03 June 2007
10 June 2007
17 June 2007
24 June 2007
08 July 2007
15 July 2007
05 August 2007
30 September 2007
14 October 2007
21 October 2007
02 November 2008
08 February 2009
GIZMOS
rss
BR "Blogroll Me!"

technorati search

» Blogs that link here
» View my technorati profile
I BLOG FOR ...
BLOG-IRAN
BLOG ROLL
PostGlobal
"Join a conversation with the world's leading minds."

A Democratic Iran
American Islamic Congress
A Reasonable Man
The Atlantic Online
Blogs x Iranians
The Economist
Daniel Pipes
Free Muslims Coalition Against Terror
Girl on the Rights
Iranian Woman - زن ایرانی
Jonathan Derbyshire
Little Green Footballs
Neonomos
Normblog
Setting the World to Rights
Solomonia
The Spirit of Man
TCS Daily
Winds of Change
CREDITS
CC License
This work is licensed under a Creative Commons License.

Powered by Blogger
Liberal Iranian
Liberal as in Liberty and Freedom. Iranian as in Cyrus and Ferdowsi.
Tuesday, June 26, 2007
Psychological Impact on Economy
There is no such thing as the psychological impact on economy.
technorati tags:
I always find it baffling when I hear or read about the psychological impact of an event on economy. I don't understand what is really meant by the term. Does it mean that the event in question somehow affects the psychology of the people in some unkown but pathological way and then this unhealthy state of mind impacts the economy? What I usually suppose they mean is that the said event either falsely signals a particular, non-existent situation, or that it is interpreted falsely due to invalid but popular theories. But to take people's reaction in such cases to be "psychological" and its economic consequences to be a sort of "psychological impact" on the economy, especially as a way of analyzing the situation, is hardly worth consideration in a rational, objective theory.

An example is this economic focus article in The Economist, which is concerned with the sensitivity of the Chinese economy to a stock market bubble burst. After giving a detailed account of who in China and how owns shares of the stock market and the proporion of companies and how much they issue shares in the market, The Economist concludes

The direct economic impact of a fall in Chinese share prices would therefore be modest.
But right afterward it continues
Some indirect effects could be larger. For instance, the psychological impact of a sharp sell-off could severely puncture consumer confidence.


But this way of viewing things is fishy. If the detailed analysis leading to the first conlusion is right then there remains nothing left to the psychology of the general consumer. Why should they care about a stock market sell-off if it doesn't affect them? What could be the case is that the consumers are not aware of this analysis. They have their own analyses. They act on them. If the result is a state of severly puncutred consumer confidence when the economic data show it need not be the case, I can't see this as the "psychological" impact of the stock market crash. It is the consequence of widespread false theories of what that crash means. It is perfectly non-psychological in exactly the same sense an otherwise solid consumer confidence would be.

Similar and much worse analyses prevail about inflation and prices in Iran. For instance, Davoud Danesh-Jafari, then head of the Economic Commission of Majlis and now the Minister of Economic Affairs and Finance, has the following theory:
"People expect the prices to go up when the new-year starts and this automatically pushes up the rates."
The fallacy of such claims is apparent on a little thought. Why, for instance, do people expect the prices to go up? As the same newspaper article also notes,
A close and impartial look at the budget statement and reasons behind chronic deficits show that unless the government comes up with ways to put a stop to the unchecked rise in liquidity, inflation will continue to haunt the economy not only during the next year but for years to come.
The psychological theory of inflation, of course, has no room in serious economics.

Labels: ,

 
Comments: Post a Comment



<< Home