Week #2: Can I have some Context?

Karl FitzgeraldCommentaryLeave a Comment


It’s week 2 and already I know I like my Finance subjects better than my Economics subjects. The key difference is: Context.

I have a sneaking suspicion that Economists have made Economics far harder to teach (and understand) than it needs to be. For example ‘Marginal Propensity to x’ where ‘x’ can be ‘consume’ ‘save’ ‘tax’ etc. Surely there is an easier way to convey the meaning than ‘Marginal Propensity’. I’m sure there are hard nosed Economists that think the distinct nuance is somehow important, but for your lay person, just call it the ‘tendency’.

If I were to be uncharitable, I would say that the Economic emphasis on blinding with scientific language and writing as many lecture slides in pure mathematical symbols is designed to distract students from the fact we are talking about a model of reality, not reality itself.

But being more charitable, I just think it’s because Economics is concerned largely with aggregates. It is a ‘Barn Dance’ for which we are learning what people are ‘supposed to do’ when the RBA lowers interest rates and what not, but there’s very little chance you will ever encounter an aggregate*, so its pretty safe to never mention the actual context of what we are talking about, hence we can have a lecture slide that says nothing more than:

Y = Co + kYD + Go + Xo – (Mo + mY)

Where YD = kC – (kT + To)

Interestingly, the Economics stream doesn’t provide formula sheets in exams, ensuring we expend most of our energy just memorizing these formulas of dubious real world value.

Finance though, will deal with a customer, which is an individual (or an individual making decisions on behalf of the organisation) and thus has no particular concern with aggregates. Thus the emphasis is on the application and being able to explain the concepts in plain English. The formulas are only of concern in knowing which one to use when, and thus Finance do provide a formula sheet. (curiously they are also easier to remember).

The thing that yet alludes me in my Economics subjects, is that I can’t envision what sort of decisions I can make based on these formulas. The only one is setting an interest rate, which will be handy if I end up being Governor of the RBA. Finance again, thanks to the miracle of context is all about making decisions. There is practical value to calculating FV (future value) and discounting it back to PV (present value) given a required rate of return, it would help somebody make a decision.

*A point easier to illustrate with racism, you can easily make the general statements that Australians are as an aggregate ‘loud, classless, jocular, larrikins’. Yet as an Australian moving to India, would you like your new manager to base his treatment of you on what he “knows” about Australians. In other words, would you rather be treated as an individual or an aggregate?

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