What's our Time Frame

I have noticed over a period of time that Economists usually ignore the role that societal learning plays in economics.  Let me give the most germane example of which I can think.  Imagine a crisis occurs.  The crisis could be anything for the general nature of this question but let's take it as a specific type of economic crisis for the purpose of this argument.  How about a banking crisis precipitated by excessive leveraging in an economy?  How's that for topical?  The causes of such a crisis are somewhat controversial but generally they share some traits.  A few are: irrational exuberance, excessive borrowing, over investment, and insufficient risk management on the part of just about everyone.  I don't think that this is too controversial so I am going to assume you agree with me so far.  My question isn't about the causes of the crisis anyway, it's about the result.  I am not concerned with the immediate result (unemployment, recession, deleveraging) but about the long term impact on the decisions and thought processes of the society.

We can imagine various different worlds.  The two extremes would be: one, that we would forget such a crisis immediately after it happened and two, that we would remember such a crisis, forever, as if it had just happened.  Obviously the truth is somewhere in between but let's think about the two worlds.  In the first, nothing would change as a result of the crisis.  There would be no behavioral change, no policy response, and no decrease in risk taking.  In the second, changes would be more or less permanent.  The changes might be tweaked to improve them but the immediacy of the crisis in the minds of people and policy makers would make the change in mindset remain.

The actual affect is somewhere in the middle.  Behavior changes due to a crisis for a period of time.  It seems intuitive to me that this change would be correlated to the length and severity of the crisis but I can't prove it empirically (if you are aware of research on this please let me know).  Generally people become more risk adverse for a period of time. Less borrowing and more conservative investment decisions driven by risk aversion will make a future crisis less likely.

So if we can accept that crises affect risk appetite and risk appetite affects crises then it seems very important to understand how this relationship works.  Specifically: how long does behavior change, how does the severity of the crisis affect the degree to which behavior changes and the length of time it changes, and, do frequent low impact crises affect society differently than infrequent high impact crises?  These questions matter because policy makers have made decisions which have drastically changed the structure of the business cycle.

Adam Smith argues that there are many natural tendencies of the market which serve to correct man's many foibles and that when government interferes with man's natural liberty it distorts these corrections.  We can imagine that this extends to the timing of bubbles and manias and the crashes that subsequently follow them.  When central banks and governments act to forestall a crisis, through monetary or fiscal intervention, they change the length of time between crises and the severity of crises when they happen.  This changes the way society experiences the crisis and therefore what we learn from the crisis.  But we don't know exactly how, what, and for how long, we learn from these events so we don't know the actual impact of the intervention.

Intro

I studied a bit of economics in college and since then it has been a hobby of mine.  In pursuing my hobby I have  been constantly frustrated by economics as a Social Science.  Modern economics focuses undue attention on getting the right answers without knowing the right questions.

I had a graduate student instructor in one of my classes tell us that he had, along with a colleague, figured out why wages had been stagnating for the middle and lower classes in America since the 1970s.  He said that the statistics showed a strong correlation between the time spent in a job and wages.  Since the average amount of time that the less wealthy 50% spent in their jobs had been decreasing so had their wage growth.  I can't argue with the methodology of this study because I haven't looked at it but it seems obvious to me that it is
not a conclusion.  You would need to know why they had spent less time in the jobs they had.  If you discovered that they left there jobs you would have to know why and if you discovered that they were laid off you would have to know why. Even that might not be enough.  In economics it is virtually impossible to know whether you have actually identified the independent variable and much of the time the idea of an independent variable is meaningless.

This sort of thing has lead me to the look at asking questions as a way of broadening the perspective by which we look at economics.  I plan to ask questions and explain why they are important; I don't pretend to be able to answer them.  I think many of them are probably unanswerable.  But I think that by asking the right questions we can see which questions are the wrong questions and why.  After all it is more logically complete to prove something wrong than right and thankfully it is easier.  To paraphrase Taleb, taking away what is wrong is often more important than adding what is right.