Against Index Variables

I don’t think that the economists of the future will use index variables in the same way that economists use them today. Simply put, and based on my very-under-educated understanding of how the U.S. central bank makes policy decisions: all of modern economics is a big sham based on index variables with no context attached to them.

The reason why we’ve created index variables is clear: it’s very hard to understand the economy.

But the immediate question is: why are most of the index variables we care about on a national level? For one, these indexes aren’t relevant to much of the economic experiences of most people: almost none of my transactions or transactions decisions are national (whatever that means). Sure, the CPI being 1000% would probably effect me — but most indexes aren’t this.

I bet part of the reason is historical: the book is “The Wealth of Nations” after all. But even then, what other system do we model by taking the system itself to be the base unit? “Ah, the cell. The cell is made up of the cell, and that’s it.”

Another part of the reason that national banks can only really enact policy on a national level. Just because of free movements of goods and people within a country (seemingly non-negotiable), they need to make decisions based on national statistics. But even then, that doesn’t mean the model itself must be constructed out of national indexes.

The other approach exists already (though it seems not very well-studied or used): understand the economy as a dynamic system of complex, interacting agents. Who knows. My best bet is that there is a formalism in which the expression of these agents behavior isn’t that much more complex than existing models — but the resulting dynamics of their interactions do a much better job of capturing the dynamics of the economy as a whole.