Tue, 13 May 2008

Finance is not Economics

I think David Isenberg is a little frustrated with me, because he keeps snarking at me about economics. The problem is that not only does he not "get it", he doesn't understand that he's not getting it. It's like the guy who adds 2 plus 2 to get 5, and then when you say that he's bad at math, he says "Oh yeah? Well I know that 3 plus 4 is 8!"

From the looks of things, David is good at finance -- at least that's what his later posting is about. Trouble is that finance is not economics. Finance tells you how much, but economics tells you why. Finance can let you determine that two things have the same value, or the same cost, but only economics can tell you why people would buy one versus the other.

This seems to be a fairly commonly executed fallacy. Many many people feel free to criticize economics and economists, when it's clear that they don't know the first thing about economics. I think that's because they, like David, confuse finance for economics. They figure that they can balance their checkbook, so they know as much as somebody who has studied economics for years and year. At least, that's my best guess, but I might be wrong.

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