Friday, March 23, 2012

Difference between N Theory and Conventional Economics

N Theory and conventional Economics both exist to explain the factors affecting future commerce. It is assumed by both theories that understanding the factors will allow experts in the field to better describe what will occur when government takes actions that affect these factors or market conditions change.

The model of conventional Economics is a counting model. Adding up the current income of a country's citizenry can predict how much the economy will grow over last year. Prediction is strongly based on what happened in the past. Comparing the amount of copper ore available for sale with the amount needed by buyers will indicate whether the price will go up or down. Looking at the interest rates banks are offering for home loans will indicate how many homes will sell in the coming year. Knowing the number of citizens seeking employment will foretell the growth in wages.

On the other hand, N Theory is an attitude model. Knowing why people are settling for a certain salary increase or decrease will allow prediction of the total income for the coming year. Prediction is based on how attitudes will move the settlement point of negotiations in the future. Studying why copper buyers and sellers are settling at certain prices will give an indication of what factors will affect sales in the future. Surveying potential home buyers will indicate whether lowering interest rates will increase or decrease future sales. Surveying employers willingness to add new workers will allow predictions of future employment trends.

The purpose of economic modeling is to predict what will happen in the future. N Theory is much better at this task than conventional Economics that relies on supply and demand modeling. N Theory looks at the person making the decision and through their eyes at the factors determining what decision they will make. Conventional Economics only looks at the factors affecting a buyer or sellers decision.

Here is an illustration of the difference between the two approaches. Imagine you are given the task of determining how many miles will be driven in the next month in your county. Conventional Economics would answer this question by looking at gas prices, last years driving miles, possibly the weather and the income level of drivers. From this information an economist can predict that driven miles will increase by "x" percentage. N Theory would take a slightly different approach. N Theory would ask the driver's how much driving they intend to undertake and how this compares to last year, or better, compare this survey from the results of last year's survey. Both approaches require mathematical techniques to refine their predictions. The big difference is N Theory asks the economic "driver" what they plan to do. Conventional Economics looks at the factors that affect the decision. N Theory looks at these factors through the buyers' eyes. Conventional Economics looks at these factors through the eyes of an economist.

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