Archive for May 23rd, 2012

Review of Why Nations Fail?

May 23, 2012

This blog is a big fan of the Why Nations Fail blog  based on the book by the same title. I have still not read the book and hence no real comments.

Here is a superb review by Jared Diamond who also wrote a famous book — Guns, Germs and Steel. 

It is just an amazing review of the book. Gives both pluses and minuses of the book..

What are economists for, anyway?

May 23, 2012

Robert Johnson of INET in this post looks at this most important question:

In the wake of INET’s conference in Berlin, Executive Director Robert Johnson poses a profound question during this interview with the German foundation Stiftverband.Who does the economist serve: powerful interests or society? 

The answer seems clear-cut. Economists today primarily serve the needs of powerful interests at the expense of society in general.  But why?

To answer this, Johnson peals back the surface of overt corruption to explain how the problem goes far beyond that. It was not that economists were all on the take leading up to the global financial crisis, Johnson says, but that those whose visions aligned with powerful financial interests “were used as marketing vehicles, and they were not adequately skeptical as scientists of what the flaws in their vision might be.”

The world is always uncertain,” Johnson continues, “so when people become anxious, they want the expert to tell them what is going to happen.” The problem is that these experts don’t shoulder much of the risk of being wrong – or of selling confidence when humility is called for – and it is society that ultimately pays the full price of their deception.

There is a complete disconnect between what people want from eco and what econs deliver:

Yet many economists don’t even see the problem. They don’t know – or don’t want to know – that they are selling snake oil and that the abstract precision of their finely tuned mathematical models doesn’t hold up to the many contingencies of the real world.

In this regard, “economists are the victim of the Thirty Years War,” Johnson says. “Economists now worship at the altar of abstract theory which was the product of the fear and anxiety that followed the Thirty Years War 350 years ago. It’s time to reexamine our methods very fundamentally.”

The problem is exemplified by David Collander’s study of the economics profession, Johnson says. Collander found that of economics Ph.D. students “85% say they need to know a lot about mathematics, while only 13% say they need to know anything about the economy in order to become an economist,“ Johnson notes.

This is interesting stuff by Colander. You come across so many people who end up taking/worrying over math before applying to US/UK colleges. Most colleges clearly say higher math skills are a must (or some statement like that). One keeps wondering where is he applying to an econ major  or a math one..

What are the remedies? Change the way it is taught. Make it more subjective and context specific. History is a must:

First, the basic paradigm through which the economics profession sees itself and presents itself to society needs to change. “Rather than teaching economics 101 as an indoctrination in method, they should teach it as a course in philosophy of science where the subject is economics and its assumptions, and the tradeoffs and the flaws as well as the strengths are explored on behalf of the student,” Johnson says.

Second, economics must lose its fascination with deduction and reincorporate context into the profession. “Understanding the context of institutions, understanding economic history, and particularly the history of economic thought (where the subject is economic thinking embedded in the real context of the problems and vested interests of the day, the various challenges, the state of technology), would help people to develop a more humble and realistic of what economic thinking is all about,” Johnson says.

Thumbs up to both the suggestions…

Will Financial economics post crisis be more Keynesian in spirit??

May 23, 2012

What an amazing paper by Carlo Zappia of University of Siena. It connects so many dots in such few pages that one is just amazed.

It looks at history of financial economics and how it has changed/expected to change post the financial crisis. The history bit is a really abridged version of Capital Ideas book by Bernstein.  It covers the works of Markowitz, Sharpe, Merton/Scholes/Black, Fama etc.

He starts by pointing how the crisis has led to rethinking on much of these finance theories. He then reflects on how all this theory around finance developed and was later questioned by behavioral theories.

The crux of this crisis from fin eco perspective is that basic assumptions laid by Markowitz (and followed by others) was not true. Much of it is based on Bayesian thinking which is flawed:


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