Archive for May, 2012

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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How Development Economists Can Learn from Beatles’ Paul McCartney…

May 22, 2012

WB’s chief econ Justin Lin picks lyrics from Paul McCartney’s song:

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Why Indians prefer social convention to rigid rules

May 22, 2012

Niranjan Rajadhyaksha in his terrific new column — The Impartial Spectator –twists the debate:

The entire debate on why the Indian govt has been unable to spend enough on things that benefit all citizens may then have to be reconsidered in terms of our own social preferences, more specifically our historical inability to broaden the arc of cooperation.
He points to a lecture by Avinash Dixit:

Game theory in Repo markets..

May 22, 2012

I have always been thinking about how game theory can be used to understand repo markets. I mean it is a classic market for applying game theory ideas given the dynamic nature of both the fields.

Somebody has surplus funds, somebody has securities to offer. Should the lender offer funds to the bank or to the central bank? Should the borrower borrow from markets or central bank?

Huberto Ennis of Richmond Fed provides some ways to look at the issues in this paper:

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Improprieties of the Pretense of Knowledge

May 22, 2012

A nice speech on the topic by Daniel Klein of GMU. I posted about his views on central banking a while ago.

Coming from the Austrian School, speaking on such topics is like a cakewalk.

Knowledge has its counterpart in action, and your actions emerge from your normative calls in personal policy-making. On those two steps I propose to bring to the traditional Hayekian knowledge problem a prism of Smithian moral analysis. This approach perhaps sheds new light on the absurdities and profound quackishness of statist pretenses of knowledge.

He discusses how Knowledge entails three facets, information, interpretation, and judgment. We usually focus on information but not much on interpretation which is far more critical. There is a nice Sherlock Holmes story to show the difference.

The broader criticism is on government and regulators who seem to think they know what to do/regulate etc.

Nice bit…

Divorce rates help explain why Americans work more than Europeans..

May 21, 2012

A very longish paper by the trio explained in voxeu.

Why Americans work more than Europeans? This Europe vs US issue has always been a hot topic.

The authors say apart from higher tax rates in Europe, it is higher divorce rates in US which explain part of the problem:

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Who are better forecasters? Equity guys or Bond guys?

May 21, 2012

There is always a war between the two groups in fin markets. Equity camp believes they do a better job and Bond guys believe they do a better job. Some say equity markets are more sophisticated and transparent with large number of companies, quarterly reporting of companies earnings etc. Bond guys say we track macroeconomics and all that hence we are better placed..

In this BoJ paper, there are some interesting results:

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United States Then, Europe Now..

May 21, 2012

This is the title of the Nobel Lecture of Tom Sargent. The Nobel Committee website only  has slides and a video. Sargent put up the detailed paper on his website recently (HT: WNF Blog).

The paper details what Prof. Sargent said in this IMF interview:

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Financial crisis in US and euro area in 2007 vs Japan crisis in 1990s

May 18, 2012

A note in ECB’s latest bulletin on the topic. The usual fashion is to compare US-2007 with Japan-90. Here we have US/Euroarea-2007 with Japan 90.

The authors feel it is unlikely that US/EU will be like Japan in 1990s. Highly optimistic …

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Using Asset Disclosures to Study Politicians’ Rents in India

May 18, 2012

A terrific paper by  Rikhil Bhavnani of University of Wisconsin-Madison. The paper was presented in World Bank’s Annual Development conference – ABCDE 2012.

He looks at corruption amidst India’s politicians using their asset disclosures before the elections. The paper is full of surprises:

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An Assessment of Inflation Modelling in India

May 18, 2012

B. Karan Singh of ICRIER throws some light on this otherwise dark issue.

He analyses inflation using Philips curve:

This study analyses India’s inflation using the Phillips curve theory. To estimate an open-economy Phillips curve, we need three variables: (1) inflation (2) the output gap and (3) the real effective exchange rate. In India, the incorrect measurement of variables causes much difficulty in estimating the Phillips curve. The study by Singh, B.K. et al (2011) found that the Phillips curve existed, after addressing the issues related to measuring the variables. They suggested that the composite consumer price index (CCPI) was the best measure of inflation, and should be used to construct the real effective exchange rate in India. In measuring the output gap, the paper found that the Kalman filter estimates of the output gap capture all the dynamics of the Indian economy. This study constructs the variables, using a method similar to that followed by Singh, B.K. et al (2011). During the period 2008 to 2011, a combination of adverse supply shocks and overheating of economy resulted in an inflationary situation.

The paper discusses some interesting papers on inflation modelling in India as well..

Economic Case for Same-Sex Marriage

May 17, 2012

Betsey Stevenson and Justin Wolfers have this amazing article on the topic. They pick up from where Gary Becker left.

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How Boston Fed connects to the common man/real economy..

May 17, 2012

Boston Fed released its 2011 annual report recently..

It has three short articles/case studies on how it tries to stay connected to the common man etc. They call it Stories of Connecting:

Every day, the people of the Boston Fed connect with their world and their region. From identifying trends in data to encouraging collaboration among key populations, Boston Fed employees bring unique backgrounds and talents to their work to better the economic conditions for all in our region and nation.

Here, we share three stories of those connections.

The three connections are:

  • Cash During Catastrophe: Hurricane Irene tore through Vermont on August 28, 2011. The story shows how Boston Fed acted to provide  currency notes to the region as most currency in banks was washed away…Really interesting to read..
  • An Empathy Initiative: Shows how Ana Patricia Muñoz, a Senior Policy Analyst, connected with the Latino community using her common language skills and understanding of the community….interesting to see how much knowing the local language matters..
  • Beyond Monetary Policy: How Fed used mon pol to manage the falling growth and sentiment..this is pretty general stuff..

Interesting reading..

Cone of Uncertainty of the 21st Century’s Economic Hurricane

May 17, 2012

Just an amazing note by Avinash Dixit.  He looks at the possible scenarios world economy is likely to take in future.

He calls this crisis as a hurricane and uses the uncertain cone to build on his scenarios for the future.

First some humor from Dixit. Why the need to forecast? Barring the issues wrt forecasting:

indulging in wild speculation is simply too much fun.

 It is difficult to extract from this pdf as it prints a para in a vertical line of one word each. Hence not really pointing to key things. And anyways every word by Prof Dixit is important.

Must read from the first word…

Predicting oil prices: Economist view vs Geologist view…

May 16, 2012

A fab IMF paper on the topic.

It is an important paper as it mixes the two views on oil prices. Econs (and technologists) believe that if oil prices increase and it becomes scarce, people will figure something else..some innovation will come in and people will move on. Infact, this is what has happened with many projections of food/oil etc running out not coming true. Geologists however believe oil is scarce and will run out soon. Hence, we need to preserve oil etc. Similar views of Geologists are held by Physicists as well.

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Why did Sicilian Mafia originate?

May 16, 2012

Arcangelo Dimico, Alessia Isopi and Ola Olsson have this paper on the topic, summarised in voxeu.

Economists have given an interesting perspective to why mafia etc exists and becomes powerful over a period. The reason is in absence of protection from government, mafia becomes a kind of an alternate government. It provides protection to citizens and businesses and demands a premium for providing the services which ideally government should be providing. [Those of us into watching hindi movies, we now have an economic  explanation for the hafta (weekly payment) collected by the hero/villain].

Now the next q is how did mafia originate in different regions? What businesses did they seek to protect etc. This paper by the trio looks into origin of Sicilian Mafia.

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Obama vs Romney – Keynes vs Schumpeter?

May 15, 2012

Guy Sorman writes this hugely debatable article in city journal.

Most of us know the differences in ideology between Keynes and Schumpeter during crisis. First asks for government intervention to increase demand. Second suggests market forces to take over and let the new take over the old..

What is interesting is to see Romney being pitted as Schumpeter:

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The return of the surprise in central banking

May 15, 2012

Keeping this super lecture aside, here is a nice speech by Patrick Honohan, Governor of the Central Bank of Ireland.

He says though, mon pol is all about transparency these days, surprise elements still play their role esp in  crisis situations:

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Kidnapped by Pirates at Sea? An economics perspective

May 15, 2012

Such write-ups make for such a fascinating read.

Gabriel Rossman — Sociologist at UCLA– in this super piece tells us how economics can help understand a piracy situtation:

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