A Teacher Writes to Students Series (III): How To ‘Eat’ Economics Better

Here is third article of the series.

How To ‘Eat’ Economics Better
Annavajhula J C Bose, PhD
Department of Economics, SRCC

The distinction between Keynesians and Monetarists is obsolete

Coen Teulings in this voxeu article:

Last week Robert Lucas passed away. His work changed macroeconomics forever. The idea of rational expectations has permeated macroeconomic models of all walks, at the University of Chicago as well as MIT – the cradles of Monetarism and New Keynesianism, respectively. This column argues that the distinction between Keynesianism and Monetarism is obsolete for understanding the current macro debate since both schools rely on Walrasian economics. A more useful distinction is between Neoclassicals (embracing both Keynesians and Monetarists) and Neo-Austrians. This distinction allows for an alternative view of the role of public debt in the economy.

Advertisement

A Teacher Writes to Students Series: Psychopathy versus Compassionate Morality

I had posted earlier that Prof AJC Bose of SRCC will be writing to students via this blog.

Here is Second Article of the series:

Psychopathy versus Compassionate Morality
By Annavajhula J C Bose, PhD
Department of Economics, SRCC, DU

In the real world, you are a psychopath if you show up antisocial personality disorder.

That means that you copiously exhibit any of these or some of these or all of these symptoms: you are regularly breaking or flouting rules or laws. You are lying and deceiving others. You are impulsive. You are aggressive. You have disregard for the safety of others. You are irresponsible. And you have no remorse or guilt.

Rest in Peace Prof Robert Lucas

Prof Robert Lucas of Univ of Chicago passed away.  He was one of the giants who shaped the subject of macroeconomics.

This story on his Nobel prize is quite something. His wife in her divorce settlement had said that if he does win the Nobel Prize she should get half the prize money.  Lucas did get the prize and the ex-wife half the money. One of those rare instances, when the wife had a high impression of husbabd’s abilities.

Rest in Peace Sir.

A Teacher Writes to Students: How Economics and Finance Can Be Studied

For the next few weeks, Mostlyeconomics blog will be featuring posts by Prof Annavajhula J C Bose of Sri Ram College of Commerce, Delhi University. Prof Bose reached out to this blog to share his oriented to inspire students to find and read on unconventional economics. Read his insightful interview on economics and state of teaching economics.

This is the first article of the series.

How Economics and Finance Can Be Studied
By Annavajhula J C Bose, PhD
Department of Economics, SRCC, DU

The Political Economy of John Kenneth Galbraith: A Guide for Beginners

In this paper, Brendan Sheehan writes on JK Galbraith:

In the third-quarter of the twentieth century John Kenneth Galbraith was probably the best-known economist in the world. He gloried in taking the road less travelled, challenging the conventional wisdom, the doctrines and myths, which sustain the social order. But criticism was never enough for Galbraith.

He created an alternative analysis, an unconventional wisdom, of how capitalism works: the general theory of advanced development. It emerged over the course of four of Galbraith’s key books: American Capitalism (1952), The Affluent Society (1958), The New Industrial State (1967) and Economics and the Public Purpose (1974).

It’s an audacious economic, political and social theory in the eclectic tradition of North American Institutionalism, which gives a new twist to the insights of Edward Chamberlain, Joan Robinson and John Maynard Keynes. Disappointingly, mainstream economics has ignored it; no trace is to be found in modern economics textbooks.

Mainstream economics have excluded quite a few things. Ignoring Galbraith’s contribution and ideas are no different..

Profile of Robert Merton and his contributions to finance

Zvi Bodie and Andrew Lo in this paper profile Robert Merton and his contributions to Finance:

Robert C. Merton is the School of Management Distinguished Professor of Finance at Massachusetts Institute of Technology, and the John and Natty McArthur University Professor Emeritus at Harvard University. Merton received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives. After receiving a Ph.D. in Economics from MIT in 1970, Merton joined the MIT Sloan School finance faculty until 1988, at which time he was J.C. Penney Professor of Management. Merton’s research focuses on finance theory, including lifecycle and retirement finance, optimal portfolio selection, capital asset pricing, pricing of derivative securities, credit risk, loan guarantees, financial innovation, the dynamics of institutional change, and improving the methods of measuring and managing macro-financial systemic risk. Merton received a B.S. in Engineering Mathematics from Columbia University, a M.S.in Applied Mathematics from Caltech, and a Ph.D. in Economics from MIT.

 

 

Ayn Rand vs. Elinor Ostrom: The Fight for the Future of Social Media

Pia Malaney in this interesting INET article says the fight for social media can be seen from Rand vs Ostrom lenses.

How did social media transition from decentralised platforms to centralised ones?

Elon Musk’s recent takeover of Twitter paralleled, in some sense, the 2016 earthquake when Donald Trump unexpectedly took over the Oval Office. In both cases, a populist billionaire put an existing entity with millions of members under radically new management. Unsurprisingly, whereas alarmed Americans had signaled a desire to escape to Canada in 2016, alarmed tweeters in the fall of 2022 signaled their trepidation by announcing their intention to move as well. But the most commonly threatened exit was to a structure of which few had ever heard: Mastodon.

Mastodon is but one of many new social media sites, alongside Post, Steemit, Planetary, or the Dorsey-funded Nostr, that are drawing attention in the face of Musk’s inscrutable decision-making with respect to the banning of journalists, the firing of personnel, and algorithmic changes. Many of these new sites focus specifically on shifting away from the centralized architecture of today’s tech behemoths like Twitter and Facebook.

It can be difficult to remember that a mere quarter century ago, the very social networks that have now demonstrated the terrible pitfalls of the social media revolution known as Web 2.0, were the objects of fanfare and genuine idealism. Facebook set out to “Connect the World,” while Google sought to make available all human knowledge for everyone at no cost. The latter went so far as to embrace the unofficial slogan of “Don’t be Evil.” In the spring of 2018, it was finally deliberately removed and retired from the preface to Google’s code of conduct when the obvious absurdity of the statement coming from an enormous hierarchical corporate leviathan made it more of an embarrassment than an asset.

These social media sites are perhaps the best example of the destruction of the idealism that characterized the development of the internet in the late 1960s. A time of flourishing countercultures, there was a belief, captured effectively in Richard Brautigan’s poem, “All watched over by machines of loving grace,” that we were entering a technological utopia, where machines would protect humans, and “mammals and computers (would) live together in mutually programming harmony like pure water touching clear sky.”

Rand vs Ostrom?

In the end, the issue with social networks comes back precisely to the question of scaling. At a technical level, decentralized networks have the advantage of being more robust; when faced with attacks that destroy some nodes, other nodes, and links can be decoupled, limiting damage.

At an ideological level, they attempt to break from the capitalist, profit-driven models that lie at the heart of many of the current problems of social media. But the economics of the platforms cannot get around the fundamental issue of the economies of scale. Each of the links in a network cost something to run. While these costs can be distributed among users or a non-profit structure can be created to raise resources to support networks, it will require very creative architecture to push back against the inherent tendency towards a monopolistic structure.

Nonetheless, the contrasting ideologies at play in this tech sector mirror, to a surprising extent, the conflicting ideologies in economics between the most extreme, Ayn Randian version of libertarianism and its reflection in the neoliberal economic models of the Chicago School and the more heterodox, community-oriented approach of Ostrom. It is possible, and perhaps likely, that what we are watching is the n^th iteration of a cycle that we seem powerless to exit.

In this view, Ayn Rand might represent the thesis that the power of atomized market selfishness is sufficient and optimal for converting greed into a catalyst for pro-social greatness through the counterintuitive genius of the market’s invisible hand. By contrast, Elinor Ostrom represents the antithesis, as market failures due to monopoly, public goods, principal-agent problems, regulatory capture, etc. pile up until they torture the honest market argument into a form where it is almost no longer recognizable or easily defensible. What we are missing now is a synthesis into a harmonized model combining the insights of two existing schools.

 

History matters: The ideas of Paul David

Timothy Guinnane , William A. Sundstrom and  Gavin Wright pay tribute to Paul David:

Paul David, who passed away in January 2023, was a major figure in redefining economic history; an early practitioner of cliometrics – exploring historical economies through rigorously specified models and quantitative evidence; and a strong advocate of the view that historical research should be fundamental to the economics discipline – that ‘history matters’. This column, written by a Stanford colleague and two former students, outlines some of his many contributions to our understanding of economic progress, not least the diffusion of new technologies. His account of the persistence of the QWERTY keyboard despite its technical disadvantages is one of the most cited articles in all of economics.

Tribute to Nobel laureate Edward Prescott

Prof Rajnish Mehra of Arizona State University pays tribute to Prof Edward Prescott:

Edward Prescott, co-recipient with Finn Kydland of the 2004 Nobel Memorial Prize in Economic Sciences, passed away in November 2022. This column, written by a long-time friend and co-author, outlines his many research contributions, including being one of the scholars that laid the foundation of the rational expectations revolution in dynamic macroeconomics. He and Kydland were the architects of real business cycle theory and the literature on time inconsistency, which has reshaped our thinking about the credibility of government commitments and had a profound impact on policymaking, particularly monetary policy.

 

Adam Smith’s 300th birth anniversary

The year 2023 marks Adam Smith’s 300th birth anniversary.

University of Glasgow is hosting a series of events to celebrate the tercenteenary.

Narayan Ramachandran has a piece in Mint on lessons from Smith.

More to follow.

Rawls and the Economists: The (Im)possible Dialogue

Herrade Igersheim of , University of Strasbourg in this very interesting paper discusses Rawls engagemnt with economists and then distancing himself:

Although falling within the scope of political and moral philosophy, it is well known that A Theory of Justice has also had a great impact on economists. As such, Rawls put great emphasis on his desire to combine economics and philosophy, and particularly to deal with rational choice theory, notably and famously claiming that “the theory of justice is a part, perhaps the most significant part, of the theory of rational choice” (1971, 15).

After the publication of A Theory of Justice, aspects of it came in for criticism – often very vehement – by economists such as Arrow (1973), Musgrave (1974), Harsanyi (1975) and later by Sen (1980).

Rawls’s immediate answers (1974a,b in particular) showed that he first wanted to maintain a dialogue with the economists, but the later evolutions of his works (1993, 2001) clearly demonstrated that he had removed himself from the economic realm, returning to his initial philosophical territory in order to overcome the internal inconsistencies of A Theory of Justice.

In this paper, by focusing extensively on the letter exchanges between Rawls and the economists before and after the publication of A Theory of Justice, I attempt to shed light on other (complementary) elements which can explain Rawls’s retreat from the realm of economics, and his progressive disenchantment regarding the possibility of a dialogue on equal footing between economists and philosophers.

 

Gold Rush vs. War: Keynes and the Economics of Digging Holes

Michele Bee (Universidade Federal de Minas Gerais) and Raphaël Fèvre (Université Côte d’Azur) in this paper on Keynes digging holes arguement:

This paper aims to fully exploit the heuristic virtues of Keynes’ famous ‘old bottles’ story, deploying a multi-layered argument and drawing out its broadest implications. We show that with this story Keynes was making a very serious point about anti-crisis policies: the need for authorities to stimulate animal spirits by relying on people’s natural impulse to action.

Rather than taking the place of entrepreneurs and paying people to dig holes, Keynes seems to be arguing that public authorities should put entrepreneurs in a situation where they are so enthusiastic that they go into debt to dig holes, just like during a gold rush. At the same time, it is a question of restoring the banks’ willingness to lend for these over-optimistic projects in a period of depression.

This article explores the conditions that make public intervention as effective as possible through the enthusiasm and individual initiative that can be generated by an artificial gold rush. Such intervention therefore can be as minimal as possible, without having to resort to the opposite authoritarian solution of war.

Since the gold rush builds cities and wars destroy them, Keynes spent considerable energy convincing his contemporaries that liberal-democratic countries would have to take the former path if they wanted to avoid the latter.

 

 

Michael Woodford’s Interest and Prices After Twenty Years

Pierrick Clerc of Banque de France and Mauro Boianovsky of Universidade de Brasilia review 20 years of Michael Woodford’s Interest and Prices:

The present paper reflects about Michael Woodford’s 2003 Interest & Prices, 20 years after its publication. The paper stresses its role (i) in the transition from a ‘neo-monetarist’ towards a ‘neo-Wicksellian’ framework within the New Keynesian – DSGE paradigm; (ii) in the widespread use of the concept of a ‘natural rate of interest’, especially by economists working in central banks; and (iii) in providing a general method for deriving a ‘utility-based’ welfare criteria consistent with the models used to determine the optimal monetary policy.

Importantly, the paper points out that Woodford actually pursued a different, and much less recognized, objective: promoting a new, and ‘rule-based’, approach to inflation targeting. The paper finally discusses some aspects of his concern with financial stability after the 2008 crisis.

 

History of Indian socialism and central planning, legacy of PC Mahalonobis, importance of sadhus and much more

Shruti Rajagopalan speaks to Nikhil Menon, the author of the book “Planning Democracy: Modern India’s Quest for Development“. The books discusses role of Mahalonobis as the key architect of Indian Planning.

Lots of interesting things in the conversation:

Friedman on Mahalonobis:

I found this quote by Milton Friedman about Mahalanobis quite arresting. Milton Friedman writes about the time that he comes to India and that he meets Prasanta Chandra Mahalanobis. He says that the professor impresses him as a person; he’s a very brilliant man. He says that there is a reason why people who are mathematically gifted at a young age tend to drift toward planning. He says the reason is that people who are gifted in mathematics at a young age seem to require that they need to find solutions that are black and white from a very young age. They’re not willing to admit that there is any gray in between.

Milton Friedman then quotes Adam Smith to say that the planner thinks of human society as a chess board upon which the planner can move pieces, but forgets that every piece on this chessboard of humanity has its own agency. He says that this is a problem with a person like Mahalanobis, that he thinks that this is a problem of physics. That’s something I write about, that he does not think that there are any political tradeoffs to be made. He thinks that this is entirely a problem of mathematics and physics, and you just need to find the mathematical solution to it. I think there’s this willingness to jettison politics in a way that I think can be sometimes dangerous.

In terms of whether allowing for this kind of technocratic planning erodes political legitimacy, in terms of a cabinet’s power being eroded and a prime minister becoming too powerful, I think that under Nehru there were some guardrails because Nehru was particularly deferential toward this kind of procedural democracy. And this is something that other scholars have written about, including Ramachandra Guha, Sunil Khilnani, et cetera—that because he knew that he was the first prime minister, he put a lot of attention to, for example, turning up to parliament, sitting during opposition leaders’ speeches, responding to their questions, et cetera. There was some deference to other members of the cabinet.

Using Sadhus for spreading message of planning:

 I found this also bizarre and completely surprising, and I didn’t know anything about it. When Sadhus started turning up in these archival papers I was looking at, I felt like I had to tug on that string. What happens is this, to give your listeners some idea: In early 1956, there’s a meeting at Birla Mandir, this Hindu temple in Delhi, between 50 Sadhus (Hindu ascetics) and members of the Nehru government, including ministers and including the then-minister of planning, a longtime Gandhian, Gulzarilal Nanda.

Gulzarilal Nanda, we know, was a trade unionist who then taught economics for a bit in Bombay, was a Gandhian, was very well respected in the Congress and outside for being extremely upstanding, abstemious, personally unimpeachable in his morality. But also an extremely devout Hindu and a believer in many spiritual causes and in some also, I would say, some kind of obscure causes as well.

This is one of them, in which Gulzarilal Nanda is meeting with these Sadhus in 1956 at this meeting. And it’s a meeting that has been set up by the Sadhus and Gulzarilal Nanda. Curiously enough, Nehru doesn’t have very much to do with it, and it’s a program that really has the backing within the Congress of Gulzarilal Nanda and the president of India, Rajendra Prasad.

Rajendra Prasad, you remember, is also somebody who shares this Hindu conservatism, but a longtime stalwart of the Congress Party, somebody that Nehru was of two minds about becoming the president of India, somebody that Nehru disapproved of—the fact that Rajendra Prasad was present at the re-inauguration of the Somnath temple. Believing not that the Somnath temple should not be rebuilt, but that doing so by the president of India right after Partition was reopening those wounds, given that Somnath had been raided by medieval Muslim looters like Muhammad of Ghazni.

Both Rajendra Prasad and Gulzarilal Nanda are behind this venture, and the venture is to set up an organization called the Bharat Sadhu Samaj, or the Indian Society of Ascetics. The explicit charter for this organization is for the Sadhus to help with the propagation of the five-year plans. As you said, it seems quite mad because Sadhus are meant to have given up a material life. They are meant to have gone beyond the material sphere into the spiritual sphere, but as Gulzarilal Nanda says in one of the meetings, actually, the Sadhus can help be a bridge between the material and the spiritual, between the lok and the parlok, as he says.

To him, the problem with Nehruvian planning, the problem with Nehruvian socialism, the problem with people like Nehru and Mahalanobis is that they did not understand the ways in which the ordinary Indian would understand these ideas and the idioms and the language in which these ideas may best be communicated to the ordinary Indian. To him, that idea needed to include religion. There was no way to go around religion, and the way to do it is to include Sadhus. Interestingly, Nehru is extremely ambivalent about this. In his writings between Nehru and Nanda, Nehru keeps hemming and hawing, saying, “Do we really need to do this? Can we really trust these Sadhus?”

And how do Sadhus spread the message:

RAJAGOPALAN: Austerity, that’s an important bridge. The austerity part that you must sacrifice and build on the savings rate. This can’t be a capitalist material economy. There’s an element of sacrifice. So it’s bizarre how they connect.

MENON: Exactly. In some ways you’re right: They find an organic link point, and that link seems to be that moral improvement involves sacrifice. As part of this Bharat Sadhu Samaj, they are also, of course, propagating against drinking alcohol, against eating meat. But at the same time, they’re saying part of this model improvement is also saving according to what the second five-year plan wants you to, investing in the national bond as opposed to buying jewelry. All these are part of this savings, this sacrificial ethic that is required to be a better Indian citizen/also perhaps a Hindu as well.

The median citizen is a median Hindu, and it leads eventually, of course, to the Sadhu Samaja allying itself with causes that would come to be to the detriment of the Communist Party. As I go into in the book, it would ally itself with the VHP [Vishva Hindu Parishad]. One of the founders of the Bharat Sadhu Samaj is one of the vice presidents of the VHP. By the time the Babri Masjid issue is bubbling up at the same Kumbh Mela Pandals at the Bharat Sadhu Samaj, they’re basically saying that the mosque should come down at Babri Masjid and a temple should be built there. You see this drift from being an organization that was meant to be dedicated to five-year plans becoming just a Hindu conservative organization.

Superb all through..

From the 1931 sterling devaluation to the breakdown of Bretton Woods: Robert Triffin’s analysis of international monetary crises

Ivo Maes and Ilaria Pasotti in this Central Bank of Belgium paper discuss ideas of Robert Triffin:

Robert Triffin (1911-1993) was one of the main protagonists in the international monetary debates in the postwar period. He became famous with his book Gold and the Dollar Crisis, published in 1960, in which he predicted the end of the Bretton Woods system. In his analysis there, Triffin was very much marked by the breakdown of the gold exchange standard in the early 1930s. In his view, the growth of foreign exchange reserves after World War Two repeated, but on a much larger scale, their similar expansion after the First World War. Triffin argued that the gold exchange standard had been a highly fragile construction as funds could move in and out due to changes in relative interest rates and/or changes in exchange rate expectations. The focus of this paper is on Triffin’s analysis of the sterling devaluation of 1931 throughout his writings, from his early articles on the 1935 devaluation of the Belgian franc to his writings after the breakdown of the Bretton Woods system. The aim is twofold: to provide an assessment of Triffin’s view of the interwar period and assess the significance of his analysis of the interwar period for his view on the Bretton Woods system.

Amartya Sen as a neoclassical economist

Antonis Ragkousis of Kings College in this paper argues that Sen is a neoclassical economist in Veblenian sense:

Amartya Sen is often described as an insightful critic of mainstream economics, and in particular, his work in development economics, alongside the construction of the capabilities approach, has been associated with endeavors to revisit both the theory and practice of the discipline.

Despite his in-depth criticisms of certain aspects of mainstream economics, Sen’s extensive use of formal methods is suggestive of an ontological tension, one identified by Thorstein Veblen when commenting on some of his contemporaries and originally introducing the term “neoclassical”.

Veblen coined the term to highlight the ontological inconsistencies in the work of a particular group of economists, including Alfred Marshall and John Neville Keynes. Veblen argued that their work involved both an implicit recognition of a causal processual social ontology he associated with modern, thoroughly evolutionary, approaches and a commitment to a taxonomic conception of science – the latter relying on a set of methods that presupposed an associationist ontology of event regularities. For Veblen, the adherence to taxonomic methods was the classical feature of the work of the relevant group, and the commitment to an evolutionary viewpoint was the neo aspect.

This paper argues that the same tension runs through Sen’s contributions and that he is neoclassical in this specifically Veblenian sense. The assessment of the ontological inconsistencies in Sen’s work is shown to shed light on its reception within the economics academy.

Dr C Rangarajan’s 91st birthday

Ahmedabad University recently celebrated and felicitated Dr C Rangarajan on his 91st birthday at its 4th annual economics conference.

What a career he has had and more importantly what a person he is despite all the achievements. Tremendous inspiration for generations. He shows why age is just a number.   He has just written an account of his policy days.

I wrote a few lines on his birthday.

Dr Rangarajan @91

As India reflects on its financial sector reforms of nineteen ninety one,
The captain who led the reforms has also turned  ninety one.
And when that captain writes a book on the reforms at that age,
We know he is a special person on the world stage.

He started career as a teacher of economics,
Appointed RBI Deputy Governor as one of the few  from academics.
He chaired many a committees at the Central Bank,
Gradually shaping himself as an economic think tank.

The 1991 crisis hit all of India’s economic targets,
Needing to change economic policy from planning to markets.
Just like Kapil Dev with whom he nearly shares his birthday,
He led the reforms which has shaped Indian economy as we see it today .

He has  served public for so long,
There is barely a policy position he has not  been on,
From being the RBI governor to holding finance commission chairmanship,
Is like running on the Friedman road and then taking a Keynesian trip.

Even Gods marvel at his work ethic,
All humans can do is to admire and applaud his magic.
We pray that Gods continue to bless him with happiness and health,
So that he can  keep writing books sharing his wealth.

 

On ‘Defunct Economists’ and the Use of Economic Ideas

Prof Steven Medema of Duke University in this paper:

One Friday afternoon a dozen or so years ago I sat in on a freshman honors seminar led by one of my colleagues. This weekly seminar featured guest speakers from various walks of life, and that week’s speaker was a state legislator who happened to be a member of the Republican party. At one point during his talk, the legislator emphasized that he was not a “Keynesian,” for he was opposed to expansive government expenditures, seeing tax cuts as the path to economic growth. During the Q&A period that wound up the session, I raised my hand and, when called upon, informed our speaker that Keynes (1936), too, saw tax cuts as a tool for economic stimulus, meaning that our speaker was, unknowingly, a Keynesian. His reaction was one of disbelief, that I could not possibly be correct. Of course, he had never read Keynes. He had simply been taught that Keynesian economics meant big government and so was bad, and he was only too happy to parrot that line.

 

Profile of Emi Nakamura: Questiong Assumptions

Peter Walker profiles Prof Emi Nakamura of Univ of Berkeley.

One of Emi Nakamura’s favorite movies growing up in Alberta, Canada, was the 1987 docudrama The Race for the Double Helix. Fast-paced and infectious in its enthusiasm for the scientific method, it tells the story of how James Watson and Francis Crick discovered the structure of DNA. “There’s nothing worse than a wrong fact,” quips Crick in the movie, exasperated by all the incorrect theories clouding his thinking (before Rosalind Franklin’s X-ray images of DNA led him and Watson down the right path). It is a quote that Emi recalls her economist parents repeating to emphasize the importance of sound data.

Now a professor of economics at the University of California, Berkeley, the 42-year-old Nakamura is best known for investigating macroeconomic questions using micro data—data that provide information about characteristics of individual people, households, and businesses. She has long been seen as a rising star in economics. In 2018, The Economist listed her among the decade’s eight best young economists. A year later she won the John Bates Clark Medal—awarded to the most influential American economist under the age of 40—for her research on fiscal stimulus and price stickiness, a measure of how often prices change.