Archive for the ‘Economist’ Category

Dominant sect in economics today: There are none so blind as those who will not see.

September 18, 2017

Prof Steven Keen hits out at mainsteam economists for choosing to ignore obvious evidence:

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The seven sins of economists..

September 18, 2017

Pramit Bhattacharya on the 10th anniversary of sub-prime crisis points to 7 sins of economists:

 

  • Sin 1: Alice in Wonderland assumptions
  • Sin 2: Abuse of modelling
  • Sin 3: Intellectual capture
  • Sin 4: The science obsession
  • Sin 5: Perpetuating the myth of ‘the textbook’ and Econ 101
  • Sin 6: Ignoring society
  • Sin 7: Ignoring history

Given the number of omissions and assumptions, one wonders what does the subject include?

Challenging the Samuelson paradigm in economics textbooks…

September 8, 2017

This blog had written about a new economics text called “The Economy” or the core textbook. The book is making inroads.

Samuel Bowles and Wendy Carlin explain how the book marks a shift from the Samuelson textbook (HT: CafeEconomics):

Things are radically different at the undergraduate level. The Samuelsonian paradigm is basically Marshall plus Keynes, and this remains the basic content of the dominant textbooks today. Asymmetric and local information, and strategic social interactions modelled by game theory are mentioned, if at all, at the end of the introductory course, or as special topics,. (Von Neumann had commented – surely ungenerously – about Samuelson that “…even in 30 years he won’t absorb game theory”.)

Understandably, students think information problems and strategic interaction are simply refinements of the standard model, rather than challenges to two of its foundations – price-taking as the benchmark for competitive behaviour, and complete contracts (and hence market clearing in competitive equilibrium) made possible by complete information.

CORE’s introductory text, The Economy, attempts to do for information economics and strategic social interaction what Samuelson did for aggregate demand. CORE has made these concepts part of the foundation of an economic paradigm that can be effectively taught to introductory students. This new open-access online text, simultaneously published as a conventional book, is now available (The CORE Team 2017).1

The Economy takes on board the fundamental innovations of Hayek and Nash used in contemporary economics research. But concerns about climate and other market failures as well as economic instability provide reasons to doubt Hayek’s argument that governments should limit their activities to enforcing property rights and other rules that permit markets to function.

Likewise, behavioural experiments and research on human cognitive capacities call for a more empirically grounded conception of human behaviour than is present in Nash’s work. Integrating both limited cognitive capacities with greater capacities for cooperation among individuals provides a more adequate foundation. Keynes’ contribution is similarly in need of modification. We provide both models and evidence to question his optimism that government demand-management policies could substantially eliminate involuntary unemployment in the long run.

In Table 1 we contrast the foundational tenets of the standard paradigm, as represented by Samuelson, with that represented by CORE. By the ‘benchmark model’ we mean the standard case presented to students, from which ‘deviations’ are studied. For example, competitive markets are treated as the standard case, with monopolistic competition as an extension.

Table 1 Samuelsonian and CORE paradigms

Hmm..

One keeps wondering why economics textbooks take so long to change? For a subject which talks so much about change, it is amazing how little its own textbooks change?

I mean our major macroeconomics textbooks continue to rely on IS-LM models which say central banks change money supply. Whereas central banks change interest rates.

Undercover Historian tweets on this new textbook as: “Using thin history of economics to manufacture a scapegoat”

🙂

 

How is it that ECB understands role/importance of cash where cash usage is declining?

September 5, 2017

Yves Mersch member of ECB Executive Board has a piece on role of cash in the system. It is interesting to note that despite the fact that some of the European countries are seeing a decline in cash usage, ECB thinks cash still plays an important role in the system. He made an earlier speech on the issue as well.

In this piece he says:

There is much talk about the demise of cash. But to paraphrase Mark Twain, reports of its death are an exaggeration. Cash remains popular. A crucial point for banks to understand, since respecting clients’ needs and wishes is a precondition to ensuring their loyalty and support. This not only applies to the relationship between private banks and their clients, but also between central banks and the public, where cash provides a tangible daily link. I will discuss each in turn.

….

In this context, some see major business opportunities arising from abolishing cash, by eliminating the high storage, issuance, and handling costs that the financial industry currently faces. Customers would benefit, too, as they would no longer need to carry wads of cash or search for ATMs.

But this assumed increase in convenience would come at a cost. There are a wide range of legal, governance and operational questions that need to be considered carefully before switching away from cash. Just as cash has a number of technological safeguards to protect from counterfeiting, innovative payment systems require significant safeguards to protect individuals from theft and from loss of personal information. That protection of personal information extends to ensuring the ability of law-abiding citizens to maintain their anonymity and addressing legitimate concerns surrounding the use of Big Data for personal profiling.

Most importantly, empirical evidence suggests that the lobbying to abolish cash fails to respect the will of the people: cash remains popular. Recent research for the ECB finds that 80% of transactions at point of sale are in cash. Even adjusting for the value of transactions, cash still accounts for the majority. Indeed, the demand for cash currently outstrips the growth in nominal GDP.

Banks should see such developments as a positive opportunity to engage with customers, without actively pushing them away from cash where it remains their preference. Enabling customers to manage their finances in the manner that most appeals to them encourages loyalty and supports customer retention.

He then discusses how cash provides the crucial link between central bank and public…

The integration of economic history into economics

September 4, 2017

Prof Robert Margo of Boston Univ has a piece (detailed paper here):

Hmmm.
Whatever the forces, the brunt is always on the history inclined…

 

How economists are the new astrologers…

September 1, 2017

As one was reading this piece, popped this piece in the mailbox.

The first piece features an this economist whose projection/prediction of India’s GDP for Q1 2017-18 was as per the printed numbers.

The second one says economists are the new astrologers:

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The interdependence of research and (monetary) policymaking

August 29, 2017

ECB chief Mario Draghi gives a nice speech on the topic. It is at Lindau Nobel Laureate Meeting.

He looks at how research has impacted policies over the years summarising many years of research and policy. In the end points t0 5 lessons:

This account of how policymakers and researchers have interacted in the past ten years shows how indebted the former are to the latter. From my point of view, one can draw five lessons for policymakers.

First, sudden shocks often make visible the flaws in our policy frameworks and challenge the explanatory power of existing theories in ways that have been previously overlooked. But analysis conducted by researchers and embraced by policymakers remains essential in designing the policy response.

Second, a policy response that has its foundation in rigorous research is less prone to being impaired by political compromise and easier to explain to the general public.

Third, Keynes is often quoted as saying, “When the facts change, I change my mind. What do you do, sir?” Well, for policymakers, it is not that simple, and research helps us to decide whether a change in the facts deserves a policy response or, as we say, we should look through it.

Fourth, when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defence of previously held paradigms that have lost any explanatory power.

Fifth, we must be aware of the gaps that still remain in our knowledge. Our mainstream macroeconomic models still have little to say, for instance, about the non-linear propagation of shocks, the distributional impacts of policies, or how endogenous firm entry and exit can affect economic performance.[15] Policy actions undertaken in the last ten years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges.

The changes that we have discussed, profound as they are, often hinge on one fundamental idea. A natural question to ask is whether such an idea sprang out as a response to a specific policy problem or was rather conceived previously in an entirely different, unrelated intellectual environment, perhaps addressing a different set of problems. It is a question that is especially relevant in economics, when previously held consensus views change. But it is a question that is unlikely to have a precise answer.

Let me rather use the 1939 words of Abraham Flexner, the first director of the Princeton Institute for Advanced Study: “Almost every discovery has a long precarious history. Someone finds a bit here, another a bit there. A third step succeeds later, and thus onward till a genius pieces the bits together and makes the decisive contribution.”[16]

Today, I have had the privilege of addressing such people – geniuses who have pieced the bits together and made decisive contributions.

He misses the 6th and most important lesson: avoiding hubris and need for humility in both research and policymaking. We often see a lot of problems when both research and policymaking think they have solved all economic problems  and nothing can go wrong, is when all wrongs happen…

How William Baumol created cultural economics in sleep!

August 28, 2017

Prof. Victor Ginsburgh of Université Libre de Bruxelles pays a tribute to Prof Baumol who just passed away. He points to this interview Alan Krueger takes of Baumol:

William Baumol is the ‘inventor’ of the cost disease, an idea that initiated the field of cultural economics. According to Blaug (2001: 123), “cultural economics or the Economics of the Arts, as it used to be called, may be said to have been created almost de novo 30 years ago by Baumol and Bowen’s (1966) book.”

Instead of defining the disease – every cultural economist should know what it says – here, according to Baumol himself, is the story of its birth:

“John D. Rockefeller III and August Heckscher of Twentieth Century Fund had decided that it was time for the United States to do something to encourage the arts. So they decided they would have a two-pronged operation. One was a panel composed of good, solid business people who could show that the arts were not a Communist homosexual plot. Then they wanted a serious study. They talked to a number of people, and then someone told them that there was this crazy economist at Princeton who was interested in art. Well, it was the wrong art. I was interested in painting and sculpture. So they called me in, and I told them how I would go about selecting somebody to study it… And then the next day they called me and said, ‘We’d like to give you those instructions.’ I said, ‘I’m terribly busy. I can’t do it.’ And they called again, and I said, ‘Well, I’ll do it on one condition. There’s a young assistant professor here, in whose work I have great confidence. If he’s willing to do it and you’ll pay him…’ And they agreed and Bill Bowen came and took over the whole thing, as you can imagine. It was such a pleasure working with him. So we started to work on it, and he laid out all the things that had to be covered, how one should go about covering them. And then we started to get all these statistics about budgets. Then one night, it was 4:00 in the morning, I suddenly woke up and said I know why those costs are going up! I got up, wrote down a few notes, and went to sleep again. That’s literally how it happened.” (Krueger 2001: 217-18).

The productive nature of sleeping seems to recur in science: a French mathematician called Andre Lichnerowicz once said that there is no difference between a mathematician who sleeps and a mathematician who works. This is very close to what Baumol’s son, Daniel, recounted about his father: “During a long trip, he would sit in the back of the car, oblivious to the world, and as we pulled in, he would announce, ‘I just finished that article’” (New York Times 2017).

Brilliant..

Though these gifts are possessed by rare few. Most of us struggle to come with any ideas despite all eyes awake…

What economists study: A guide for the curious

August 17, 2017
Christopher Snyder of Dartmouth College provides a guide:

When you meet someone at a cocktail party who learns you are an economist, the inevitable question follows, “What’s the stock market going to do?” That’s an excellent question. If, on the day I was born, my parents had invested $100 for me in Altria, the top-performing stock since then, I would be a millionaire.

Of course, most of us economists do not spend our time thinking about the stock market.

The press has its own view of what we do, not always positive, whether criticizing our inability to predict the future (Harford 2014), our lack of engagement with the real world (The Guardian 2017), or our preference for mathematics over people (Smith 2015). How do we, as economists, combat these negative stereotypes? Perhaps by explaining better the broader set of issues economists think about and how we think about them. I recently attempted this in a chapter (Snyder 2017) published in What Are the Arts and Sciences? A Guide for the Curious.

One short answer is that economics is the social science focusing on people’s material well-being, the ‘business side’ of life. How do people earn a living? What do they buy with the money they earn? What spurs the overall economy to grow?

While a starting point, the domain of economics has continued to expand, blurring any distinctions between it and other social sciences. For example, crime was once exclusively a matter for sociologists and corruption for political scientists. But economists realised that these social problems might respond to economic incentives, and left untreated could destroy a productive economy. In this way, the issues have become part of mainstream economics.

Nice bit..

Though he does answer the stock market question at the end:

Having patiently listened to your description of what you do, your audience may still expect an answer to the million-dollar question, “What’s the stock market going to do?” Recall the stock that could have made me a millionaire by now, Altria, the top-performer over the last several decades according to Siegel (2005). Are you curious what Altria makes? A good guess might be something high-tech, perhaps computers or pharmaceuticals.

Altria makes cigarettes. Until a recent spinoff, Altria was the parent company of Phillip Morris, manufacturer of Marlboro and other cigarette brands. With smoking on the decline in rich countries due to high taxes and restrictions, it is hard to believe cigarette manufacturing would be a good investment.

The surprising performance of cigarettes provides a useful economic insight into stock prices. It is tempting for average investors to think they can beat the market, but study after study shows this is generally not true. They are better off diversifying across many stocks and holding these stocks over the long term.

🙂

Do economists cheat us by presenting opinion as facts?

August 3, 2017

Mark Buchanan of Bloomberg serves a scathing criticism on how economists use their imperialistic powers  and push their opinions as facts.

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70 years of John Bate Clarke Medals: How do you define excellence in economics?

July 28, 2017

Beatrice Cherrier and Andrej Svorenčík research on 70 years of Clark Medal. They analyse the forces behind the medal and the several arguments over what is meant by excellence in economics:

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Our obsession with using survey data for economic research is ruining economics…

July 26, 2017

Jonathan Newman has a piece saying economic research relies too much on survey data. However, most of surveys are biased and even large samples cannot do away with these biases:

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What Remains of Milton Friedman’s Monetarism?

July 18, 2017

Robert Hetzel of Richmond Fed has a paper:

From the early 1960s until the early 1970s with the emergence of rational expectations, under the rubric of monetarism, Milton Friedman defined macroeconomic debate. Although the Keynesian consensus that he challenged has disappeared, the current academic literature makes little reference to monetarist ideas. What happened to them? The argument here is that those ideas remain relevant but require translation into terms expressible in modern macroeconomic models and in the monetary policies of central banks, neither of which contain any obvious references to money. Moreover, the Friedman and Schwartz methodology for identifying shocks retains relevance.

Lots of monetary history in the paper..

How New Keynesian economics betrays Keynes

July 14, 2017

Roger Farmer has an interesting essay on evolution of macro thought (HT: Cafe Economics). It is actually an extract from his book Prosperity for All.

He reviews the history of macro thought and says New Keynesians miss a basic point from Keynesian view:

The program that Hicks initiated was to understand the connection between Keynesian economics and general equi­librium theory. But, it was not a complete theory of the macro­economy because the IS- LM model does not explain how the price level is set. The IS- LM model determines the unemploy­ment rate, the interest rate, and the real value of GDP, but it has nothing to say about the general level of prices or the rate of inflation of prices from one week to the next.

To complete the reconciliation of Keynesian economics with general equilibrium theory, Paul Samuelson introduced the neoclassical synthesis in 1955. According to this theory, if un­employment is too high, the money wage will fall as workers compete with each other for existing jobs. Falling wages will be passed through to falling prices as firms compete with each other to sell the goods they produce. In this view of the world, high unemployment is a temporary phenomenon caused by the slow adjustment of money wages and money prices. In Samuelson’s vision, the economy is Keynesian in the short run, when some wages and prices are sticky. It is classical in the long run when all wages and prices have had time to adjust.

Although Samuelson’s neoclassical synthesis was tidy, it did not have much to do with the vision of the General Theory. Keynes envisaged a world of multiple equilibrium unemploy­ment rates where the prevailing rate is selected by the propen­sity of entrepreneurs to take risks. He called this propensity animal spirits.

In Keynes’ vision, there is no tendency for the economy to self- correct. Left to itself, a market economy may never recover from a depression and the unemployment rate may remain too high forever. In contrast, in Samuelson’s neoclassical synthe­sis, unemployment causes money wages and prices to fall. As the money wage and the money price fall, aggregate demand rises and full employment is restored, even if government takes no corrective action. By slipping wage and price adjust­ment into his theory, Samuelson reintroduced classical ideas by the back door— a sleight of hand that did not go unnoticed by Keynes’ contemporaries in Cambridge, England. Famously, Joan Robinson referred to Samuelson’s approach as “bastard Keynesianism.”

The New Keynesian agenda is the child of the neoclassical synthesis and, like the IS- LM model before it, New Keynesian economics inherits the mistakes of the bastard Keynesians. It misses two key Keynesian concepts: (1) there are multiple equilibrium unemployment rates and (2) beliefs are funda­mental. My work brings these concepts back to center stage and integrates the Keynes of the General Theory with the mi­croeconomics of general equilibrium theory in a new way.

Hmm..

Lots more there..

How economics became a religion…

July 13, 2017

Another piece berating economics and its soothsayers. It is a book extract from a book:

Although Britain has an established church, few of us today pay it much mind. We follow an even more powerful religion, around which we have oriented our lives: economics. Think about it. Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle”. And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy.

Over time, successive economists slid into the role we had removed from the churchmen: giving us guidance on how to reach a promised land of material abundance and endless contentment. For a long time, they seemed to deliver on that promise, succeeding in a way few other religions had ever done, our incomes rising thousands of times over and delivering a cornucopia bursting with new inventions, cures and delights.

This was our heaven, and richly did we reward the economic priesthood, with status, wealth and power to shape our societies according to their vision. At the end of the 20th century, amid an economic boom that saw the western economies become richer than humanity had ever known, economics seemed to have conquered the globe. With nearly every country on the planet adhering to the same free-market playbook, and with university students flocking to do degrees in the subject, economics seemed to be attaining the goal that had eluded every other religious doctrine in history: converting the entire planet to its creed.

Yet if history teaches anything, it’s that whenever economists feel certain that they have found the holy grail of endless peace and prosperity, the end of the present regime is nigh. On the eve of the 1929 Wall Street crash, the American economist Irving Fisher advised people to go out and buy shares; in the 1960s, Keynesian economists said there would never be another recession because they had perfected the tools of demand management.

More than the predictions going wrong, it is how economics has come to dictate most things we do. If it makes economics sense, there is a point in doing something else dump it..

Econs do their best work when there is humility and limited hubris:

Economists arguably do their best work when they take the stories we have given them, and advise us on how we can help them to come true. Such agnosticism demands a humility that was lacking in economic orthodoxy in recent years. Nevertheless, economists don’t have to abandon their traditions if they are to overcome the failings of a narrative that has been rejected. Rather they can look within their own history to find a method that avoids the evangelical certainty of orthodoxy.

In his 1971 presidential address to the American Economic Association, Wassily Leontief counselled against the dangers of self-satisfaction. He noted that although economics was starting to ride “the crest of intellectual respectability … an uneasy feeling about the present state of our discipline has been growing in some of us who have watched its unprecedented development over the last three decades”.

Noting that pure theory was making economics more remote from day-to-day reality, he said the problem lay in “the palpable inadequacy of the scientific means” of using mathematical approaches to address mundane concerns. So much time went into model-construction that the assumptions on which the models were based became an afterthought. “But,” he warned – a warning that the sub-prime boom’s fascination with mathematical models, and the bust’s subsequent revelation of their flaws, now reveals to have been prophetic – “it is precisely the empirical validity of these assumptions on which the usefulness of the entire exercise depends.”

Leontief thought that economics departments were increasingly hiring and promoting young economists who wanted to build pure models with little empirical relevance. Even when they did empirical analysis, Leontief said economists seldom took any interest in the meaning or value of their data. He thus called for economists to explore their assumptions and data by conducting social, demographic and anthropological work, and said economics needed to work more closely with other disciplines.

Leontief’s call for humility some 40 years ago stands as a reminder that the same religions that can speak up for human freedom and dignity when in opposition, can become obsessed with their rightness and the need to purge others of their wickedness once they attain power. When the church retains its distance from power, and a modest expectation about what it can achieve, it can stir our minds to envision new possibilities and even new worlds. Once economists apply this kind of sceptical scientific method to a human realm in which ultimate reality may never be fully discernible, they will probably find themselves retreating from dogmatism in their claims.

Paradoxically, therefore, as economics becomes more truly scientific, it will become less of a science. Acknowledging these limitations will free it to serve us once more.

This blog pointed to the Leontief lecture just a few days ago.

20th anniversary of Start of Asian Crisis: Is China making the same mistakes?

July 12, 2017

Prof Barry Eichengreen points to several things South East Asian Countries have done since the 1997 crisis.

For starters, the crisis countries have ratcheted down their investment rates and growth expectations to sustainable levels. Asian governments still emphasize growth, but not at any cost.

Second, Southeast Asian countries now have more flexible exchange rates. None is perfectly flexible, to be sure, but the region’s governments have at least abandoned the rigid dollar pegs that were the source of such vulnerability in 1997.

Third, countries like Thailand that were running large external deficits, heightening their dependence on foreign finance, are now running surpluses. Running surpluses has helped them accumulate foreign-exchange reserves, which serve as a form of insurance.

Fourth, Asian countries are now working together to ring-fence the region. In 2000, in the wake of the crisis, they created the Chiang Mai Initiative, a regional network of financial credits and swaps. And now they have the Asian Infrastructure Investment Bank to regionalize the provision of development finance as well.

Ironically, the more things change the more they remain the same. In 1997, China was not a risk. This time it is as it seems to be following the same model followed by SE Asian countries 20 years ago:

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Making sense of Argentina ‘s 100 year bond offer

July 5, 2017

This blog pointed earlier how Argentina managed to sell a 100 year bond recently despite such a poor fiscal history.

Carmen Reinhart points this is mainly due to search for yield:

At the end of the day, this is not about the character of the country, the maturity of the debt, or the size of the issue. It is about the coupon rate on the offering, 7.9%, which is considerably higher than most other plausible alternatives. Just as water finds its level in nature, capital finds its level in international finance: when interest rates are low in core markets, it flows to higher-yielding alternatives.

Without question (and without much precedent), interest rates are extraordinarily low in advanced economies, pulled down partly by the slowdown in longer-term output growth, but also as a consequence of official efforts. Two of the “big three” central banks, the European Central Bank and the Bank of Japan, have lowered their policy rates into negative territory and continue to add to their balance sheets. As for the third, the US Federal Reserve’s slow motion monetary tightening has just put the federal funds rate above 1%, and plans to pare the Fed’s asset holdings appear to be in the works. As the chart shows, almost one half of GDP in advanced economies is produced where policy rates are below 0.5%. Only a sliver of activity takes place where the policy rate is above 1.5%.

Official measures extend beyond the realm of central banks, too. In terms of the huge stock of foreign exchange reserves held worldwide, the public sector holds more US Treasury securities than the private sector.

These distortions encourage investors in money centers to scan the horizon for more attractive destinations. Argentina got their attention, but so, too, did Cyprus, another country that recently had a financial crisis. Likewise, capital has flowed into Iceland at such a rapid clip that the International Monetary Fund felt obliged to warn that, “overheating risks are a clear and present concern.”

She is after all the co-author of the book which has become very important four words in economics: This time is different..

Being an economics rebel like Prof. Deirdre McCloskey…

June 29, 2017

Superb interview of Prof McCloskey who has challenged most aspects of current economic teaching and research.

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Where does World Health Organisation get its economic advice?

June 15, 2017

From nobody and hence it needs a chief economist urgently.

Amanda Glassman has a post on how WHO messes up on basic health economics. She also links to this more detailed letter by health economics expert citing many mistakes made by WHO.

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When an Australian economist’s piece on monetary transmission is discussed in Parliament..

June 7, 2017

It does not happen too often when Parliamentarians discuss an economist’s piece, even if the hearing is on economic matters.

So it is interesting when Prof. Abbas Valadkhani of Swinburne University of Technology writes this piece in Oct 2016 on how banks delay rate cuts following rate cut by central bank. He shows via research that these delayed rate cuts help these banks make money:

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