Archive for the ‘Economist’ Category

Nothing Natural About the Natural Rate of Unemployment

November 16, 2017

Edmund Phelps debunks some macro myths. In a short piece, there is fair bit if history of macro thought as well:



Great Depression research remains the holy grail..

November 15, 2017

Bernanke called Great Depression the holy grail of macroeconomics.  It is perhaps one of those few events despite being historical continues to inspire so much research after all these years. Books continue to be written and debated vigorously on the crisis .

Came across two recent posts in this regard:

  • David Glasner argues how Friedman was not the first to argue about France’s role in gold standard which eventually was one of the key reasons for the Depression to become global. Lots of history of monetary thought in the post.
  • In another post, Robert Murphy says Gold Standard was not responsible for Depression.

Phew…Keep breaking heads over it…

What Keynes, Sraffa and Hayek knew about bitcoin….

November 10, 2017

Andy Mukherjee in this piece:

While preparing antidotes for the widespread unemployment of his time and imagining a future age of leisure and abundance, John Maynard Keynes also worked out the interest rate on bitcoin. 

Amend that. Since cryptocurrencies weren’t around in the 1930s, the famous British economist worked out the price at which bitcoin should be lent and borrowed, were it to be invented.

 That interest rate is 57 percent. Before we get to the how and wherefore of that astonishing number, another qualifier. The original insight wasn’t Keynes’s. As part of his takedown of Friedrich Hayek’s idea of a uniquely important interest rate for the economy, Italian academic Piero Sraffa posited that every commodity has its own borrowing cost. For example, there’s such a thing as a cotton rate of interest. Keynes borrowed the concept for The General Theory of Employment, Interest and Money.
While nobody I know tries to work out how many bales or barrels it would cost to borrow some cotton or oil today, currency traders deal with implied interest rates all the time. Here’s how it works. Suppose you’re marooned on an island with some Singapore dollars but the bank there can give you a deposit facility only in U.S. dollars. What the island does have, however, are foreign-exchange spot and forward markets. So on Nov. 9, you take 100 Singapore dollars, sell it for about 73 U.S. dollars, deposit the money in your greenback account for 50 days through Dec. 29, and simultaneously buy Singapore dollars in a forward contract for Dec. 29, using up all your principal and interest. 
Come to think of it. We have just given bitcoin etc a cryptic name like cryptocurrency. But the broad fundamentals still apply..

Economists should keep asking big questions and economics columnists should relate and explain the discussion..

November 7, 2017

Gene Epstein has a piece of advice for both economists and economics columnists (and both):


How GDP obsession failed the economy (same with most economic indicators/indices/ranking)…

November 6, 2017

Umair Haque writes on the topic. He says Kuznets excluded advertising and finance from his idea of GDP. But then government thought why not include tham and blow the GDP?:


Why is Austria not influenced by the Austrian School of Economics?

October 27, 2017

I am forgetting the name but someone did tell me this: That the famous Austrian school is perhaps least famous in Austria itself.

In this piece,  Mohammad J. Malayeri and Bill Wirtz look at recent evidence. They wonder why is Austria so un-Austrian?


He died as he lived: David Hume, philosopher and infidel

October 26, 2017

Prof. Dennis Rasmussen (political science at Tufts University) has a nice piece:

As the Scottish philosopher David Hume lay on his deathbed in the summer of 1776, his passing became a highly anticipated event. Few people in 18th-century Britain were as forthright in their lack of religious faith as Hume was, and his skepticism had earned him a lifetime of abuse and reproach from the pious, including a concerted effort to excommunicate him from the Church of Scotland. Now everyone wanted to know how the notorious infidel would face his end. Would he show remorse or perhaps even recant his skepticism? Would he die in a state of distress, having none of the usual consolations afforded by belief in an afterlife? In the event, Hume died as he had lived, with remarkable good humour and without religion.

In particular, how Adam Smith’s essay celebrating Hume’s life brought the former so much reproach:


Islam and Economic Performance: Historical and Contemporary Links

October 3, 2017

Timur Kuran of Duke Univ has a research paper  (HT: MR blog):

This essay critically evaluates the analytic literature concerned with causal connections between Islam and economic performance. It focuses on works since 1997, when this literature was last surveyed. Among the findings are the following: Ramadan fasting by pregnant women harms prenatal development; Islamic charities mainly benefit the middle class; Islam affects educational outcomes less through Islamic schooling than through structural factors that handicap learning as a whole; Islamic finance hardly affects Muslim financial behavior; and low generalized trust depresses Muslim trade. The last feature reflects the Muslim world’s delay in transitioning from personal to impersonal exchange. The delay resulted from the persistent simplicity of the private enterprises formed under Islamic law.

Weak property rights reinforced the private sector’s stagnation by driving capital out of commerce and into rigid waqfs. Waqfs limited economic development through their inflexibility and democratization by restraining the development of civil society. Parts of the Muslim world conquered by Arab armies are especially undemocratic, which suggests that early Islamic institutions, including slave-based armies, were particularly critical to the persistence of authoritarian patterns of governance. States have contributed themselves to the persistence of authoritarianism by treating Islam as an instrument of governance. As the world started to industrialize, non-Muslim subjects of Muslim-governed states pulled ahead of their Muslim neighbors by exercising the choice of law they enjoyed under Islamic law in favor of a Western legal system.

Hmm.. A very long paper (95 pages)..

The coevolution of kinship systems, cooperation, and culture

September 25, 2017

Prof Benjamin Enke of Harvard Univ analyses the relationship between kinship, cooperation and culture. This issue is perhaps the holy grail of all social studies.

He says that societies with tighter kinship cooperate more within but poorly outside:


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:


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


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):

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:


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).


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.


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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