Archive for the ‘Economist’ Category

How Keynes got idea about his General Theory book from Malthus…

September 18, 2018

Fascinating paper by Steven Kates.

He draws evidence showing how Keynes book General Theory drew inspiration from Malthus. More specifically Keynes drew insights about aggregate demand from the letter exchange between Malthus and Ricardo. Malthus wrote to Ricardo showing how excessive savings could lead to fall in demand to a fall in profits and to a fall in output.

It was because Keynes read Malthus’s letters to Ricardo in late 1932 that he eventually focused on effective demand in the General Theory. Because of his reading of Malthus, Keynes attacked Say’s Law and wrote the General Theory to establish variations in effective demand as the major cause of fluctuations in economic activity. If these conclusions are right, the story of how the General Theory came to be written cannot be understood in isolation from Malthus’s role nor is it possible to understand the General Theory itself without seeing it in relation to Keynes’s interpretation of Malthus. The continuing focus on aggregate demand by macro and business cycle theorists is due to the insights gained by Keynes from his reading of the Malthus side of the Malthus-Ricardo correspondence during the months of October and November, 1932.

How ideas evolve…

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RIP: Deena Khatkhate

September 18, 2018

It is quite something about 2018 as notable figures in their respective fields leave us one after the other.

Last weekend, Deena Khatkhate also passed away.

Niranjan of Cafe Economics tweeted about Mr Khatkhate:

 Sep 17

Deena Khatkhate, Anand Chandavarkar, M. Narasimham and V.V. Bhatt were the formidable quartet that built up economics research at the RBI in the 1950s and 1960s. Three of them subsequently moved to the IMF. Narasimham stayed on — and became RBI governor

 Sep 17

Khatkhate was also an elegant writer on economic issues. His EPW column of dispatches from the banks of the Potomac were consistently brilliant. And his collected essays –Ruminations of a Gadfly — is one of my favourites, especially the pen portraits of great Indian economists.

There is another tribute by Prakash Loungiani of IMF on his blog. Prakash cites three main areas of Mr Khatkhate’s work:

“Life is lived forwards but understood backwards,” wrote the philosopher Kierkegaard. This collection of a life-time’s work of the Indian economist Deena Khatkhate can be understood as an act of rebellion against much of his intellectual inheritance: socialism and central planning, Keynesian macroeconomics, and an adversarial view of North-South relationships. Instead, these essays put forward a spirited (but not uncritical) defense of capitalism and markets, espouse a macroeconomics as much Friedmanite as Keynesian, and urge a constructive approach to relationships between developing and advanced nations.

The last of these themes is illustrated in arguably the best article in the collection, which is on the brain drain—the emigration of skilled workers from developing to advanced countries. In this article, published in F&D in 1971, Khatkhate challenged the prevalent view of the brain drain as an evil, a form of aid from the poor to the rich. He showed that because most emigration occurred from developing countries with a clear excess supply of skilled workers, it was actually a social safety valve for the poor countries. And because it encouraged the “cross fertilization of ideas” between skilled workers from the poor nations and the richer nations, the brain drain could be “a desirable investment.”

….

Prior to joining the IMF, Khatkhate worked for over a decade—from 1955 to 1968—at the Reserve Bank of India, the country’s central bank. Not surprisingly, therefore, a second major theme of the essays is the role of macroeconomic and financial policies in promoting economic growth. In the 1950s, the Keynesian view advocated running fiscal deficits to promote growth in developing countries. The rationale was that since there were underemployed resources in these economies, heavy government spending could lead to employment of those resources without triggering inflation. However, Khatkhate writes that the negative evidence on the actual impact of government spending convinced him that “all that happened as a result of heavy resort to fiscal deficit was inflation, decline in income, saving and investment.” Khatkhate’s views on monetary policy also differed from the 1960s Keynesian view, emphasizing as they did the need for rules to guide the central bank rather than give it too much discretion.

A third theme is the rhetoric vs. the reality of socialism and central planning. Khatkhate blamed socialism for trying to deliver both growth and equity and delivering neither. The real problem in developing countries, he said, was not so much the skewed income distribution but “improving the standard of the whole mass of people, which is possible only with rapid economic growth.” These views were far from the mainstream when Khatkhate wrote them in 1978. He is not, however, an unvarying defender of capitalism and free markets. On the free mobility of capital, for instance, his views are close to that of his compatriot Jagdish Bhagwati in favoring a cautious approach, given the evidence that hasty liberalization can contribute to financial crises.

Just as in case of Prof Dwijendra Tripathi, so little is known about Dr. Khatkhate as well.

Infact, barring M. Narasimham whose name comes up in the two financial sector reforms committees he chaired in 1990s, we hardly know anything much about the other three economists mentioned by Niranjan. The works of these economists is barely taught anywhere in economics departments in Indian universities.

I had the good fortune to review some of VV Bhatt’s work during my PhD thesis work, but is hardly enough.

Update:

Arvind Subramanian pays a tribute

Revisiting Marx and Smith

September 12, 2018

Nice post by Gulzar whose blog I should read more often.

He posts about how we need to move away from the usual description of Marx and Smith’s works.

Niranjan’s contribution to Mint newspaper and financial media should be appreciated

August 31, 2018

This post is a farewell to Niranjan Rajadhyaksha, the executive editor of Mint who writes an amazing column named Café Economics. Niranjan is quitting Mint and moving onto IDFC Institute. This is quite a catch for IDFC Institute and an absolute loss for Mint.

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Inequality is highest in the Middle East..

August 16, 2018

Facundo Alvaredo, Lydia Assouad and Thomas Piketty relook at the inequality in Middle East using different sets of data. They say the region has highest inequality amidst the other regions in the world:

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How Goethe figured second price auction much before William Vickrey…

August 9, 2018

I just learnt how Fisher figured the Philips Curve before AW Philips.

Now this gem by Avinash Tripathi tells us how the famous German polymath Johann Wolfgang von Goethe figured second price auction way back in 18th century:

Johann Wolfgang von Goethe (1749-1832) was arguably the greatest German writer, poet and polymath of the Romantic era. His forays in science, diplomacy, literature etc are well-known. His dabblings in the applied economics and auction design are less known however.

One incident in particular is worth mentioning. While selling the publishing rights of his epic poem ‘Hermann and Dorothea’, Goethe had made an intriguing proposal to his publisher. According to this proposal, Goethe would submit his reserve price in a sealed envelope. The publisher was asked to quote how much he was willing to pay for the publishing rights of this poem. If the price quoted by the publisher turned out be greater than the reserve price asked by Goethe, the deal would be finalised. The publisher would get the publishing rights of ‘Hermann and Dorothea’; Goethe would receive the amount he asked (not the amount the publisher quoted) as royalty.  If the publisher’s quote turned out to be lower than Goethe’s reserve price, the negotiation would be broken and there would be no deal.

For many decades, this proposal remained a mystery. Why conceal your reserve price in a sealed envelope? Why not state it upfront and make a ‘take it or leave it’ offer to the publisher? And once the publisher has indicated a much higher figure, why settle for the lower reserve price as royalty? Few were able to solve this puzzle. The consensus was that the entire scheme was whimsical and devoid of any logic.

Read the whole thing where Avinash explains how modern auctions based on game theory helped understand this puzzle. William Vickrey even won the Nobel Economics for this becoming the only person in economics to win the award posthumously. The award was announced on 8th October and he died just three days later on 11th October.

I mean there is so much economics to learn from general literature. And here we have someone who actually designed the auction only to fail as he could not figure the integrity of the auctioneer. Read the article for more details.

 

The Ahistorical Federal Reserve

August 9, 2018

J Bradfrd Delong writes that Federal Reserve has forgotten lessons of economic history by tightening its policy

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Are free trade and free markets quaint ideas from the past?

August 9, 2018

Prof James Haskett of HBS poses this evergreen question in economics: Are free trade and free finance really so important as econs tells us? There is a parallel debate going on in The Economist on Capitalism which also in a way looking at this issue.

Haskett reviews recent books by Dani Rodrik and Robert Kuttner who point to other side:

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It’s time for Queen Elizabeth II to revisit LSE and ask questions to leading American And British Economists…

August 8, 2018

Alvin Rabushka rubs more salt in already wounded economics profession.

Shortly after the Financial Crisis of 2008, H.M. Queen Elizabeth II went to the London School of Economics and asked its professors “Why didn’t you see this coming?”  They never really gave her a satisfactory answer.

It’s time for Her Majesty to revisit the LSE and also host a conference of leading American and British economists to ask several additional questions.

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Albert Hirschmann’s CV for job application at Harvard (1942)

August 7, 2018

Irwin Collier has been doing a great job digging archives from different economics departments. He has been telling us how economics questions papers were set earlier, indicating how far we have come when it comes to economics teaching.

In his recent post, he picks this job application of Late Prof Albert Hirschmann at Harvard. I mean even CVs/applications have gone through such a change:

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Britain’s economics students are dangerously poorly educated

August 7, 2018

British Media continues to question the quality of economics education in the country:

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How to become a good economist?

August 3, 2018

Anantha Nageshwaran on his Gold Standard Blog posts on what it takes to become a good econ:

Yesterday, I began teaching for the fifth year, the Global Macroeconomics and exchange rates course at the Singpaore Management University to graduate students of the Wealth Management programme, 2018-19. The first session is to set the stage for the course, for learning economics, the right approach to learning economic theories. Emanuel Derman says that they are models and models, to him, are approximations. A theory is an ‘explanation of everything’. Economic theories cannot be that. He calls them models.

In the process of preparing for the class, I read the first chapter of the book, ‘A brief history of economics: artful approaches to dismal science’ which I had downloaded some years ago. Ray Canterbury writes well.

Sample these lines:

As important as pure analytics, mathematics, and statistics are, if we know only the tools of the trade, we will be unable to know the place of economics within the broader community of ideas, much less be able to explain it to the uninitiated. We will be unable to engage in the rhetoric of the intellect….

…A broader approach invites readers to range across the neighboring fields of history, philosophy, mathematics, politics, natural science, and literature….

… Historical perspective puts the lie to any claim that economics always is a progressive science—operating, like nuclear physics, outside time and in pursuit of eternal verities.

….We cannot recognize truly new ideas unless we are familiar with the ideas that economists have already explored. And we cannot understand the ideas of the great economists unless we understand the times of their lives.

…..Institutions include formal systems, such as constitutions, laws, taxation, insurance, and market regulations, as well as informal norms of behavior, such as habits, morals, ethics, ideologies, and belief systems.

Hope to see some of SMU students imbibe these ideas….

Milton Friedman interview on methodology, popular writing vs academic writing, his influences and many more things…

August 3, 2018

We just had Prof Milton Friedman’s 106th birthday on 31 July.

I came across this interesting interview of the late Prof which has some interesting discussion on his approach on doing economics.

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Getting closer or falling apart: Euro countries after the crisis

August 1, 2018

Massimo Bordignon, Nicolò Gatti and Massimiliano Onorato review the economic conditions in Euro countries:

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Have economists changed since the 2008 crash?

June 26, 2018

Cédric Durand Prof of economics at the University of Paris says some progress has been made but long way to go: 

Economists are not innocent people. The 2007-08 financial crisis that almost sent the world economy into a great depression was, to a large extent, a consequence of the designs dreamt up by leading economists. This raises three concerns about the economics profession. The first is a basic moral failure resulting from a lack of integrity in some of its prominent representatives; the second is the idiotic collective fascination with the technicalities of the discipline, reinforced by an inclination for group-thinking; the third is a deeper, intellectual challenge that questions the very role economics ought to play in society.

In 1971, neoliberal icon Milton Friedman was paid by the Chicago Mercantile Exchange for a report that decisively tilted the balance in favour of opening a market that allowed betting on the variation of currency values – a kind of financial product that was illegal under the strict regulation imposed in the post-war era. Ever since, studies by economists have played a legitimating role in each phase of finance’s liberalization. This close connection was not without its ethical problems. Take the lesson learned from Charles Ferguson’s documentary Inside Job (2010). This notes that Larry Summers – former Harvard president, Treasury Secretary in the Clinton administration and an adviser to President Obama – untiringly defended financial liberalization throughout the 2000s, a period in which his ties with the industry brought him more than $20 million. In the wake of the financial crisis, a study of 19 eminent financial economic specialists showed that, in addition to their university posts, most had affiliations with the private sector that were not publicly disclosed.

On this front, some progress has been made. The American Economic Association has set up a new disclosure policy stating that authors submitting papers to academic journals should identify each interested party from whom they have received at least $10,000 in the past three years. Moreover, it calls for disclosure during media appearances. Professor Gerald Epstein, who was at the forefront of this battle, calls the change ‘a very big step forward’. He particularly stresses that disclosure in non-academic work could help ‘set norms of behavior that colleagues, the press, students and citizens can help make economists accountable to’.

Another, more mildly positive, evolution concerns the content of economic curriculain universities. Academic thought influences political decisions; or, as JM Keynes memorably put it: ‘Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.’ In the realm of university teaching there has, during the past few decades, been a growing fascination with the technical sophistication of analyzing abstract dynamics of markets at the expense of thinking about economic history and institutions. This created an intellectual climate favorable to opening a Pandora’s box of financial ‘innovation’ during the neoliberal era. It supported the comforting view that by spreading the risk, complex products – like the subprime mortgages that were sold to low-income Americans and then bundled up to be sold to institutional investors like pensions funds – were reducing financial instability. Of course, as it should be clear now, it was the exact opposite.

In 2014, the International Student Initiative for Pluralism in Economics sounded the alarm: ‘A lack of intellectual diversity,’ they claimed, ‘does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century – from financial stability, to food security and climate change.’ They call for bringing the real world into the classroom through paying greater attention to economic history and developing a deeper dialogue with other social sciences. They also demand a greater diversity of theoretical perspectives by adding post-Keynesian, ecological, feminist, Marxist and other economic traditions to the commonly taught ‘neoclassical’ approach. Thanks to student pressure, some openings have been made. For example, CORE, a new open-access online syllabus funded by the Institute for New Economic Thinking, is introducing some elements of intellectual variety into the economics departments of tens of leading universities.

Hmmm..

More in the piece..

A Brazilian Adam Smith: José da Silva Lisboa as the Founding Father of Political Economy in Brazil

June 22, 2018

Interesting paper on how ideas transcend borders.

Paulo Roberto de Almeida (Brazilian Ministry of Foreign Relations; Centro Universitário de Brasília (UniCEUB)) points to works of José da Silva Lisboa> He brought Adam Smith teachings to Brazil:

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How Keynes took over the world (and Robertson lost it)?

June 14, 2018

Murray Rothbard in this long piece:

Keynes used tactics in the selling of The Genera Theory other than reliance on his charisma and on systematic deception. He curried favor with his students by praising them extravagantly, and he set them deliberately against non-Keynesians on the Cambridge faculty by ridiculing his colleagues in front of these students and by encouraging them to harass his faculty colleagues. For example, Keynes incited his students with particular viciousness against Dennis Robertson, his former close friend.

As Keynes knew all too well, Robertson was painfully and extraordinarily shy, even to the point of communicating with his faithful, longtime secretary, whose office was next to his own, only by written memoranda. Robertson’s lectures were completely written out in advance, and because of his shyness he refused to answer any questions or engage in any discussion with either his students or his colleagues. And so it was a particularly diabolic torture for Keynes’s radical disciples, led by Joan Robinson and Richard Kahn, to have baited and taunted Robertson, harassing him with spiteful questions and challenging him to debate.

 

The Many, Diverse ‘Main Points’ of Adam Smith’s the Wealth of Nations

June 14, 2018

Prof Barry Weingast of Stanford Univ in this paper:

The purpose of this short paper is to demonstrate that in the modern era Adam Smith scholars make a surprising variety of claims about the “main point” of the Wealth of Nations. In these notes, I collect a range of statements asserting the main point and arrange them by categories. Most statements focus on economic topics (60%), though some entries clearly fall under politics (40%). Nearly half of the statements in the literature argue that Wealth of Nations’s main purpose was to provide a theory of economic development. Other categories include the idea that self-interested individuals can support gains from cooperation; ideas about justice, morals, and liberty; and finally, contributions to economic theory.

The diversity of points is striking, indicating not only the work’s richness, but the many different topics to which it made substantive contributions. An obvious interpretation of these results is that no single, over-arching theme can be said to be the purpose or main point of the Wealth of Nations. This work made so many fundamental or foundational contributions to economics, government, history, law, politics, sociology, and normative political theory that it is difficult to say that any one contribution dominates.

It is a nice summary of different perspectives on Adam Smith’s work.

Profile of Donald Davidson: Sherlock of Trade

June 7, 2018

IMF’s Finance and Development profiles Donald Davidson and his etrrific research on impact of railroads from a historic lens:

Trading gold for salt is clearly a thing of the past. But studying the market for salt in 19th century India and the effects on trade of building a railroad led the prize-winning economist Dave Donaldson to important new findings that are relevant today.

“Whether it be by the construction of a railroad a hundred years ago or by opening up to trade with the global economy, I’m fundamentally a big believer in the gains from trade,” says Donaldson, a professor at the Massachusetts Institute of Technology (MIT) in Cambridge, Massachusetts. “Trading between pairs of people, whether it’s between two people who happen to live in the same household, the same village, the same country, or the same planet, is the basic source of economic development. It’s the reason that we no longer live like cavemen.”

How he got into studying economics? He moved from Physics to Economics:

Donaldson did not set out to become an economist or to study trade. Raised in Toronto, he initially focused on physics, completing a master’s degree at the University of Oxford. He was following in the footsteps of his British scientist parents—a father with a degree in physics and a mother who taught chemistry.

While he was still studying physics at Oxford in 1999, the anti-globalization movement came into prominence. Demonstrators hit the streets outside the World Trade Organization’s conference in Seattle and the IMF headquarters in Washington to protest the increasing unification of the world economic order that they maintained was leaving too many people behind.

Donaldson’s then-girlfriend—now wife—was studying economics at the time. The couple talked a lot about the economic issues behind the discontent. Donaldson says he supposes he “fell prey—prior to learning the basic logic of formal economics—to the trap of thinking that international things like trade, development, and FDI [foreign direct investment] might have a strong zero-sum-game feature to them whereby rich countries might get rich at the expense of their interactions with lower-income countries.” It inspired him to pursue a PhD at the London School of Economics (LSE).

“I got hooked on the idea that economics was the physics of the social sciences, or physics for public policy,” Donaldson says, “using theory and evidence to come up with answers to those policy questions that were being raised by the anti-globalization movement—and I wanted to learn how to do that.”

How the study on impact of railways in India shaped:

He spent two years digging into the archives of the British government’s India Office, poring over salt reports and ledgers from 124 districts dating back as far as 1861. He was trying to determine the extent to which India’s colonial railway system might have raised real incomes by reducing trade costs. After collecting data on trade flows among 45 regions in India and more than a hundred thousand observations, Donaldson was able to put a value on the role of trade.

“That number turned out to be about 16 percent of GDP,” Donaldson says from his book-lined office at MIT. The study made the case that the benefit of the railways was indeed the result of increased trade.

He published his findings originally in a 2010 working paper, then in the American Economic Review in 2018 under the title “Railroads of the Raj: Estimating the Impact of Transportation Infrastructure.” His extensive use of data made the work stand out and led to his winning the John Bates Clark Medal last year.

“Donaldson’s work on railroads brought a whole new approach to 19th century history, particularly in India,” says Nobel laureate Angus Deaton.

The “Railroads of the Raj” study was not driven by a particular interest in railways but by the desire to better understand the true value of large transportation infrastructure projects, Donaldson says. More World Bank lending in 2007, for example, went toward transportation infrastructure than to education, health, and social services combined, he says, without a rigorous empirical understanding of just how much transportation infrastructure projects actually reduce the costs of trade, and how those cost reductions affect welfare.

In the India study, Donaldson learned of one of the world’s truly unusual trade barriers. To enforce a tax on salt in the early 19th century, the colonial British authorities built a thorny, 12-foot-high thicket stretching 2,300 miles down the middle of India. The Salt Hedge blocked hundreds of millions of people in India’s interior from getting tax-free salt from the seacoasts as the British administration’s appetite for tax revenue grew. The wildly unpopular salt tax eventually spurred Mahatma Gandhi’s campaign against British rule. In the end, it was found that the Salt Hedge was too much of an impediment to trade and was abandoned.

“I read about all this history and found it fascinating but quickly realized that salt had a completely auxiliary benefit for me,” Donaldson says. “They collected a lot of data about salt.” Because salt production was confined to a very small region and everyone needed it, Donaldson says, it was the perfect product for measuring the impact on trade of the railroad system that was built during the same period.

Donaldson found that the railroads brought significant welfare gains to India because they reduced the cost of trading and enabled India’s diverse districts to enjoy unprecedented gains from trade.

 

How economists became so timid: From a visionary field to a dull one..

May 9, 2018

Eric Posner and Glen Weyl lament the decline of the profession from a visionary one to a specialised technocrat:

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