Archive

Europe is embarked on a grand experiment, managing modern financial crisis without a dealer of last resort, so refusing to follow the lead of the 2008 Fed.

On November 2nd, I was sitting in the Hayden Library Special Collection reading room at MIT, browsing archives on the undergraduate and graduate students’ discontent during the early 70s and the response of the economics department faculty.

Amid mass unemployment and economic turmoil, instructors who lecture on the superiority of free markets without acknowledging the dysfunction in the wider economy are at risk of appearing out of touch and exacerbating antipathy towards economics.

Cosma Shalizi urges economists to stop doing what they are doing: Fitting large complex models to a small set of highly correlated time series data.

INET published a paper, written by John Kay, that deals with the relationship between economics and the world we live in. The Map Is Not the Territory: An Essay on the State of Economics spells out methodological critiques of economic theory in general, and of DSGE models and rational expectations in particular.

A week ago, Mark Carney, chairman of the Financial Stability Board, warned of emerging global consequences of the escalating eurozone crisis.

The INET roundtable on “new conversations and the academy” took place a week ago. Most panelists were bloggers, including Mike Konczal from RortyBomb and Noah Smith from Noahopinion.

A recent e-mail conversation I had with Harro Maas concerning one of my latest drafts (shameless self-promotion) made me buy and read Naomi Oreskes and Erik Conway’s, Merchants of Doubts.

The following text was sent to us by Roger Backhouse and Bradley Bateman, we reproduce it in its entirety.

Professors Roger Backhouse and Brad Bateman wrote an op-ed for the New York Times a few days ago, arguing that “thanks to decades of academic training in the “dentistry” approach to economics, today’s Keynes or Friedman is nowhere to be found” - we have stopped thinking big they say.

The Toxic Textbooks movement devotes energy to curriculum reform as well. Its purpose is to galvanize student protests and “encourage schools and universities to use economics textbooks that engage honestly with the real world.”

This is the question I’m supposed to answer for an experimental INET conference aimed at inspiring new thinking through interdisciplinary conversation and collective reflection without rules.

Yesterday, Harvard students of Ec 10 staged a walkout to draw attention to the bias they detect in the course.

My first TV chat show performance:

In the case of utility, it’s all in the name.

The crisis has exposed the failure of economic models to deal sensibly with endogenously generated crises propagating from the financial sectors to the real economy, and back again.

Okay, so here is the statement, but what does it mean? Felix Salmon offers an unnamed advisor’s flowchart. Let’s see if Money View thinking can do better.

Last week Goldman Sachs published a note in favor of the Fed’s adopting a formal nominal GDP target, while Fed-watchers caught a whiff of a possible change in policy in the works.

Till is right. It’s not the historian’s task to question the legitimacy of the decisions of the Nobel Committee.

Goodhart brings back on the table the 2% minimalist federal fiscal counterpart to monetary union: “As has been exemplified in the recent crisis, it is problematical to try to issue money without the power to support that via taxation. Equally without access to money (notably via taxes), the power to undertake counter-cyclical, or cross-country, stabilisation is limited. So, the second proposal is to revisit the exercise that was done, some twenty years ago, to assess what fiscal changes might be needed to accompany a single currency.”

It’s Nobel Prize time again. And what a beautiful prize this year it is!

Plumbing Matters

The Globe and Mail published a long piece about the dismal science, covering a lot of ground from moral philosophy to rational expectations, from Adam Smith to this year’s Nobel laureate Thomas Sargent, from the Post-Autistic Economics movement to the Institute for New Economic Thinking. Excerpts:

The optimism embedded in the efficient market hypothesis has been one of the main sources of the recent turmoil

Focus on quantities

First ECB, then EFSF

The financial crisis of 2007-2009 should have been sufficient empirical evidence to indicate that the axiomatic basis of the mainstream theory needs to be replaced.

The future of macro, he says, may well make “the formation and revision of expectations an object of analysis in its own right.”

The reputation of economics and economists, never high, has been a victim of the crash of 2008.

INET presents you a paper that deals with the relationship between economics and the world we live in. John Kay spells out methodological critiques of economic theory in general, and of DSGE models and rational expectations in particular. The paper builds on two articles that Kay, Fellow at St. John’s College of Oxford University and Visiting Professor at the London School of Economics, recently published in the Financial Times (scroll down to find the links). It is concerned with the relation of quantitative models to the world in which we live, and with evergreens such as the implications of unrealistic assumptions in economic theory. Highly recommended reading. INET forwarded Kay’s paper to a handful economists and invited them to respond. In the following days, we are going to publish direct responses to the paper by a handful of prominent economists. Follow the INET Blog and stay tuned to what is going to be a healthy discussion.

This one is different. Tiago, Benjamin and Floris have asked a dozen economists in the Bretton Woods hotel hall to reflect on the way their teaching has been affected by the current economic crisis and their answers, taken collectively, are quite puzzling.

Forget the G7, Watch the C5

At its core, this rolling crisis is really about financial globalization.

Financial Globalization versus the Nation State

I cannot resist but to start quoting Mary Morgan’s second entry to the second edition of the New Palgrave: “Modeling became the dominant methodology of economics during the 20th century.”

While waiting for TALF

A story about the rise of the modern Think Tank and how in a very strange way they have made thinking impossible.

Can the renminbi displace the dollar as the world’s international money?

I thought I could use some of my illegitimate blog administrator’s privileges to participate in the discussion on the “progress in economics” post by Floris without being lost in the midst of other users’ comments.

Understanding QE3

Ok, time to deal with the elephant in the room: when is one theory better than the other? What is progress in economics?

The transatlantic conference has been moving targets: sociology went first, then economics, then history, today it was political science and international relations.

It’s not everyday that one finds economists using history as not just the right way but the only way to answer a question.

Reminder

The U.S., in aggregate, acts as a bank to the rest of the world. The precise role of that bank has evolved over the course of the crisis.

Our interviews in the halls of the Mount Washington Hotel, covered the range of opinion about the severity of conflicts of interest in economics: we are alright; economics is no more corrupted than other sciences; corruption is substantial; it is rotten to the core.

The first graph shows US financial flows over the past five years.

The Marshall Lectures often provide thought provoking talks and one talk in particular spoke to me looking at the relationship between history and economics:

In 2006, the Fed asked its macroeconometric model what would happen if house prices dropped by 20%. The model projected the past into the future and said: “Not much.” Well, the financial crisis proved it wrong.

One silence, and one silo

Banks take on excessive risk since they know, in case of failure, the taxpayer will step in to rescue them. That is a form of free insurance, and Ed Kane wants to end it.

Innovation drives economic growth and welfare, and the industrial corporation drives innovation, says William Lazonick. But just how do corporations innovate?

Last June at a History of Social Science workshop , David Engerman presented a paper on the Harvard’s Refugee Interview Project (1950-1954).

On this blog, we like to overstate quite a bit our irreverence towards the establishment and in particular our senior colleagues.

When externalities are present and transaction costs are absent, private parties will strike welfare-enhancing deals regardless of who owns what. In a frictionless world, bargaining leads to efficiency. That is the essence of the Coase Theorem, and it is fiction, according to Steven Medema.

In response to the walkout staged by students in the intro economics class at Harvard, the Institute launched the syllabus project, 30 Ways to Teach Economics.

The physicist Sorin Solomon begins to feel dizzy when the economist Leanne Ussher talks econ lingo. Yet he listens, because the two of them have found a productive area of collaboration: some economic phenomena, they find, can be explained without recourse to the quirks that feed into human decision making.

The Nobel Memorial Prize defines high achievement in economics, and it validates the discipline’s claim for scientific authority. And yet, historically, it can be understood as a reflection of domestic policy conflicts in Sweden.

We all know it: The financial sector is bloated and banks are too big to fail. But just how bloated is it, and how much should it be shrunk?

An individual fish reduces the danger to itself by swimming as close as possible to the center of the school. That is how schools hold together.

To celebrate its 100 years of publishing, the AER published a special issues, whose retrospective part consisted of a list of the 20 most important articles, assembled by a committee which included Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow, and an essay on the history of the AER by Robert A. Margo.

Without law and legal institutions, financial markets won’t work. That’s what economists discovered about 15 years ago, when former socialist countries turned towards capitalism.

Months ago, I got a message from a friend that was a swift and excited line: Errol Morris was writing a series of posts about science, even more remarkable about Thomas Kuhn.

I am late to the party on the inventive use of copper by Chinese companies seeking alternative sources of funds.

And heading where?

Updating Hawtrey for the Shadow Banking System

Economics and politics go hand in hand, we all know that.

The Institute for New Economic Thinking and The Centre for International Governance Innovation are calling for new research proposals in areas of vital importance to the field of economics for the Fall 2011 grants cycle.

Fed to the Rescue?

I interviewed Victor Shih, political scientist at Northwestern, at INET’s Bretton Woods conference earlier this year.

Paul Samuelson was both a mathematical micro-economist, working from theorem to proof in the neoclassical tradition, and a committed Keynesian macroeconomist, convinced of the necessity of policy intervention to improve the performance of market economies. How did he square these two sides of himself? Wade Hands goes into the archives to find out.

What happens to Main Street when Wall Street fails? Japan expert David Weinstein squeezes a unique data set to answer this question.

INET is all about thinking new things, and indeed academia is supposed to inspire great thoughts.

Grand Bargain at last?

When you flip a coin, you expect heads and tails to show up with a 50% chance each. But what if all you knew was that heads and tails each have a chance of at least 25%? That’s how Scott Condie captures Knightian uncertainty in asset markets.

As part of the tremendous promotion campaign for the 8th edition of his textbook Economics, Samuelson was devoted a feature in the New York Times (February 5, 1970, p. 41).

Paul Samuelson was notorious for many things, but also, like Marshall, for spending most of his academic life in the same institution.

Did you know that, around 1920, Cleveland, Ohio, had a technological cutting edge not unlike Silicon Valley today? You probably didn’t. Margaret Levenstein tells the story.

Alchemy or Banking?

Economists aren’t born, they’re made. Irwin Collier digs into archives to find out how Paul Samuelson and his generation were made.

Two FT pieces by Tracy Alloway caught my eye this week: this article from Tuesday’s print edition, and this post on Alphaville today.

Two things seem to be taken for granted in the current debt-ceiling debate: 1. The parties will come to an agreement on the debt ceiling because 2. These United States have never defaulted and will not start now.

Mention the government and the market and all academic reflection and civilized discussion dissolves into heated monologues. Politicians are an extreme case.

INET and CIGI Award Spring 2011 Grants: The grants offer a diversity of approaches and global perspectives that target critical issues that have been neglected by conventional economic analysis.

What challenges will China have to surmount in order to make its currency a true international currency?

A Monetary Rorschach Test

If you want to understand how fund managers choose a portfolio, why not ask them?

Last time, I looked at the Chinese property market. The last link in that chain of financial interlinkages is the People’s Bank of China, the Chinese central bank.

You would have thought that to be a “jazz economist” was a good thing. I first imagined a “cool cat” that would entrance the hearts and minds of the populace. Not so.

So, how hard is it to write the history of exceptional figures? Shall we buy film cameras?

Who is going to teach fields like economic methodology and the history of economic thought if these fields aren’t taught to current graduate students?

Anatole Kaletsky explains the recent global crisis in sweeping historical context, and points out the once-in-a-lifetime opportunity now opening up to economists - particularly the younger generation.

The view from BIS

The organizers of Duke’s Summer Institute on the history of economics were so worried that students might be embarrassed to ask their supervisors for a letter of recommendation, or that the supervisors would say it’s a waste of time to study history, so they took a last minute decision to cancel the need for a letter of recommendation.

In his two-tome, 1400 page Dutch Leerboek der Staathuishoudkunde (Textbook of Economics), first published in 1884, Nicolaas Pierson (1839 - 1909) accuses the great Scotsman of being a communist – or at least of consciously clearing the way for the socialists with their ideal of a communist society.

The Political Economy of Debt

The financial and economic crises started by the fall of Lehman Borthers came as a big shock, a financial shock, an economic shock, a psychological shock, and a political shock among others.

Some time ago, my colleague and dear friend (nevertheless!) Loïc Charles wrote on the previous version of the Playground, a very nice and intriguing post on Samuelson’s introductory textbook, Economics, and TV Series.

Liquidity versus Solvency