Matt Nolan

Quote: 5) Lionel Robbins – definition of economics

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Lionel Robbins (*):

Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses

This is the fundamental definition of economics that I adher to when I write here. In all honesty this is not the sole definition of what people “see” economics as – however, it THE definition of what I would term “economic science”.

This definition fits neatly with the theoretical and applied versions of micoeconomics – however, without appropriate “microfoundations” it is hard to decide whether marcroeconomics sticks to this definition of what economics is – is macroeconomics raising the TRUE trade-off between scarce resources in the entire economy?

Ultimately, Milton Friedman felt we make macroeconomics consistent with this view (and useful) bu focusing on predictive accuracy – like many economic models, this made sense once you converged to your result, but not out of equilibrium 😛

Matt Nolan

Quote: 4) Kevin D Hoover – Is the representitive agent model really “micro-foundations”

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Kevin D Hoover:

The claim that representative-agent models provide micro-foundations succeeds only when we steadfastly avoid the fact that reporesentative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models

Kevin Hoover is a professor at Duke University.  I put down this quote as I believe that the modern day process of macroeconomics is likely to come under scrutiny following recent global events – and Dr Hoover’s writing has convinced me that the representative agent model isn’t really the same as reductionism/micro-foundations.

Microeconomics is beautiful descriptive discipline, macroeconomics needs to either find ways to apply it, or use a different holistic method to explain what it is doing – doing something that is (possibly) half and half might not cut it in the end.

Matt Nolan

A run on finance companies – but not in the direction you’d expect

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So investors are “rushing” to finance companies to invest money.  One of my economist friends just told me he tried to invest money in a finance company, just to be told that they were “over-subscribed”.

I have two concerns stemming from this:

  1. Moral hazard:  Finance companies will invest in higher risk ventures to get the return – knowing that there downside is covered by the government.
  2. Bank funding:  Given suggestions that banks may face a funding crisis, a movement of funds from banks to finance companies can’t be a good thing 😛

I suspect that Bank’s decision to charge a premium based on the quality of investments will have some impact – however, is the premium high enough to solve these problems?  I guess we will know once we see the new set of deposit rates that finance companies come out with.

Matt Nolan

Random statement of the day

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This from the Minneapolis Fed:

Thus, roughly 80 percent of such business borrowing is done outside of the banking system. The claim that disruptions to the banking system necessarily destroy the ability of nonfinancial businesses to borrow from households is highly questionable

There are two ways I can read this quote, one that I agree with and one that I dispute. The first way is that “this isn’t the end of the world” – I agree with this, and I still think that people too closely linked to the financial markets are expecting worse outcomes for the global economy than will actually occur.

However, I think the Minneapolis Fed’s paper overplays it a little and suggests that there is no credit rationing element – only a risk-price element.
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Matt Nolan

Does the Bank see petrol prices as anti-inflationary?

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According to their recent official cash rate decision they might:

The reduction in domestic spending will be partly offset by the depreciation of the New Zealand dollar over the past few months, falling oil prices (emphasis added) and the recent loosening of fiscal policy

Now I have no problem with this view – hell we have discussed the ambiguous nature of oil prices on inflation before (here, here, and here).  However, our conclusion was that the net impact would be zero – not the negative relationship the Bank is implying here.

This is consistent with the RBNZ’s strong focus on the “demand” side of the economy ahead of any “supply” side effects – and indicates that any sharp increase in retail sales (given recent declines in oil prices) could put the Bank back into pausing mode.

I think this is actually a fairly substantial point – it tells us that as well as watching the labour market numbers, we need to watch retail numbers in order to get a handle on future movements by the Bank.

Matt Nolan

Arnold Kling rips into economists

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Over at Econlog Arnold Kling takes to task virtually all mainstream Macroeconomists for there “description” of the current economic crisis. This combined with my reading last night on reductionism in economics (I think it was Robert Frank Kevin Hoover – although I have now forgotten as it was an essay in a larger book) currently has me on the back foot – even though I’m a strong methodological (and even an ontological) individualist there are obviously issues with the current application of reductionism in economics.

However, let met put down some of the key bits from the Kling.

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