Matt Nolan

Weekend reading

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This post from mainly macro combines my favourite (although getting dated) book on macroeconomics, my preferred methodological statement for economic modeling, and tackles the idea of microfoundations in macroeconomics.

One of my favourite blog posts in a while – I suggest you have a peek at it.  One thing I would note is that, for applied macro, one day we will realise that microfoundations provide many potential paths to a single macro relationship – and in order to get anything policy relevant we will need to come up with an idea of what is “plausible” in order to narrow this set.

This involves not just working with data, but having to make subjective calls – and that is the area where things get hairy fast.

I’d also note that microfoundations are a huge part of academic economics as they are currently doing the technical work of creating micro models that provide potential explanations of macro phenomenon.  This is an essential task, even if much of the work ends up with potential explanations we view as “not plausible” in the end.

jamesz

New blogger: Acemoglu

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Daron Acemoglu has a new book out with James Robinson–the catchily titled Why Nations Fail–and they have a blog to support it. Add it to your reader because, seriously, Daron Acemoglu daily in your inbox: what’s not to like!?

jamesz

Behavioural prejudices

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Eric has a post up in which he criticises behavioural economics:

Behavioural economics usually leaves a bad taste in my mouth. Too much of it just feels like …it was done in the 50s and 60s.

Essentially, his problem with the field appears to be that its results are often used to rationalise paternalism. I don’t have time to respond in detail now but my first thoughts are:

  • Don’t dismiss results just because you don’t like the potential implications or the messenger. That would be like me saying I don’t like the Coase theorem just because it’s constantly misused by libertarians.
  • There is a big difference between disliking a result and disliking the conclusions that some people draw from it.
  • Behavioural economics is a very young field so it’s not surprising that it feels like mainstream economics from fifty years ago. It hasn’t yet matured into a coherent framework, but we should encourage practitioners to move in that direction, rather than dismissing it for lack of maturity.
  • The research in behavioural economics has, until recently, been spearheaded by psychologists so it isn’t necessarily tightly tied to the sort of framework economists use. That’s not a problem, it’s an opportunity for economists!
  • The youth of the field and its present empirical focus mean that it often feels very piecemeal. At the very least, it certainly doesn’t have the monolithic feel of mainstream choice theory. It’s hard to say whether economists will be able to tie it all together into as satisfying a framework as standard choice theory, but the lack of an overarching theory doesn’t make it wrong. It may be that economists eventually just have to accept that their field is becoming more fragmented, which just reflects the difficulty of accurately describing human choices.

I’ll return to some of these themes over the course of the week as I have more time.

Matt Nolan

A famous fallacy

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Apologies for the lack of posting.  I am currently in the process of finalising forecasts at my workplace – which of course involve traveling to the farthest reaches of New Zealand and battling mythical animals.  In many ways its similar to the labours of Hercules – and as a result gives me little chance to post.

However, I do plan to write on the welfare reforms at some point, as its an issue I like to have an opinion on.  This means I have to quickly point out that a lot of commentators and politicians are making a simple error – and they should stop – they are committing the lump of labour fallacy.

Sorry but the government doesn’t actually create jobs per see, outsourcing doesn’t “reduce the stock of jobs” here, and jobs are not the be all and end all of the universe.  What matters is income, living standards, and subjective happiness – issues jobs are related too.  However, the focus on work helps us to miss the point, and convinces politicians to introduce dumb policies that make many, if not all, of us worse off.

Now, time to get back to the Waikato to make battle with their ridiculously strong quarterly retail result.

jamesz

Larry Summers: revealed brilliance

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If you’re not an economist you may not have heard of Larry Summers. He’s the nephew of Paul Samuleson and Kenneth Arrow, and has himself received the John Bates Clark medal, been president of Harvard university, Chief Economist of the World Bank, Secretary of the Treasury for Clinton, and Director of the National Economic Council for Obama. So, a fairly stellar CV, really. What makes this interesting? Well, Wikipedia tells us:

Summers resigned as Harvard’s president in the wake of a no-confidence vote by Harvard faculty that resulted in large part from Summers’s conflict with Cornel West, financial conflict of interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a “different availability of aptitude at the high end,” and less to patterns of discrimination and socialization.
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Summers stated in a 1991 interview: “There are no… limits to the carrying capacity of the earth that are likely to bind any time in the foreseeable future. There isn’t a risk of an apocalypse due to global warming or anything else. The idea that we should put limits on growth because of some natural limit, is a profound error and one that, were it ever to prove influential, would have staggering social costs.”
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In December 1991, while at the World Bank, Summers signed a memo … stat[ing] that “the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that…. I’ve always thought that under-populated countries in Africa are vastly underpolluted.”

More recently, he has claimed that there is no point learning to speak any language other than English–the native tongue of only 6% of the world.

Whatever you think of the substance of those comments, they’re probably not what you’d put in your firm’s PR material. So Summers is not exactly a stranger to controversy. Just imagine your thought process when faced with a man that has such a history of gaffes: he would have to absolutely stun you with his brilliance to win your confidence such that you’d appoint him to a role under any public scrutiny. Yet, Summers continues to win the most prestigious positions that an economist could hold. If that doesn’t reveal how persuasive and impressive the man must be in person then I’m not sure what would! Unfortunately, it probably also says something about how first-world institutions view statements that appear to demean socially disadvantaged groups.

jamesz

Greece: party like it’s 1999

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The Economist estimates how far back the GFC has set various economies:

They’ve used GDP, consumption, wages, stockmarket indices, house prices, wealth and unemployment to calculate that single index. I really like the concept as a way of showing the effect of the crisis to people who aren’t familiar with macroeconomic statistics, but I wonder how they managed to combine that lot without double counting. The Economist Intelligence Unit has certainly not been immune to criticism of its indicators in the past, with Chris Auld calling their Liveability Index “…an arbitrarily weighted sum of arbitrary measures which can neither be meaningfully summed nor measured.” So, I like the concept, but I’d take the actual numbers with a grain of salt until we can see the methodology.