Before railing against economics, read this

I had trouble getting out of bed this morning, so to help get me going I decided to read an essay about economics.  And I ran back into a treat of an essay I think we should all read.  This is Modern Economics and its Critics, 1:  by Partha Dasgupta.

His focus is explicitly on what economists actually “do”, noting that economists tend to focus on small questions we can actually go someway to answering – and that economists through economics, in no way, try to derive sweeping universal rules for society.  Furthermore, the focus of economists, and the assumptions economists make, are a product of their times and the questions that “matter”.

My favourite quote though:

I said earlier that modern economics treats people with respect; it does not regard them as mere dupes and foils of Business and Government.

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Folk addiction = time inconsistency?

As you may or may not know, I am a vegetarian.  As a result, occasionally I talk myself into needing more protein.  To do this I eat cashews, which I think are actually just mainly fat, but are very yummy.

Anyways, I went along to the supermarket and purchased a small number of cashews.  The checkout operator warned me “be careful, those are addictive”.  I responded by saying “hey that is why I buy them is such small quantities”.  We’ve talked about this idea in the past here and here.

Now what we really described there was a situation where the consumption of cashews is time inconsistent, and where I use a precommitment strategy of “buying less of them”.

This broad definition of addiction, which merely means that you are unable to commit to an optimal time path of consumption, is fine.  But the cost of it is limited by the cost of precommiting.

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Discussion Tuesday

I’m currently working part time and studying full time, which has significantly reduced the time I have to blog – even my normal plan of “writing the week ahead on Saturday morning” is starting to get stretched.  So to ensure that something will be up, I’m throwing up aimless metaphors and quotes and leaving them open for discussion.

Note that I do not necessarily agree with the points I’m putting up – in fact, some of them are points I disagree with.  The things I’ll raise will just be questions and statements I find interesting to consider!

This will be fun, I promise.  If the discussions are wicked enough I can do posts on them as well – win-win.  So let’s kick this off.

Economists provide the menu, it is up to society to choose from it, and accept the consequences of their choice.

Is current spending unsustainable?

Recent statistics indicate that households are ramping up the number of goods and services they are buying.  With debt levels still elevated and the spectre of the Global Financial Crisis still fresh in our minds is this a cause for concern?  Gareth Kiernan indicates that perhaps current spending behaviour is more ‘sustainable’ than meets the eye for two reasons (Infometrics link):  Price growth has been weak (holding down the increase in the value of spending) and ‘quality adjustment’ has been substantial.

So although growth in the total value of household spending has picked up over the last year, it is not out of line with historical norms – unlike growth in the volume of spending.  In simple terms, consumers have been able to purchase more goods and services without having to stump up more cash.

A view on debt in the dairy industry

After the most recent Financial Stability Review in New Zealand, Benje Patterson has decided to have a look into whether dairy farm debt really is a significant financial stability risk – and what this means for macroprudential policy (Infometrics link).  His conclusion:

On balance, it seems that a sharp correction to both dairy and farm prices is an unlikely scenario at present.  This conclusion implies that risks to financial stability are contained for now, but the Reserve Bank’s warnings regarding dairy sector debt still provide a prudent and balanced starting point for a discussion of risk.  Even so, this does not mean the Bank’s comments should in any way be interpreted as a prelude to LVR restrictions in the dairy industry.  The Reserve Bank knows full well that such restrictions could lead to inappropriate distortions to investment incentives and the ownership structures of farms would make dairy LVR restrictions unworkable in practice.

It is a risk that we must be mindful of, but there seems to be no sensible reason for loan-to-value restrictions for farmers (in any way of defining such restrictions).  Do you agree?

What are we asking with productivity in NZ?

Danyl posted about the recent Productivity Commission paper on Australia vs NZ productivity differences recently.  If you ignore the politics and conspiracy (the timing of the paper was well known and they were asking people to write about it, hence why I wrote this at the time) he asks a good questions, why have we seen relative productivity drop up?

I gave a fairly casual response in the comments – which was ignored as other people busily made things up ;) :

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