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Showing posts from September, 2010

Saving: vice or virtue

From Mario Rizzo's comment on Coordination Problem (an Austrian blog):
Keynes...does turn certain virtues (like saving) into vices -- from an economic or consequentialist perspective. What is particularly disturbing is that from a long-run perspective surely saving is a "virtue."But surely it's not. Investment is a virtue; and saving, usually, is what enables investment.

Saving in itself is a neutral act, because one person's savings are another person's debt. In the Keynesian model, attempts to increase saving while investment is falling simply lead to a spiral of shrinking income. It's investment that creates future wealth.

According to the savings identity, total savings does equal investment, but that statement is misleading for two reasons: one, because this definition of investment includes inventory (which may be built up involuntarily, and is not especially "virtuous"); and two, because it hides the effects of savings in one period on inv…

Where did Ireland's money go?

Whenever I see some huge figure for an institution's "losses" I am suspicious. Ireland has now supposedly spent about 55% of its GDP, or €100 billion, to bail out its banks and buy toxic property assets from them.

But they haven't created anything with this money - it hasn't been spent on goods or services. In fact, it's just a transfer. So where is the money now, and has anything of economic value actually been lost?

Partly the story is similar to that in the UK - lots of people who had a property and sold it in 2007 have made a ton of money. Many of the people who bought the properties have now handed the properties - and the debt - over to the government. But at average Irish house prices, that €100 billion is about 500,000 houses - and surely that number of people did not exit the housing market (in a population of 4.4 million). Even if they had, the government has certainly not foreclosed on (or acquired) 100% of the relevant mortgages.

Beneficiaries in …

A story of perfect pricing

Thanks to Jonah Thomas, commenter on Marginal Revolution, for this beautiful story:


I once talked to a Marine who had served in the Philippines. There was a guy who sold bananas right outside the base. He sold one bunch of bananas for ten cents, and he sold three bunches of bananas for 35 cents. The Marine tried to explain to the man that his pricing was wrong. "Look. I buy one bunch of bananas. Here's a dime. I buy a second bunch of bananas. here's another dime. I buy a third bunch. Three dimes. I came out ahead! I got 3 bunches of bananas for thirty cents! But you wanted to sell them for thirty five cents!" The man would stare blankly at him and never understood, no matter how hard he explained. Lots of Marines tried to explain it and the man never figured it out. Later my friend noticed that in town he could buy a bunch of bananas for 3 cents.

Fellatio targeting

The French MEP and ex-justice minister Rachida Dati has entertained legions of Youtube viewers with a slip of the tongue - intending to state that "inflation" was close to zero, but instead claiming "fellatio" was close to zero.

Fortunately, we hear, the European Central Bank is responding in a timely manner to this problem, with a "moral easing" or ME policy. In contrast to its attitude to inflation, the ECB board - especially its French and Dutch members - are quite concerned about a shortage of fellatio in the economy. They are willing to print as many euros as it takes - and distribute them wherever necessary - to return fellatio to its trend rate. As precedent they have cited Oval Office policy during the Clinton administration.

Some economists have claimed that fellatio targeting is not the appropriate measure, and instead the overall level of orgasms in the economy (also known as NGDP, or Number of Groans Derived from Poking) should be the concern o…

The shrinking names of economists

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Paul Krugman bemoans an externality imposed on him by Narayana Kocherlakota (or his ancestors): the need to fit more letters into a short column, the more he is discussed.

While this problem has been solved over at WCI (see what I did there?) by compressing him to NK, this is a risky policy due to the frequent mentions of New Keynesian models alongside his name.

Paul suggests that all economists should have short names like Ip and Ng.

If this a problem now, surely it was a bigger problem in the days of mechanical movable type. With modern typesetting software and the greater readership of electronic media, long names are now more affordable to the reader.

We can test this hypothesis statistically. Let's start with the founders of economics in the 18th century: Hume, Smith and Mill. So far, so good. Indeed, the first entry in my Routledge "Fifty Major Economists" is the tiny-surnamed Thomas Mun.

In the 19th century the theory was developed further by Ricardo, Edgeworth an…

The economics zeitgeist, 26 September 2010

Image
This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.
I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.
If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Noun, noun, noun, noun, noun, noun, noun, verb

News headlines naturally need to be compact and punchy, and they have a certain distinct grammar which is recognisable at a glance. Often a noun is used as an adjective, or a verb elided, as in "Labour leader vote close".

But the headline I saw on the BBC website today takes this principle just about to its outer limit. Six nouns are converted into adjectives one after the other, each one raising the stakes of an extraordinary portmanteau noun phrase:
MS charity respite home closure protest vote failsThe story is here, if you can figure out quite what it means.

Emergent cognitive order

As I've mentioned here before, I'm conflicted about Austrian economics. While I disagree strongly with most of its political conclusions, I think it asks many of the right questions - especially in its seminal works, such as von Mises' On Human Action.

Pete Boettke in this post shows that, despite being surprisingly wedded to a narrow, libertarian strand of political opinion, the Austrian movement is still interested in much bigger and more intriguing questions than what the right level of taxes is. His colleague Virgil Storr has been appointed editor of the journal Studies in Emergent Order.

Let me use this opportunity to briefly mention some of my ideas in this area, placing a marker for future, deeper exploration of them.


First: the notion of emergent order is critical to economics. The high level behaviours and structures of many complex systems arise from low-level components that apparently have little in common with them. The human brain is perhaps the canonical exa…

Birthdays

The blog has been a bit inactive the last couple of weeks as I've been in Spain celebrating my brother's 30th birthday, followed by a bit of holiday time. Just arrived back, and ready to get some new ideas into writing.

In the meantime, a message kindly provided to me in one of my own birthday cards, a couple of weeks previous:
Birthdays are good for you.Statistics prove that the people who have the most live the longest.  - Larry Lorenzoni

The economics zeitgeist, 19 September 2010

Image
This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.
I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.
If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

What is the difference between cognitive economics and behavioural finance?

This question was posed in an interesting LinkedIn discussion group (Behavioural Finance: Theory and Practice) by Kerry Pechter.

I dashed off a quick answer which ended up being 500 words long. So I thought it might be useful to post on here.

Can anyone tell me the difference between cognitive economics and behavioral finance?

Cognitive economics is not yet a widely used phrase, though Marco Novarese and I have been using it as a name for a more microfounded version of what's typically called behavioural economics.

So I'll answer the question based on how I use the term.

The first difference is between "economics" and "finance". Economics is a broader field, including the trading of any kind of goods or services, whereas finance specifically focuses on investment and the value of financial instruments. Indeed I consider economics very broadly to be the study of how resources are allocated (by individuals, and across society).

The more fundamental distinct…

The economics zeitgeist, 12 September 2010

Image
This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.
I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.
If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

That overwhelming 8% majority

Image
See that "Most believe retirement is over" link on the right?

When you click on it, you get the article on the left.

Which says that fully 8% of people expect never to retire.

I know that the definitions of some words are variable, and subjective, and that reasonable people can disagree even on the meaning of "majority". The US Senate certainly does.

But it's rather difficult to stretch the definition of "most" to mean 8% of people.

The economics zeitgeist, 5 September 2010

Image
This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.
I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.
If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Minimum drink prices - responsibility or idiocy?

[Update 05/10/2010: UK home secretary Theresa May has announced today at Conservative Party conference that the government will be imposing a similar policy at UK level - banning the sale of alcohol below cost. "Below cost" is almost impossible to define - how much fixed costs do they include? - but at least it's not quite as simplistic as the Scottish version. Still not a smart policy.]

Today the Scottish Executive announced that it wants alcohol in Scotland to be sold at a minimum price of 45p per unit.

From time to time, governments around the world have imposed maximum prices on various products - petrol is a typical one - usually with the intention of helping their poorer citizens, and with a secondary effect of causing shortages.

The Scottish Executive's goal is instead to reduce consumption - and setting a minimum price is, according to economic theory, a valid way to do that. Naturally, if two litres of cider has to be sold at £3.80 instead of £1.32, fewer pe…

Kocherlakota has a mentor

Paul Krugman (quoting Jan Hatzius) uncovers another scary article from another Fed president:
Third, the statement seems to be at odds with a recent article by President Bullard of St. Louis suggesting that a continuation of the Fed’s current stance on short-term interest rates could result in deflation (see “Seven Faces of ‘The Peril’”, July 28, 2010). The first sentence of the abstract reads: “In this paper I discuss the possibility that the U.S. economy may become enmeshed in a Japanese-style, deflationary outcome within the next several years.”The original report from Bullard can be found here. Guess who is thanked in the footer of page 1? Narayana Kocherlakota (as well as David Andolfatto, regular blog commentator on Worthwhile Canadian Initiative and TheMoneyIllusion).

So what's going on? The paper is making the same argument for which Kocherlakota has been pilloried over the last two weeks. But the paradoxes in that paper are layered with yet more contradictions:
Hatzius quot…