Knowing and Making

Tim Harford's on a couple of rants this weekend: a light-hearted bitch about non-mathematical economists alongside a more serious argument against the "Robin Hood tax" (a much catchier, or perhaps I should say Orwellian, name for the Tobin tax ). I'm with Tim on this one. There's a typically Curtisian video on the front page of the campaign's website (about as blatantly manipulative as the director's better-known work, Love Actually , and with about the same amount of factual content). It attempts to put across the idea that the tax is simultaneously tiny and huge - small enough to have no impact on financial efficiency while being large enough to solve all the world's problems at home and abroad. Tim makes the case against it pretty well - here's a key example: For instance, I might buy car insurance which could – if I knocked somebody down and permanently disabled them – trigger a payment of £1m. My insurance company might want to reinsur...

For a while, I've been storing up lots of links to interesting pages from blogs and other places. I keep meaning to weave many of them into an interesting narrative, but some of them don't quite seem to fit, and yet are still on topics that I'm interested in, namely: expectations (and related, rational expectations theory) sentiment and whether it is real, and can be modelled macroeconomic theory and in particular, under what behavioural or market conditions Keynesian stimulus is efficient Here are some of those links which I'm, realistically, never going to get around to to analysing in detail: Rajiv Sethi on rational expectations and equilibrium paths . A good insight into why the rational expectations model is unlikely to reflect reality. But aren't rational expectations the only way to achieve a stable equilibrium in many models? Yes indeed. The conclusion must be that either those models are incorrect (a cop-out) or that the economy cannot be stable . Th...

A slight misunderstanding here (in my opinion) from datacharmer at the Bluematter blog. Tim Harford: "...[was too fascinated with] behavioural economics. But the financial system did not fail because of some psychological trait, but because it was riddled with damaging incentives" In other words, let's get over evil bankers and the belief that moralizing will change the world, and let's focus on incentives. But behavioural economics is not about moralising, nor is it about blaming individuals for making mistakes in the hope that they won't make them again. It's about understanding why and how people behave the way they do; so that when we do design incentives, they will work. Of course people respond to incentives. What else would they respond to? But if you think they respond consistently, transitively, stably, and (in the technical economic definition ) rationally*, to incentives, you'll be sorely disappointed. Even the most famous exampl...

I don't often do link lists but they seem to be quite the thing for bloggers. Here's one: Tim Harford's article in Forbes about what credit does to our brains . A clear and simple model showing one way to think about toxic bank assets from Mark Thoma The US is following the UK again: the administration has a plan to improve small business access to credit, just like Alistair Darling; a guest post on Econbrowser  has some interesting microeconomic analysis of the rationale. Nick Rowe is always good value: here is a discussion of how liquidity can be factored into the value of a financial (or other) asset. A very nice summary (PDF) from Tyler Cowen of different definitions of rationality used in economics (somewhat technical, so you'll need a bit of economics vocabulary, but not much mathematics) That will do for now. Given the results of this week's zeitgeist, perhaps I should include something about AIG. But I find it difficult to care.