Knowing and Making

A debate has been going on within economics (and in my head) about how the economy is changing. Tyler Cowen thinks there is a " Great Stagnation ": all the low-hanging technological fruit (trains, planes, automobiles) has been harvested; we've grown for the last thirty years by getting some efficiencies out of existing processes, but that has limits; and there's no new major new invention on the horizon which will transform living standards further in the coming century. Umair Haque says something similar in more provocative language: the old models are bankrupt, we need a new mode of life - moving away from consumption and towards eudaimonia . A bigger TV doesn't provide any more satisfaction, just a shallow, temporary endorphin hit and a status upgrade relative to some of your friends. [ Update : Umair comments on twitter that "my definition of eudaimonia is economic, not just psychological" ] But the default position of economists - including...

Robert Peston has an approving discussion of Hector Sants' comments about irrationality in financial markets. Sants says that "Markets have shown not to be rational" but (at least in Peston's quotes) does not distinguish between the agency problem, and the phenomena of behavioural irrationality at the individual level. It's an important distinction. The agency problem is amenable to more conventional solutions: aligning the interests of shareholders and employees through share schemes, some types of options, long-term performance based bonuses. These problems and the simple solutions are well known and have been discussed in the management literature for decades. This is obviously not enough. Perhaps the focus of investors slipped a bit in recent years (Peston discusses the inclination of shareholders to sell rather than reform the companies they invest in). Alternatively the effectiveness of some solutions might have diminished as employees learned to game the s...

I am not sure what to call this category of articles, though I tend to agree with them and have my own series of postings coming up along similar lines: Amartya Sen has called for " capitalism beyond the crisis " (via Economist's View ) which means a better understanding of economic psychology (he likes Pigou in particular) Willem Buiter objects to " the unfortunate uselessness of much 'state of the art' academic monetary economics " and would like to see practising economists use behavioural theory and complexity theory Colander, Follmer, Haas, Goldberg, Juselius, Kirman and Lux (whew) lament " the financial crisis and the systemic failure of academic economics " and would like to see economics that reflects the real world better, and is more oriented towards genuine practical concerns instead of navel-gazing Robert Shiller's new book says that "Animal Spirits" need to be revived to end the recession Dani Rodrik proposes " ...