Knowing and Making

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...

Sam Robbins and I attended a fascinating workshop yesterday at the OFT , titled Trust In Markets . It covered three areas: the nature of trust and its importance in economic exchange; trust and the law; and how trust is manifested in some specific industry sectors (online marketplaces and finance). I'm especially interested in trust as an economic concept. Clearly trust is an absolute prerequisite for many kinds of economic systems to even function. Any system in which transactions are not instantaneous; anything where the quality and nature of the product is not fully known in advance of purchase; and any financial system where credit is offered - will operate smoothly only if parties broadly trust each other. The crowning theory of microeconomics, the Arrow-Debreu theorem, can only work where futures markets are available - and futures markets can only work if parties know that their contracts will be honoured over time. Sometimes trust can be replaced, in the short term at leas...

I heard somewhere that what people do on blogs is write comments about what other people said on blogs. I guess I do a bit of that, but I'm sure my rate is below average. Therefore time to catch up. In this post I'll look at a couple of interesting points on the American healthcare debate: Megan McArdle looks at rates of insurance among unhealthy people and finds that the adverse selection theory is wrong . But I think there's a serious flaw in her argument. Her finding is that since uninsured people are about as healthy as insured people, adverse selection can't be happening. But she relies on the following assertion: "we would expect the uninsured to be sicker than the general population". I don't think that's correct at all. Surely sick people have far more incentive to get insured than healthy, and so we'd expect the uninsured to be substantially healthier than the average? After all, we would assume that people who don't own cars probabl...

If you have clicked onto this article just from reading the title, then I may disappoint you slightly. I am not (yet) going to propound a behavioural theory of money, though I think there's one coming in the future. But I will point to a couple of results which may indicate where to get one. The first is a quote from John Moore and Nobu Kiyotaki of LSE, in the beautifully titled lecture Evil Is The Root Of All Money . "Money is the medium of exchange. Notice that for this argument to hold together, there has to be a set of mutually-sustaining beliefs, stretching off to infinity. I was willing to hold money yesterday because I believed the dentist would accept it today. She is willing to hold money today because she believes someone else will accept it tomorrow. And so on. If there were a known end-point to history, the entire structure of beliefs would collapse back from the end." This, as they point out, is the conventional view among microeconomists about the existence ...