Knowing and Making

My panel on behavioural economics from earlier this year is now available at WorldBytes . Thanks to The Lantern Group for spotting this before I did. If you look hard enough you may spot missmarketcrash in the audience.

This week's word cloud from the economics blogs. I generate a new cloud 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. 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.

Tyler at MR has been asking recently whether the structure of bankers' pay caused (or contributed to) the financial crisis. Matt Yglesias also has something to say about it (via the above link). I agree with the general skepticism about this - it is a bit too easy as an explanation. Limited liability on the other hand is definitely a contributor - shareholders' interests are actually almost the same as those of employees: take lots of risk as the upside is much higher than the downside. If a bank makes $100 billion, shareholders and employees get to share it out. If it loses $100 billion, shareholders lose their whole stake, employees lose a large part of theirs, but creditors are likely to lose many times more. Or if the creditors in question are insured depositors, the taxpayer loses out instead. Ultimately, banks manage much more of their depositors' and other lenders' money than shareholders' money. So this had some impact on risk-taking. But I am starting to c...

The Economist has a Global Public Debt Clock on their site now, along similar lines to the American and Irish debt clocks but monitoring the total public debt of the whole world. But lots of people are concerned by the buildup of private, consumer and corporate, debt as well as debt incurred by governments. So, inspired by previous conversations with Nick Rowe , I decided to extend it to show the net total of ALL debt in the world - public and private. The clock will automatically update to the correct figures in real time. Here it is - enjoy:

Frydman and Goldberg (authors of Imperfect Knowledge Economics , which I still must get around to reading) are in the Economists' Forum with the sexily titled article "An economics of magical thinking". They believe that nobody can predict economic crises and that swings in asset prices are natural. Because all knowledge is intrinsically uncertain, and nobody has access to it all, the market cannot find a "true" price for assets. So far I agree. But the next part of the argument is suspect: Behavioural economists have uncovered much evidence that market participants do not act like conventional economists would predict “rational individuals” to act. But, instead of jettisoning the bogus standard of rationality underlying those predictions, behavioral economists have clung to it... The behavioural view suggests that swings in asset prices serve no useful social function. If the state could somehow eliminate them through a large intervention, or ban irrational pl...

The OFT has just fined a bunch of building companies £129 million for "cover pricing", which is described as "the practice of submitting an artificially high bid for a contract which you do not intend to win". But, I thought, companies do that all the time. If a client comes to me with a project that I don't want to do for £20k, I may well be willing to do it for £50k. So I put in £50k, fully expecting not to win, but if I do, then great. Hearing the vague explanation on the BBC this morning, I figured there must be something more to it. This article from Contract Journal explains it better. The issue is not actually the high prices as such. It's the fact that there's collusion between suppliers, ensuring there is no real competition for the tender. As CJ says: What is cover pricing? Cover pricing is when a contractor bids for a job with no intention of winning the tender. For example, Company A has been invited to tender by a client, but for various r...

Everyone is looking for new macroeconomic models these days. Paul Krugman's recent article has been a prompt for a reopening of intense discussion on the matter. It seems that there are two major classes of proposal emerging: those based on cognitive/behavioural insights, and those which incorporate financial firms as part of the model instead of just assuming they transparently pass demand and money around the economy. Financial models include " New Models for a New Challenge ", Cecchetti, Disyatat and Kohler's proposal (via Mark Thoma - though a number of the comments on his posting point back towards the behavioural option). Another is Kobayashi's , which I may have mentioned before. I've explored the behavioural models more in past columns but I hadn't noticed this conference in Australia which looks to have had some interesting presentations. Krugman hints at behavioural explanations in his commentary but has not yet suggested a model incorporating ...