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+ + +

+ +

]]> + + 1415 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + hobbes-leviathan + http://www.econpointofview.com/2016/11/the-economics-of-constraining-leviathan/hobbes-leviathan/#main + Thu, 10 Nov 2016 16:17:06 +0000 + + http://www.econpointofview.com/wp-content/uploads/2016/11/Hobbes-Leviathan.jpg + + + + 1426 + + + + + + + 1425 + 0 + + + 0 + + + + + + + + + + + + About Me + http://www.econpointofview.com/brian-albrecht/ + Mon, 20 Aug 2012 00:44:13 +0000 + + http://econpointofview.wordpress.com/?page_id=2 + + Brian Albrecht's blogBrian +Economics applies to all aspects of life. It is not simply a school subject, but a way of understanding the world. Through proper economic thinking, people can directly improve their lives and make the world a better place. + +It simply requires a proper understanding of a few basic ideas. For a glimpse, check out my post "5 Life Lessons Economics Taught Me." + +I sincerely believe in the power of economics and have decided to devote my life to the study and spreading of economic ideas. I did not learn about economics through lectures. I discovered it through blogs and books. + +This experience improved my life forever. Economic thinking continues to help my life everyday and it can do the same for you. + +This blog explores economic ideas and how they can improve people's lives. It is a blend of economic theory and practical applications. + +I urge you to snoop around and show me where I'm wrong. Maybe I will even show you where you're wrong.  Together we can work to better understand our wonderful world +

About Me

+Who is this weird Brian Albrecht? + +Hello world, my name is Brian Albrecht. I am a Ph.D. student in economics at the University of Minnesota. For the 2015-2016 academic year, I am also an Adam Smith Fellow at the Mercatus Center at George Mason University and a Humane Studies Fellow at IHS. For my academic research, go to my research page. + +Before my Ph.D. program, I earned an M.Sc. in the Economics of Public Policy from the Barcelona Graduate School of Economics and a B.A. in Physics and Political Science from St. Olaf College in Northfield, MN. + +Feel free to learn more about me on my personal website or on Twitter.]]> + + 5 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Information and Feynman + http://www.econpointofview.com/?p=381 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://econpointofview.com/?p=381 + + ]]> + + 381 + + + + + + + 0 + 0 + + + 0 + + + + Complete and Perfect Information + http://www.econpointofview.com/?p=384 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://econpointofview.com/?p=384 + + + + 384 + + + + + + + 0 + 0 + + + 0 + + + + Stilger/Search Theory/Information as commodity x + http://www.econpointofview.com/?p=386 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://econpointofview.com/?p=386 + + Fritz Machlup, was at the start of this. He understood that information was scarce and vital. In other words, it is an important commodity. It has a price, exchanges, and is a factor of production for firms or individuals. + +Now economists could model markets for information with prices, quantities, and an equilibrium. Machlup, in The Production and Distribution of Knowledge in the United States (1958), estimate this value at roughly 28% of GNP. + +They choose how much to "spend" on information.]]> + + 386 + + + + + + + 0 + 0 + + + 0 + + + + (Austrian) Information as Discovery + http://www.econpointofview.com/?p=388 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://econpointofview.com/?p=388 + + exogenous. It is outside of system and must be "given" to actors. It can be "given" freely, such as the model of complete and perfect information, or at some (asymmetric) cost. Either way, the information comes from the heavens. +
Information is generate in Eureka moments
+For other economists, such as Hayek (1968) and Kirzner (1997), information is endogenous. Each action and change in preferences generates new information that needs to be incorporated in each actor's strategy. + +Taking the insurance example, both insurance companies and their customers obtain new information from action over time. The insurance companies discovers ways to distinguish between high and low-cost customers. It generates "new" markets and draws new curves. This is why the industry does not collapse like a simple asymmetric information model would predict. The actors learn from the process and update their decisions so. It is not single moment action, but a whole process.]]> + + 388 + + + + + + + 0 + 0 + + + 0 + + + + Asymmetric Information + http://www.econpointofview.com/?p=396 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://econpointofview.com/?p=396 + + lemons," cars that turn out to be poor quality. In Akerlof's model, consumers are unable to know whether a used car is good or a lemon. Since they cannot know, the hyper rational consumer will only purchase cars that are priced over valuation of the average car. + +However, the seller does not the value of the car. Therefore, they are not willing to sell an above average car. This leads to an incentive for good cars to leave the market and bad cars to enter. It is a sort of "Gresham's Law" of cars, where the bad drive out the good. + +The reason for this asymmetry is because the knowledge is "given" to the sellers. They are assumed to know whether their own car is good. However, for the average car buyer, it is extremely costly + +Why don't markets spiral down? + +In the models, one party has "free" information that is very costly for the other party. One example is insurance. If insurance companies cannot tell people apart, it will only make sense for them to charge rates at or above the cost for the average person. However, the buyers know their own health. Therefore, it only makes sense for them to buy insurance if they are the average consumer or worse. This leads to a flooding of the market with people who are of worse health, creating "adverse selection." Even though there is a price that could be mutually beneficial to both parties, the insurance company does not know what the price is for each person.]]> + + 396 + + + + + + + 0 + 0 + + + 0 + + + + Time is the missing ingredient + http://www.econpointofview.com/?p=407 + Fri, 25 Oct 2013 13:25:02 +0000 + + https://econpointofview.wordpress.com/?p=407 + + + + 407 + + + + + + + 0 + 0 + + + 0 + + + + Stigler/Alchian on Information + http://www.econpointofview.com/?p=410 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://econpointofview.com/?p=410 + + + + 410 + + + + + + + 0 + 0 + + + 0 + + + + Adverse selection and the downward spiral + http://www.econpointofview.com/?p=467 + Thu, 31 Oct 2013 08:31:14 +0000 + + https://econpointofview.wordpress.com/?p=467 + + + + 467 + + + + + + + 0 + 0 + + + 0 + + + + + http://www.econpointofview.com/?p=473 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://econpointofview.com/?p=473 + + Some people find their vocation early in life and take the exact right steps to achieve it. Other people find their vocation while reading Alchian and Allen's Exchange and Production after a long workday. I took this indirect route. Until I discovered economics, academicswerethe meansand not the ends for me. During my undergraduate, I did well in difficult physics and political science programs and on the football field. This ultimately led to an enjoyable well-paying job. That was my goal for college and I surpassed it.

+

However, when I started studying economics, my goals drastically changed. Economics turned my life anew. Suddenly, the good job was inadequate. I could not stop researching economics. My free time turned into economics time. I woke up to read Coase on the firm before work and fell asleep to Acemoglu on economic institutions. Throughout my day, I listened to lectures and economics audiobooks. Economics became my life and it spread from how I made decisions to how I spoke. I knew that I wanted to study economics. I knew that I wanted to earn a Ph.D. The details had to be worked out.

+

Through my personal research and coursework, I became interested in how information and political institutions affect firms' decisions. Hayek and Stigler attracted me to information economics. Alchian and Demsetz attracted me to institutions and IO. These interests of mine would fit well with faculty members at Maryland, such as Professors Crampton, Galiani, and Murrell. For someone interested in the interaction between economic theory and institutional analysis, Maryland is unique. I hope to merge institutional analysis with already powerful economic models, such as those in Professor Ausubel's work on auctions. How do institutions affect the development of different private and public auctions? To me, that is an interesting question that only economics can answer.

+

While I know my interests can change, I want to spend my days and nights researching and teaching about similar economic questions. Someday I will contribute to the academic understanding of these economic questions. Also, I hope to excite students about the beauty of economic way of thinking. After I took a boring economics class in high school, I became completely uninterested in economics. It took independent research and reading until, finally, I found my passion for economics. Only then did I start to take classes. I had an indirect path, but luckily it has led me to economics. Yet, I want to encourage students inside the classroom during their initial exposure, which would be much more efficient than my route.

+

The only way to do this well (and pay the bills) is through a Ph.D in a program at the caliber of Maryland. As I said before, I was not on a path to Maryland from age 16. I had not taken the typical economics courses in my undergraduate years and therefore I decided to attend the Barcelona Graduate School of Economics. Here I am learning the core theory that will prepare me for my first year and beyond.

+

Although I do not have the typical economics/math double-major background, I will come readyfor a Ph.D. Through my experiences, I have learned skills that will be beneficial in my education and research. My undergraduate preparation was thorough. Inphysics, I developed quantitative tools necessary for a Ph.D. In political science, I developed more qualitative skills, which supplement the quantitative.

+

My training has only intensified since St. Olaf. Because I programmed using Python for my physics major, I led a programming team at my work in implementing a software system, which brought a $40 million company from Excel to an integrated system. Using SQL, I wrote the code to take choices from sales and translated that into information for engineering. It was a challenging project that required 60 hours per week for a few months and 80 hours around the go-live date. The launch went excellent. I do my best work when the pressure is on. This experience with writing code to solve real-world problems made learning other languages, such as Stata and Matlab, easier.

+

Also, through working for a small private company, I learned how firms respond to incentives and informational shortcomings. I have seen how our competitors, suppliers, customers, and we made decisions. All respond to incentives and try to use the limited information available to make the best possible decision. Hayek in “The Use of Knowledge in Society,” Sowell in Knowledge and Decisions, and others have started to study this type of information. I hope to continue down this line with a focus into industrial organization and institutional analysis. My experiences and all the effort I exerted in my year between St. Olaf College and the Barcelona Graduate School of Economics continues to help me each day.

+

This year I am supplementing my quantitative (physics), qualitative (political science), and technical (programming) skills with an intensive master's at the Barcelona GSE. Here I am using those skills for economic questions. My math and physics training makes micro easier and my programming experience makes econometrics easier. I can focus on applying these tools, not learning them. In addition to the core of micro, macro, and econometrics, at the BGSE I can explore my main research interests through courses on information economics, political economy and political institutions. These classes are inspiring research ideas for the coming years, particularly a dissertation topic.

+

After a tough liberal arts college, job, and master's program, I await another challenge. I will bring what I mentioned above plus my hardworking and competitive nature, learned on the football field where I earned All-American honors, to my research. I am applying to schools like Maryland, because I want to work with and learn from the best in the field. Life is too short to give half-effort on the things that matter. I am committed to a Ph.D. in economics and want to be pushed to my limits. I know that Maryland will push me. I know it will be hard. That is what I want. I have been challenged before and succeeded. My preparation might not be typical, but it has served me well and will continue to do so for my Ph.D program.

+

+

]]> + + 473 + + + + + + + 0 + 0 + + + 0 + + + + 2 type prcing + http://www.econpointofview.com/?p=481 + Wed, 01 Jan 2014 23:01:17 +0000 + + https://econpointofview.wordpress.com/?p=481 + + + + 481 + + + + + + + 0 + 0 + + + 0 + + + + Book Summaries + http://www.econpointofview.com/book-summaries/ + Sun, 12 Jan 2014 20:11:42 +0000 + + http://econpointofview.com/?page_id=648 + + Microeconomic Theory by Andreu Mas-Colell, Michael Whinston, and Jerry Green +Chapter 1: Preference and Choice +Chapter 2: Consumer Choice +Chapter 3: Classical Demand Theory (Part Two) +Chapter 4: Aggregate Demand +Chapter 5: Production +Chapter 6: Choice Under Uncertainty +Chapter 7: Basic Elements Of Noncooperative Games +Chapter 8: Simultaneous Move Games +Chapter 9: Dynamic Games +Chapter 10: Competitive Markets +Chapter 11: Externalities And Public Goods +Chapter 12: Market Power +Chapter 13: Adverse Deletion, Signaling, And Screening +Chapter 14: The Principal Agent Problem +Chapter 15: General Equilibrium Theory +Chapter 16: Equilibrium And Its Basic Welfare Properties +Chapter 17: The Positive Theory Of Equilibrium +Chapter 18: Some Foundations For Competitive Equilibria +Chapter 19: General Equilibrium Under Uncertainty +Chapter 20: Equilibrium And Time +Chapter 21: Social Choice Theory +Chapter 22: Elements Of Welfare Economics And Axiomatic Bargaining +Chapter 23: Incentives And Mechanism Design +

Man, Economy, and State with Power and Market by Murray Rothbard

+Chapter 1: Fundamentals of Human Action +Chapter 2: Direct Exchange (Part Two) +Chapter 3: The Pattern of Indirect Exchange +Chapter 4: Prices and Consumption +Chapter 5: Production: The Structure +Chapter 6: Production: The Rate of Interest and its Determination +Chapter 7: Production: General Pricing of the Factors +Chapter 8: Production: Entrepreneurship and Change +Chapter 9: Production: Particular Factor Prices and Productive Incomes +Chapter 10: Monopoly and Competition +Chapter 11: Money and its Purchasing Power +Chapter 12: The Economics of Violent Intervention in the Market +Chapter 13: Defense Services on the Freek Market +Chapter 14: Fundamentals of Intervention +Chapter 15: Triangular Intervention +Chapter 16: Binary Intervention: Taxation +Chapter 17: Binary Intervention: Government Expenditures +Chapter 18: Antimarket Ethics: A Praxeological Critique +Chapter 19: Conclusion: Economics and Public Policy +

The Theory of Price by George Stigler

+Chapter 1: Introduction To Economic Analysis +Chapter 2: Prices and The Enterprise Economy +Chapter 3: Consumer Behavior +Chapter 4: The Theory Of Utility (Part Two) +Chapter 5: Pricing With Limited Supplies +Chapter 6: The Supplies Of Productive Services +Chapter 7: Costs And Production +Chapter 8: Production: Diminishing Returns +Chapter 9: Production: Returns To Scale +Chapter 10: Additional Topics In Production And Costs +Chapter 11: The General Theory Of Competitive Prices +Chapter 12: Theory Of Monopoly +Chapter 13: Oligopoly, Cartels, And Mergers +Chapter 14: The Economics Of Information +Chapter 15: The Demand For Productive Services +Chapter 16: Rents And Quasi-Rents +Chapter 17: Wage Theory +Chapter 18: The Size Distribution Of Income +Chapter 19: Capital And Interest +Chapter 20: The Economy And The State]]> + + 648 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + Substitute + http://www.econpointofview.com/?p=654 + Mon, 13 Jan 2014 08:01:07 +0000 + + https://econpointofview.wordpress.com/?p=654 + + + + 654 + + + + + + + 0 + 0 + + + 0 + + + + Firm type, tax type + http://www.econpointofview.com/?p=735 + Tue, 21 Jan 2014 12:22:47 +0000 + + https://econpointofview.wordpress.com/?p=735 + + + + 735 + + + + + + + 0 + 0 + + + 0 + + + + Ambiguity in the preferences of policies + http://www.econpointofview.com/?p=737 + Tue, 21 Jan 2014 12:36:23 +0000 + + https://econpointofview.wordpress.com/?p=737 + + + + 737 + + + + + + + 0 + 0 + + + 0 + + + + Sexed Semen and Cow Prices + http://www.econpointofview.com/?p=751 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://econpointofview.com/?p=751 + + + + 751 + + + + + + + 0 + 0 + + + 0 + + + + Rothbard and the Demand to Hold + http://www.econpointofview.com/?p=804 + Thu, 06 Feb 2014 09:58:53 +0000 + + https://econpointofview.wordpress.com/?p=804 + + + + 804 + + + + + + + 0 + 0 + + + 0 + + + + Bitcoin As Money + http://www.econpointofview.com/?p=806 + Thu, 06 Feb 2014 10:15:14 +0000 + + https://econpointofview.wordpress.com/?p=806 + + + + 806 + + + + + + + 0 + 0 + + + 0 + + + + About + http://www.econpointofview.com/2014/06/1015/ + Fri, 20 Jun 2014 14:56:10 +0000 + + http://www.econpointofview.com/?p=1015 + + + + 1015 + + + + + + + 0 + 2 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Twitter + http://www.econpointofview.com/2015/04/twitter/ + Sat, 18 Apr 2015 03:02:57 +0000 + + http://www.econpointofview.com/?p=1265 + + + + 1265 + + + + + + + 0 + 4 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2012/08/well-put-my-friend/ + Tue, 21 Aug 2012 00:55:12 +0000 + + http://econpointofview.com/?p=4 + + George Stigler +
"Whether one is a conservative or a radical, a protectionist or a free trader, a cosmopolitan or a nationalist, a churchman or a heathen, it is useful to know the causes of economic phenomena." -George Stigler via Thomas Sowell's important read, Basic Economics.
+
]]> + + 6 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2012/08/well-put-my-friend-2/ + Wed, 22 Aug 2012 00:57:24 +0000 + + http://econpointofview.com/?p=9 + + English: Close-up photo of Murray Rothbard + +"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." +-Murray Rothbard, Egalitarianism as a Revolt Against Nature + +  +
]]> + + 9 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Each Name Drop Can Be Important + http://www.econpointofview.com/2012/08/each-name-drop-can-be-important/ + Tue, 21 Aug 2012 01:25:26 +0000 + + http://econpointofview.com/?p=17 + + video by Tom Woods interviewing Jeffrey Herbener. Herbener's career has been greatly influenced by one reference to Eugene Bohm-Bawerk. This is just one example of the importance of heterodox economics, even in neoclassical classes. + +[youtube=http://www.youtube.com/watch?v=20tI5WBBfkg&feature=player_embedded] + +Professors are doing students and economics a huge disservice by focusing on the generic history of economic thought sequence from Smith-Ricardo-Mill-Marx-Marshall-Fisher-Keynes-Friedman-Samuelson. Of course each author added has an opportunity cost. Nevertheless, any generic history of thought book (my recommendation is here) can give this story. Hopefully, more and more teachers will branch out. + +  +
]]> + + 17 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2012/08/well-put-my-friend-3/ + Fri, 24 Aug 2012 23:36:31 +0000 + + http://econpointofview.com/?p=22 + + Ludwig von Mises + +  + +"Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man's human existence. "- Ludwig von Mises, Human Action + +  +
]]> + + 22 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Statistical Confusion + http://www.econpointofview.com/2012/08/statistical-confusion/ + Sat, 25 Aug 2012 12:23:14 +0000 + + http://econpointofview.com/?p=29 + + Marginal Revolution, Tyler Cowen links to an article discussing "the winners" of the Euro's devaluation. It defines winners as the countries with the largest percentage of exports since a weakened euro allows foreigners to by more exports. Here's the article's conclusion +
The Eurozone nations are impacted quite differently by the fluctuations in the euro. Ireland benefits the most from the weaker euro - far more than Germany as a percentage of its GDP. Because of euro's weakness it was the only Eurozone nation that saw its manufacturing markedly improve recently. But this also makes Ireland vulnerable to EUR appreciation, particularly against GBP.
+I do not have any issue with the data used. My concern is over the conclusion. Why does a country benefit from exporting goods, especially from a weaker currency? This is a point I've never understood about common economic thinking. Why is sending more goods abroad seen as a net benefit? Don't people want to receive goods instead? No one would draw the conclusion that McDonald's is doing better since it is selling more hamburgers at half price. We need more information about costs. + +I might be missing something in the logic, so can someone please clarify it for me? +
]]> + + 29 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2012/08/well-put-my-friend-4/ + Sat, 25 Aug 2012 09:24:11 +0000 + + http://econpointofview.com/?p=32 + + Peter Boettke + +From the enlightening book, Living Economics by Peter Boettke- +
"In the end, then, the New Keynesians are as ideological as the Chicago school. In the hands of both, economics is reduced to a game in which preconceived notions about the goodness or badness of markets are decked out in spectacular theory. In neither case do economists fulfill the fundamental scientific responsibility of testing the veracity of their explanations."
+Here's a professor whom I would enjoy studying under. +
]]> + + 32 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2012/08/well-put-my-friend-5/ + Sun, 26 Aug 2012 08:09:39 +0000 + + http://econpointofview.com/?p=37 + + "Homo politicus and homo economicus are the same. The critical implication of this assumption of universal self-interest is that the observed differences between public choices and private choices emerge not because individuals adopt different behavioral objectives in the two settings, but rather because the constraints on behavior are different. Different outcomes emerge not because public choices are guided by motives different from those guiding private choices, but rather because in private markets self-interested voters and politicians make choices that mainly affect themselves, while in political markets self-interest voters and politicians make choices that mainly affect others."- F.S. McChesney and W.F. Shughart II, The Causes and Consequences of Antitrust: The Public Choice Perspective +Public choice, especially the work of James Buchanan and Gordon Tullock, might signify the greatest rethinking in the academic work in the past 60 years. Politicians are no longer exclusively seen as selfless public servants. Economics provides insight into all human action. +
]]> + + 37 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2012/08/well-put-my-friend-6/ + Mon, 27 Aug 2012 10:00:09 +0000 + + http://econpointofview.com/?p=53 + + Henry Hazlitt + +"'The Distribution of Income'... implies to many people that income is first produced, and then 'distributed'- according to some arbitrary and probably unjust arrangement."- Henry Hazlitt +"Distribution of Income" is one term I would rename, if I could, to something less confusing. I hope people point out when I use such inappropriate language. Income, which is derived from value, is created, not distributed by anyone in a free society. +
]]> + + 53 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + What I'm Reading + http://www.econpointofview.com/2013/02/what-im-reading/ + Wed, 06 Feb 2013 20:12:35 +0000 + + http://econpointofview.com/?p=62 + + Cover of "The Myth of the Rational Market... + +  + +The Myth of the Rational Market: Wall Street's Impossible Quest for Predictable Markets by Justin Fox- This is a review of the history of efficient market theories and an introduction to some counter points raised in recent years. It is very accessible to non-economists and has got off to an interesting start. More will come later. + +  + +  + +Israel Kirzner, Austrian School economist + +Competition and Entrepreneurship by Israel Kirzner- This is my second run though of Dr. Kirzner's famous work. At times, astonishingly convincing, at times a little more difficult to follow, it is always insightful. Whether his theory is complete is not for me to say, but he does add a nice dimension to disequilibrium to the microeconomic equilibrium analysis that dominated the time of Kirzner's writing. I hope to do either a full length review or a chapter by chapter analysis for my own records. + +  + +  +
+ +Cover of + +Free to Choose: A Personal Statement by Milton and Rose Friedman- Sometimes it is important to go back to the basics and appreciate the wonder of voluntary cooperation. Although markets are not perfect, the Friedman's lay out many examples illustrating the power of them. A great introduction to economic reasoning for the layman.
+  + +  +
]]> + + 62 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 2 + + + http://www.economicthought.net/blog/ + + + + + + + 0 + 0 + + + + + + + + + + + + + + + 3 + + + http://briancalbrecht.com + + + + + + + 2 + 0 + + + + + + + + + + + + + + + + Bait and Switch Statistics + http://www.econpointofview.com/2013/02/bait-and-switch-statistics/ + Sat, 09 Feb 2013 11:09:55 +0000 + + http://econpointofview.com/?p=70 + + Steven Landsburg calls out Paul Krugman for a switcheroo between debt and spending. Statistics can be so misleading if one is not careful. Careful reading of everything one reads is required in order to not fall victim.

]]> + + 70 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2013/02/well-put-my-friend-7/ + Sat, 09 Feb 2013 12:02:01 +0000 + + http://econpointofview.com/?p=78 + + English: Cover of the 2010 pocket edition of H... + +From page 223 of the LvMI Scholar's Edition of Human Action- +
The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place. These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred. In periods of slow alterations in relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of event which every individual experiences in his daily life. A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell. She has little use for computations disregarding changes both in quality and in the amount of goods which she is able or permitted to buy at the prices entering into the computations.
+
]]> + + 78 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2013/03/well-put-my-friend-8/ + Sat, 02 Mar 2013 15:17:03 +0000 + + http://econpointofview.com/?p=85 + + Armen Alchian and William Allen's textbook, Exchange & Production. It is filled with gems that I've seen posted ever since Alchian's passing two weeks ago. One stuck out particularly at me, from page 32 of  my 1983 edition- +
"Asking people to restrict consumption more than they are induced to do by the market price is to ask them to reduce their gasoline use so that other people can use the gasoline in lower-valued uses. Such required "conservation" compels diversion to less valuable uses; it is wasteful. It also gives some politicians more power over economizing resources and people." (emphasis in original) +
+I would love if someone can explain a flaw in the argument (besides restricting everyone's consumption through coercion). I cannot find one.  Anyone interested in more about Alchian should check out the links below or this interview. +
Related articles
+ +
]]> + + 85 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 7 + + + + + + + + + + 0 + 0 + + + + + + + + + + + + + + + + + + + 8 + + + http://econpointofview.com + + + + + + + 7 + 0 + + + + + + + + + + + + + + + + + + + + + + + + Opportunity Costs and Externalities + http://www.econpointofview.com/?p=827 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://www.econpointofview.com/?p=827 + + + + 827 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + Rothbard Chapter 4: Prices and Consumption + http://www.econpointofview.com/?p=871 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://www.econpointofview.com/?p=871 + + how individuals act in isolation, how people exchange goods, and how money facilitates indirect exchange, he tries to bring some of these pieces together. Rothbard spent so long on the basics, because the logic remains in more complex situations. The questions driving chapter 4 is "what determines money prices?" + +In direct exchange, the exchange prices were determined by the relative rankings of the goods. The price of one good in terms of another rises or falls until a point where those who demand the good are equal in number to those who supply the good. Now that money has been introduced, the same process occurs. However, there is one great advantage to money. Instead of price a good, say bread, in terms of all other goods, such a berries, computers, cars, daycare, now there is only one price: the money price. + +Just like in direct exchange, suppliers are willing to sell until the marginal unit of money is not longer provides more utility than the marginal unit of the good. The same goes for buyers. They buy until the marginal unit of money provides more utility than the marginal product. This will lead to an equilibrium in prices, so long as preferences do not change. + +There is nothing magical about money. It is a good that is valued because it satisfies some end. However, money is not trivial either. It is not neutral. It affects exchanges. A world of direct exchange and one of indirect exchange can lead to quite different outcomes. + +But why would anyone derive utility from money? It cannot be eaten. It cannot be used to make a car. + + ]]> + + 871 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + Spell Check + http://www.econpointofview.com/?p=877 + Wed, 07 Jan 2015 22:58:49 +0000 + + http://www.econpointofview.com/?p=877 + + As a graduate student at the University of Minnesota, I am exposed to many aspects on economic theory: trade, IO, game theory. However, the ideas that inspired me to become an economist, ideas from people like Mises and Buchanan, are not taught. The Adam Smith Fellowship will allow me to pursue the ideas of these writers in a way that is not possible outside of GMU. Yes, I can read Mises and chat online, but nothing compares with real serious discussions with other academics. +
+In my coursework, it is too easy to forget there are other lenses for seeing the world than the standard neoclassical economic approach. It is easy for me, even though I have Mises' "Human Action" and Hayek's "Law, Legislation, and Liberty" on my desk. I can't imagine how easy it is for other students to ignore other approaches. I'm stuck thinking about problems through equations about constrained maximization. Each time I've been out to GMU, I have returned with a new vigor and lens to see the world. I break out of the monolithic viewpoint that is academic economics. That keeps me motivated. More importantly for me as an academic, the experiences as an Adam Smith Fellow have inspired me to keep working hard and stay at this academic game.
+
+Thinking deeply about the readings from this year and discussing them with serious students from a variety of fields has influenced my research and my teaching. For example, after the Austrian weekend, I returned to my teaching and was careful to stress the knowledge in an economy. As economists, we often assume that knowledge is given to some benevolent planner. I made clear this is an assumption to make the problem easier. The real world is much trickier. For example, it is impossible for a government to know how much an externality is imposed. Yet, most economics textbooks assume the government can exactly calculate the externality. I stressed heavily this assumption and how big it really is. Hayek and Mises were encouraging me on this point. Spending time at GMU has given me the confidence to make these points, even if most Econ 101 instructors are not. Why not "dare to be different" in our teaching too?
]]> + + 877 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Political Parties as Firms + http://www.econpointofview.com/?p=886 + Sun, 23 Mar 2014 13:42:52 +0000 + + http://www.econpointofview.com/?p=886 + + + + 886 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + Socialist to Residual claimant corporations + http://www.econpointofview.com/?p=928 + Mon, 05 May 2014 13:47:49 +0000 + + http://www.econpointofview.com/?p=928 + + + + 928 + + + + + + + 0 + 0 + + + 0 + + + + Math, Austrian Economics, and Opportunity Costs + http://www.econpointofview.com/?p=1258 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://www.econpointofview.com/?p=1258 + + (For Economists) + +To say that I've thought a lot about math this year would be an understatement. My whole life has been one long exercise in formal math since last summer. I've also spent a lot of time thinking about how math relates to economics and its possible costs and benefits. While I've come to appreciate the value of formal math and plan to become a micro theorist (aka a bad mathematician), I still read enough McCloskey to leave me uneasy about math for math's sake. + +If readers think I am confused, I will not object. I really don't know how I should use math for my work and how it benefits or hurts the profession. + +However, I'm come to a tentative hypothesis that I believe to be true.  Every Austrian insight can be modeled using formal mathematics. + +A few examples: +
    +
  • Genuine surprise: If the economist knows basic measure theory, surprise can be modeled in a straight-forward manner1.
    • +
  • Deduction from the Action Axiom: This one can obviously be done and is most not far from standard choice theory.
    • +
  • Kirznerian Entrepreneurship: Mix in the surprise elements about with some standard search models and you have it. Samuelsonian economics is starting to approximate some ideas in Kirzner's Competition and Entrepreneurship.
    • +
  • +
+The question isn't whether the ideas can be expressed in a rigorous mathematical formulation, but whether they should be. + +What do we learn by formal modeling? It translates one abstract form of theory into another. Do we really further out understanding of surprise by defining a logically valid surprise function $$s: \mathcal{A} \rightarrow [0,1]$$? I don't see how it ultimately improves our understanding of human action or the economy. + +  + +Note, up to this point I've ignored to primary role of economics, which is as a ?profilaxtic against fallacies?. Once this role is added, it becomes even less clear that formalizing the Austrian insights would have positive value. + +  + +Then the question for Austrian economics is whether the insights (entrepreneurship, coordination problems, spontaneous order) are valuable insights as they are being developed. The math isn't the problem. Ultimately, I believe the goal of the economics profession is to inform people of economic science. For this goal, no "high theory" is relevant. + +Now, the question becomes more interesting. Does genuine surprise play an important role in human action? How do actual entrepreneurs find arbitrage opportunities? Does the structure of production cause business cycles? These are all empirical questions that can't be determined by either type of theorizing. + +The marginal value to economic science of formalizing Austrian economics seems low. Some stuff might have value, especially some of Hayek's business cycle work by Josh Hendrickson and Alex Salter? + +
+ +1. Katzner, D.  Time, Ignorance, and Uncertainty in Economic Models. p. 46-75]]> + + 1258 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + The Role of Prices in Price Theory + http://www.econpointofview.com/?p=1340 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://www.econpointofview.com/?p=1340 + + Price Theory", laying out what he considers a proper definition and classification of the modern state of price theory. Secondly, Pete Boettke uploaded his syllabus for a course he is teaching this fall on the history of price theory. Both items have my mind running about what is price theory, what price theory should be, and why any of these distinctions matter. + +Let me start with Weyl's paper. + +As I've written earlier, + +  + +The distinction is all about emphasis, what is central and what is peripheral.  I truly believe that is the general disagreement between most economists who take a different approach to the field. +

Why Glen's Approach Is Important?

+One thing to keep in mind is Glen's audience. Most of the people reading are not Austrian economists, but people whom he calls "empiricists" or "reductionists." +

Why Pete's Critique Is Important?

+ ]]> + + 1340 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + http://www.econpointofview.com/?p=1434 + Wed, 30 Nov -0001 00:00:00 +0000 + + http://www.econpointofview.com/?p=1434 + + Most households in the world are “unbanked,” meaning no individual in the household has bank-account access. Even within the rich United States, 9 million households (7 percent) are unbanked. In the developing world, banking is much rarer. + +  + +What is the exact obstacle to banking? By definition, people do not use banks because the costs outweigh the benefits. On the cost side, we can split costs into “price/fees” and “transaction costs.” Fees are charged by the bank directly, like a percentage to make a deposit. Transaction costs are everything else it requires to complete a transaction: time, walking to the bank, etc. + +  + +A first guess for why people are unbanked is that the price is too high. I don’t have a Tesla because the price is high. That is no mystery. However, there is good evidence that many people do not even take advantage of “free” (zero-price) accounts. Many people live far from physical banks, making it unprofitable to use the bank, even if the bank does not charge a fee. The banking fee is only one part of the cost of banking. + +  + +There are reasons to believe those pesky transaction costs, compared to fees, are the roadblock to higher levels of banking. It is a pain to physically go a bank. I hate it. Saving money under a mattress looks attractive. However, technology has greatly lowered transaction costs. As people in the United States know, banking does not require going to a physical location anymore. Mobile or online banking have replaced the need to wait in line of some teller. + +  + +There is some evidence that mobile banking sufficiently lowers transaction costs to induce people to bank and the effects are major. In a 2016 paper, MIT economist Tavneet Suri and Georgetown economist William Jack estimated that a single mobile money technology, M-Pesa, lifted 194,000 Kenyans (roughly 2% of the population) out of poverty by making payments quicker and cheaper, allowing even poor Keyvans to use the technology. Programs like M-Pesa have left economists, including some people here at AIER, optimistic about the future impacts of mobile banking. + +  + +However, not all the results are so optimistic. A recent NBER working paper by Suresh De Mel, Craig McIntosh, Ketki Sheth, and Christopher Woodruff reports on a randomized controlled trial (RCT) they conducted in Sri Lanka. The paper raises doubts about how helpful it is to simply get people using mobile banking. + +  + +Sri Lanka is typical of most low-income countries in that mobile phones are everywhere but electronic financial services like ATMs are more limited. Therefore, the RCT subsidized fees and lowered transaction costs by allowing participants to make deposits into regular bank savings accounts through their mobile phone agent. Customers could purchase mobile phone cards to deposit funds into the bank account. The process is similar to that used for adding minutes to their mobile phone. People would buy a scratch card from a mobile phone agent, call a number, and deposit money to a bank account. + +  + +For many people, the mobile phone agent is significantly less costly than a traditional bank in terms of distance and time. For example, 77 percent of the sample lived within 200 meters of a merchant selling scratch cards and 58 percent of the sample added minutes to their phone at least once a week. In contrast, the average time for a traditional bank deposit for the sample was 21 minutes and only 23 percent had made a bank deposit in the previous month at the start of the experiment. The experiment also varied the banking fees for 8 percent to zero. This allows the researchers to estimate the willingness to pay for banking services. + +  + +The first result, in agreement with previous literature, is that the banking fee is not that important. The randomly assigned price did not change people’s behavior, compared to the predictions of a simple downward sloping demand curve. This suggests that price is not the main obstacle for the unbanked. + +  + +However, the main result of the RCT is that lowering the transaction costs did not seem to matter either. People simply did not take up the service. The authors document that “While 80 percent of participants opened the bank account and participated in demonstrations on how to make deposits, only 26 percent made at least one deposit through the mobile service, and only 7 percent made 10 or more deposits.” If mobile banking is going to increase welfare, people must use it. They did not here. + +  + +Even out of the 26 percent who used the service, the effect seems to be more about crowding out other forms of banking or saving, compared to increasing the amount. As the authors report, the “mobile-linked deposit service caused a 44 percent increase in savings deposits in the partner bank and a 29 percent increase in savings in the formal banking sector more generally. However, there was no increase in total household savings.” These numbers are relative to a control group with a small savings rate already, so overall the effect is minor. + +  + +The two results combined indicate that for the Sri Lankans in the experiment, banking fees or deposit transaction costs do not seem to be the reason why people are unbanked. The obvious costs are not the important costs. + +  + +So what transaction costs are the obstacle? It’s hard to know. As Michael Munger recently argued, electronic platforms in general greatly reduce the transaction costs and reducing transaction costs can fundamentally change markets. However, knowing that transaction costs limit trade and development is not the same thing as knowing which transaction costs limit trade and development. This paper should give pause about the ability of economists to identify the relevant transaction costs.]]> + + 1434 + + + + + + + 0 + 0 + + + 0 + + + + + + + + Math formulation in econ- (partially blame the camp) + http://www.econpointofview.com/2013/09/math-formulation-in-econ-partially-blame-the-camp/ + Mon, 02 Sep 2013 16:47:54 +0000 + + https://econpointofview.wordpress.com/?p=93 + + Bryan Caplan and Noah Smith each had complaints about math in econ. Robert Murphy, Daniel Kuehn, and Jonathan Finegold reply with praise on math for enhancing economic thinking, a specific math. They do not discuss the math appearing in most AER articles. I have nothing worthy of adding to that specific question (my views closely resemble Robert Murphy's). + +However, as a student, I believe I have something to add about the way math is introduced in grad programs. Since most undergraduate economics programs barely delve into math, besides maybe a top-level econometrics course, the first introduction for formal students is the August before their graduate studies. That is when students take their "Math Camp". The standard format is a few week crash course in what the department believes is the necessary math to get through a program. + +The instructor of my own math camp started off by saying something like "economics can be described verbally, geometrically, or algebraically depending on whatever works best" and came up with some examples for each. It is hard to argue with such a statement. However, this is at the start of math course entirely removed from economics besides token uses of labor or profit as variables. It is a math (here math means calculus) camp, not a rhetoric course so one can guess where the stress out of the three lay. In the pure math that is done in this camp, algebra is almost universally the easiest format. Once the real world is abstracted away, math can wow and impress. Most schools have the same format (see here and here). We physicists turned economists can forget econ for the time and slide into our comfort zone. + +But econ is not applied math. All of the proponents of math above talk about math as a tool within the toolkit of economics. The math has to follow the economics. However, the institutions of graduate economics encourage a different use of math, though not explicitly. + +Pure math is the mindset that all economists start off their studies with and the one many never shake. If math is just a tool for expressing economic ideas as the proponents claim, at least openly, then this structure of a math course seems wrong. It starts off with the math then the econ. With that design, is it any wonder that the economics can be molded to fit the math? Maybe a crash course in econ/price theory could proceed the math. I remember Deirdre McCloskey suggesting such an idea. If she did not, I'll take credit. Maybe this could lower the problem that Robert Murphy saw at NYU- + +
Until I saw it with my own eyes, I would not have believed how much the people in top-ranked economics programs are great at math, but bad at basic economics of the kind that I learned by reading op eds from Walter Williams and Thomas Sowell growing up.
+ + + + +P.S. Maybe I am missing the big picture here as a student, but I can only report my experiences and impressions up to this point.]]> + + 93 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Ronald Coase (1910-2013) - A Small Tribute + http://www.econpointofview.com/2013/09/ronald-coase-1910-2013-a-small-tribute/ + Wed, 04 Sep 2013 19:46:25 +0000 + + http://econpointofview.com/?p=109 + + Robert Higgs explains how Coase rightfully fought against the trends in economics over the last 80 years. David Henderson did a beautiful tribute for the WSJ. Don Boudreaux places Coase in his top ten economists. Daniel Kuehn has important food for thought on Coase in posts here, here, and here. Jonathan Finegold gives Coase an incredible compliment which I wish I would have wrote- +
I don’t know if I have what it takes to be a good economist, but I do know that without Coase my chances would be smaller. Many of you are probably smarter than me, but I still think he can do the same for you. (HT Daniel Kuehn)
+I have nothing to add to the topic of the naïve Coase theorem vs Pigou vs McCloskey. Anyone who wants to read more into that can check my twitter and get an overview my beliefs. I, instead, want to explain Coase's importance in my intellectual journey. + +About a year after discovered the  world of economics, I started to write a blog post called "10 Books, 10 Articles, 1 Year, and 1 New Life". Unfortunately, I never published it. In that (unpublished) post, I attempted to explain how 10 economics books and 10 articles changed my worldview. Ultimately, these 20 items started a new path in my life towards academic economics. + +In these two lists, Coase had a unique place. His book, The Firm, the Market, and the Law, made my book list, while The Nature of the Firm and The Problem of Social Cost (both within the book) made my article list. + +Unlike Jonathan, I have never been introduced to Coase "formally". Instead, I had to stumble my way blindly through my early reading of Sowell to Stigler to Coase. If I trust Goodreads, I finished reading The Firm, the Market, and the Law in November 2011. Searching the library (I was suspicious of journals) I discovered this book. While the exact details in the articles have blurred over time, the feeling of wonder and amazement has not. My mental image of reading that book in the St. Olaf library still exists. The small paperback book combined with Coase's friendly, easy style, hooked me. His work dismantled previous views and created new horizons. + +Coming from an appreciation of the pricing process which I developed from my early readings of Mises, Hayek, and Rothbard, The Nature of the Firm, shook my foundations. One of the great developments of modern free economies, the firm, is an almost totalitarian entity. Why did people in a free society not use the pricing mechanism? As I tweeted yesterday, this insight, so obvious in retrospect, was not elaborated until 1937! My naive worldview of a voluntary/involuntary dichotomy could not longer exist. Instead, the world was much more complex and, hence, interesting. My eyes were opened, if only a little. + +The Problem of Social Cost was less disturbing of my worldview, but equally insightful. Coase teaches us all here that the real world is complex (duh). The "blackboard" economics of textbook Pigou or zero-transaction costs does not exist. Therefore, economists cannot predict where the equilibrium will settle. Instead, the interplay of states, property rights, informal rules, and individuals leads to unique outcomes in each situation. Again, proper economics is an invitation to inquiry. + +I am not a good economist yet. But like Jonathan, I am a better one because of Coase.]]> + + 109 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + The Heart of the Math in Econ Debate + http://www.econpointofview.com/2013/09/the-heart-of-the-math-in-econ-debate/ + Thu, 05 Sep 2013 17:23:12 +0000 + + https://econpointofview.wordpress.com/?p=118 + + Bob Murphy links to a new online resource from John Stachurski and Thomas J. Sargent (via Alex Tabarrok) called Quantitative Economics. Bob Murphy quotes the description- + +
This website contains a sequence of lectures on economic modeling, focusing on the use of programming and computers for both problem solving and building intuition. The primary programming language used in the lecture series is Python, a general purpose, open source programming language with excellent scientific libraries. +
+ +He ends his post by saying- + +
Look, I enjoyed studying Markov chains as much as the next guy in grad school–actually I think the guy sitting next to me in class hated them–but I think the above is a perfect illustration of the problem with modern, mathematical economics. The world is not stuck in a terrible recession right now, because too few people understand Fourier transforms. (Emphasis added).
+ +And that really is the point of all of this. I do not mean to disrespect what these two economists have done by providing so much information. But after all the esoteric discussions, which I love as much as anyone, economics is about real people. I enjoyed my Fourier Transformations and countless other uses of Python in my days of studying physics. Python or any other program can be beautiful. It can be an end in itself for many physicists and I bet this is true of some economists too. + +But that is not why the great pioneers (choose your favorite-Smith, Marx, Keynes, Coase) advanced economic science, so we would learn Fourier or Lagrange or pick you favorite 19th century Frenchman's transformation. Here I am not talking about bloggers, but instead the academic journal authors and editors. From my viewpoint, the marginal economist is better off explaining economics to the general public or doing economic history, not running transformations or learning anything else that programming teaches. + +But we economists do need jobs and we cannot all be creative. To echo McCloskey, for God's sake and your own, be brave and buck the trend.]]> + + 118 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Kirzner and Alchian/Demsetz on the Firm + http://www.econpointofview.com/2013/09/kirzner-and-alchiandemsetz-on-the-firm/ + Mon, 09 Sep 2013 21:07:21 +0000 + + http://econpointofview.com/?p=137 + + Jonathan Finegold has a nice post arguing that Armen Alchian and Harold Demsetz's article, “Production, Information Costs, and Economic Organization,” follows the work of Ronald Coase and Ludwig von Mises. The Coase/Alchian connection is well known. The Alchian/Mises connection is not. Finegold discussing Alchian/Demsetz's article- +
In it, he advances a theory of the firm that both builds from and adds on to Ronald Coase’s transaction cost theory of the firm. It may be surprising to find out that, in the same sense, Achian (sic) and Demsetz’ theory adds on to Ludwig von Mises’ theory of economic calculation. The argument advanced in Alchian and Demsetz (1977) is that it can be cheaper to organize a firm as a means of calculating the marginal productivity of inputs, rather than rely on exchange across markets (i.e. the pricing process).(Links in original)
+This makes sense. Mises is giving a theoretical framework for how the market through prices conveys information. Alchian and Demsetz are trying to apply a broadly similar theory to organization of a firm. Owners respond to incentives from both within the firm to decrease costs and outside to increase sales. + +Jonathan then brings Israel Kirzner into the story- +
For Alchian and Demsetz, using Kirzner’s terminology, the monitor is an entrepreneur who earns a profit by best using a given pool of inputs in team production. The monitor is either rewarded or punished, through profit and loss, based on his ability to measure and control each input’s marginal productivity.
+Again, I agree with Jonathan that Alchian/Demsetz and Kirzner are trying to answer similar questions, which are the right questions. However, due to a different foundation in price theory and method, I want to argue that Kirzner and Alchian/Demsetz come to different conclusions, at least from Kirzner's viewpoint. + +Kirzner, defining entrepreneurship unique to most economists, develops a book length argument for why modern economics is wrong about the very nature of competition and entrepreneurship. Profit and entrepreneurship have completely different meanings for Kirzner than to most other economists. To cut a 200 page book to 1 sentence, entrepreneurship is the ability to see price discrepancies that others miss. +
The key point is that pure entrepreneurship is exercised only in the absence of an initially owned asset. Other market roles invariably involve a search for the best exchange opportunities for translating an initially owned asset into something more eagerly desired. The "pure" entrepreneur observes the opportunity to sell at a price higher than that at which he can buy. (Competition and Entrepreneurship, page 16)
+Competition is a process, not a state of being like the statics of monopoly/oligopoly theory. Ownership does not drive awareness. There is no mention of the costs of monitoring or shirking like in Alchian/Demsetz. Instead, these are just more input costs. In fact, Kirzner really saw himself as departing from the work of Alchian. Here Kirzner is directly addressing him- +
We have already noticed that the conventional theory of the firm tends to mask the purely entrepreneurial element in the decision-making of producers. Yet the fact that the firm is assumed to make decisions which maximize "profits" tens to promote the misunderstanding that it is indeed entrepreneurship that is at the core of the theory of the firm. On the other hand, it has become the fashion to identify the urge to maximize profits not with entrepreneurship but with ownership! (Competition and Entrepreneurship, page 54)
+As an economist who believes many "schools of thought" have something to add to economics, I appreciate Jonathan pointing out the common ground between the Austrians and the New Institutionalists. However, Kirzner wants to create a foundation that is almost completely, besides Mises' work. I believe that is why Kirzner has not been integrated into modern price theory to its own detriment. +
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Related articles
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]]> + + 137 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2013/09/well-put-my-friend-9/ + Thu, 12 Sep 2013 18:58:04 +0000 + + http://econpointofview.com/?p=147 + + George Stigler + +I have given myself the unruly task of reading George Stigler's The Theory of Price and Murray Rothbard's Man, Economy, and State, while going through the king of modern + grad school economics, Mas-Colell, for class. + +This route is probably not advised. However, due to my specific interests and the way I learn, I am taking it. Maybe I will have a post about this strategy and why I am trying it, I am not sure how this will turn out, but I will keep everyone updated. + +Reading through Stigler (you might recognize his mug from my silly banner), one passage captures why I love economics. +
The goal of the economist is not merely to train a new generation in his arcane mystery: it is to understand this economic world in which we live and the other ones which a thousand reformers of every description are imploring and haranguing us to adopt. This is an important and honorable goal. + +It is not an easy goal, however, or one which is now or ever will be fully achieved. A modern economic system is of extraordinary complexity. Imagine a three-dimensional jigsaw puzzle, consisting of roughly 100 million parts. Some parts touch against, let us say, 1,000 other parts. (This is each family deals at one time or another with that many employers, banks, retail stores, domestic servants, and so on.) Other parts touch- let us be conservative- 50,000 other parts (firms that sell to retailers and buy from other firms and hire laborers and so on). It would be enough of a task to fit these 100 million pieces together, but the real difficulties have yet to be mentioned. The pieces change shape quite often- a family has twins; a firm does the next best things and invents a new product. The economist has the interesting task of predicting (in the aggregate) each of these movements.- Stigler, George J. The Theory of Price. 1987. 7-8
+There are a few reasons why I enjoy this quote. +
    +
  1. The opening paragraph summarizes why I study economics. While it is a consumer good (enjoyable for it's own sake), economics provides the best framework for understanding the world outside of my mind. It shows what reforms are possible and which are not. As my blog's title and subtitle try to convey, it is a guide for understanding human action in all of its elements.
    2. +
  2. Human action and the ensuing order are extremely difficult to understand and even harder to predict. Anyone who says otherwise is trying to sell you something. The quote illustrates the complexity. Stigler goes on to explain the elements that make the problem exponentially more difficult because the rules are constantly changing, whether by law or legislation or custom. It is a terrifying area to study, but beautiful once these complexities and patterns are understood. For an example of what I mean, watch this video.
    3. +
  3. Economists predict the future. For good or ill, they predict. Sometimes they are called upon from non-economists and other times they freely offer. A debate exists within economics of whether prediction is key to economic models or outside of pure economic theory. No matter which side of that debate one takes, it is clear that economists are not good at predicting the future with any precision. But the question is, who is better? As Thomas Sowell would say, compared to what? I'm putting my faith (unfortunately that is the right word) with good economists. Tell a physicist to predict when an earthquake will happen and then imagine that the individual particles had free will.
    4. +
+Stigler writes as well as any economist. I, thankfully, discovered him early in my studies. If the rest of The Theory of Price is as good as the opening, it will be a fun trip. +
]]> + + 147 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 11 + + + http://necessaryandpropergovt.wordpress.com + + + + When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated. +"And then what will happen?" he asked. +The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out. +"And what will happen after that?" Professor Smithies asked. +As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat. +"And then what will happen?" Smithies persisted. +By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous -- and, in fact, much worse than the initial situation that it was designed to improve. + +You've probably read this before, but perhaps your followers haven't. + +Thanks for referencing my article today. I am now following you. Good luck in your studies. + +- Jeff]]> + + + 0 + 0 + + + + + + + + + + + + + + + 12 + + + http://briancalbrecht.com + + + + + + + 11 + 0 + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2013/09/well-put-my-friend-10/ + Thu, 19 Sep 2013 19:59:30 +0000 + + http://econpointofview.com/?p=160 + + +
The reason that the United States had a banking industry that was radically better for the economic prosperity of the country had nothing to do with differences in the motivation of those who owned the banks. Indeed, the profit motive, which underpinned the monopolistic nature of the banking industry in Mexico, was present in the United States, too. But this profit motive was channeled differently because of the radically different U.S. institutions. The bankers faced different economic institutions, institutions that subjected them to much greater competition. And this was largely because the politicians who wrote the rules for the bankers faced very different incentives themselves, forged by different political institutions.
+- James A. Robinson and Daron Acemoglu Why Nations Fail? Kindle Location 654 + +Reading through Why Nations Fail?, paragraphs like this frustrate, yet intrigue me. First, why does it frustrate me? It makes no distinct/rejectable claim. For two acclaimed social scientists, I expected boldness. instead, throughout the entire book Robinson and Acemoglu basically say "good institutions produce good results and bad institutions produce bad results" and give example after example. I know that their thesis is more specific. Extractive institutions are bad and inclusive institutions are good is a more accurate summary. Yet, many will come away remembering just what I first said, good=good, a tautology. + +Yet, this paragraph is what I enjoy about political economy. Traditional "economic" reasons +(capital, labor, technology, Cobb-Douglas) do not explain the difference between the United States and Mexico. The institutions- ignored by most economists- are the difference between prosperity and poverty. They drive which nations fail. + +This goes to the heart of our intellectual history. Adam Smith did not argue that the invisible hand directs the private good towards the public good under any conditions. Instead, this only occurs under proper institutions. The role of the political economist is to understand what these "good" institutions are (or more importantly, which are "bad") and how they arise. Robinson and Acemoglu have their theory. Deirdre McCloskey has her theory. Douglass North has his theory. And countless others exist. While there is considerable overlap, the theory is far from settled and much has yet to be written and understood. It is a topic which I (and hopefully others) find fascinating and worthy of further study, maybe even formal education. + +Hence, it is why I enjoyed Robinson and Acemoglu's book. It provided a lot of evidence to a general concept. It does not make many enemies. More importantly, as a book accessible to laymen, it (re)introduces people to comparative institutional analysis. It is not an end of the discussion, but a start. This is a good thing for economics- look an economist making an openly normative remark. Call in the science police. + +  +
]]> + + 160 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Mas-Colell Chapter 1: Preference and Choice + http://www.econpointofview.com/2013/09/mas-colell-chapter-1-preference-and-choice/ + Tue, 24 Sep 2013 10:03:02 +0000 + + http://econpointofview.com/?p=169 + + earlier post, I am working through Mas-Colell, Whinston, and Green's Microeconomic Theory1 (often shortened to Mas-Colell or MWG) as my introduction to modern Samuelsonian microeconomics. To help with the learning and teaching, I've decided to post a summary and analysis of each section. Jonathan Catalan did this with Keynes' General Theory and it was enjoyable. I hope to imitate that concept. Unfortunately, Mas-Colell is a textbook, compared to a treatise. This will bring about challenges, which I hope I can overcome. + +While most casual readers might not be interested in a walkthrough of a textbook, hopefully some students will. I hope to give an introduction to those who are interested in graduate economics without the difficulty of the actual book. Also, I believe if I cannot write down my thoughts, they probably are not clear. Put differently, sloppy writing means sloppy thinking and I want to avoid sloppy thinking through practice, practice, practice. So I need to get it "on paper." While it might be dangerous to one's esteem to put ideas online after first reading, to steal the subtitle from Gene Callahan's blog- “Silence will save me from being wrong (and foolish), but it will also deprive me of the possibility of being right.” -- Igor Stravinsky. + +Everyone is welcome (encouraged) to tell me where I am wrong. That is what comments are for and what makes blogging so enjoyable. + +Note: I will attempt to avoid any commentary until the end or in the comments. That is where I hope to make comparisons with other authors. The most important step is to first understand what the authors are saying. Only then can I decide where the author is right and make counterarguments. + + + +The first chapter begins with a complete abstraction of the consumer. MWG starts, like most of modern economics, with a decision. Every actor is faced with a set of possible alternatives, each being mutually exclusive to the others. If the actor chooses to do A, then he must forego B. To keep the topic abstract, the set of all possible alternatives is denoted by X. Each member of X is a vector, meaning that it does not mean a choice of one "good", but of any number of goods. If one is shopping at a supermarket, the set X denotes any possible combination of goods bought, while a member of X means a whole "basket" (5 apples, 3 bananas, a 6-pack, etc.) instead of any one good. This distinction between the whole set, X, the individual "baskets", and the individual items is important. The choice an actor makes is between members of X, not between individual goods. + +From this framework, MWG explain two distinct approaches to modeling and understanding consumer behavior. The first is called a preference relation and the second is called a choice rule. +

Preference Relation

+The more common of the two models and the one emphasized throughout the rest of MWG is the preference relation. Without going into the formal math- I know this is almost blasphemous for some economists- a preference relation starts with an individual's internal preferences as given. The actor prefers an apple to a banana or prefers 3 beers and a sandwich to a shot and 4 tacos. The actor can be indifferent between two alternatives; he may not care whether he has an apple or a banana.. + +In order to turn these preferences into something that economists can use, MWG imposes rationality. While rationality can mean different things for MWG, in this abstract setting, it means two specific things. +
    +
  1. Completeness- Every basket is already compared to every other basket. The relation is given. Therefore, for every basket a, the actor has a ranking with every other basket, from b to z. a might be preferred to b, b might be preferred to a, or a might be indifferent to b. The actor has already compared everything.
    2. +
  2. Transitivity- If one basket of goods, a, is preferred to another, b, and b is preferred to c, then a is preferred to c. The same idea applies for indifference. If a is preferred to b and b is indifferent to c, then a is preferred to c. This avoids any problems with the order the actor has to choose. While logically transitivity makes sense, it is does not always hold in the real world.
    3. +
+These are the two axioms  in MWG. They cannot be broken, otherwise the actors are not rational. It is hard to predict the actions of irrational people, so MWG avoids it. MWG cites proof the assumptions do not hold in reality, but insists on using them as a model. (Note: For a great introduction to some of the breakdowns of rationality and many other insights, check out Thinking Fast and Slow by Daniel Kahneman.) + +Utility Functions + +In order to better describe these preference relations, economists use utility functions. A utility function assigns a numerical value to all choices in our set, X. The value does not matter, only the value relative to other baskets' value. If a is preferred to b, then with this new utility function, u(x), the number given to a, u(a), must be greater than the number given to b, u(b). Since we assume completeness and transitivity, a utility function is possible in theory. Mas-Colell emphasizes that the order of preferences is preserved when going from a preference relation to a utility function. Again, the numerical value of u(x) is meaningless. + +  +

Choice Rules

+Since it is not stressed throughout the rest of MWG, I will be short here. The choice rule model of consumer behavior is similar logically, but different mathematically. The choice rules dictate what basket(s) of goods is picked given a choice between "many" baskets. For example, the choice rule will say that if the actor has a choice between baskets x,y,z, he will pick x and y. The rule dictates the choice. It starts from choice, compared to preference. The difference is subtle, but MWG stress this distinction. + +Just as revealed preference required rationality, the choice rule requires a different assumption called the weak axiom of revealed preference. This is less demanding than rationality. Simply, if an actor is given the choice between x and y, and he picks x, then the introduction of more options, z, will not change his choice. He still picks x. + +MWG goes on the explain how the two approaches are different. However, since MWG focuses on preference relations, I leave this part to readers if interested (see page 12). +

Analysis

+While the difficult part of MWG is the formal math proofs of preference relations and choice rules, the logic is simple. All possible choices are compared with every other and the action picks a favorite. A utility function is then used to turn these preferences into a ranking on a graph or a numerical value for easier analysis and understanding. Although Austrians love to make fun of utility functions, MWG at least in the first chapter pays lip service to these concerns. If MWG follows through with the idea that the value of u(x) is irrelevant and does not try to add or subtract the utilities, utility functions will greatly improve our analysis and thinking. + +I do, however, feel uneasy about indifference. I can imagine a rational actor. I cannot picture an indifferent actor. How does a scientist observe indifference? If I buy an apple, clearly I prefer the apple to money. If I do not, I prefer the money. What do I do if I am indifferent? Do I just stand with a look on my face of confusion? While indifference does not make sense to me, I will see of MWG uses it in future chapters before I decide whether the modeling shortcut is worth it. + +It is also unfortunate that time is ignored. MWG does not reject the importance of time, but ignores it. Again, time is a vital part of economics which is introduced too late. Hopefully, MWG avoids this problem. + +Just as Euclid starts with definitions of lines and points and Rothbard with definitions of action, MWG stars with formal definitions. It is not the most thrilling topic, but necessary to understand the rest of the work. Hopefully, this little summary makes it a little easier. +
    +
  1. Mas-Colell, Andreu, Michael Dennis. Whinston, and Jerry R. Green. "Chapter 1 Preference and Choice." Microeconomic Theory. New York: Oxford UP, 1995.
    2. +
+Also see Chapter 7 of Hal Varian's Microeconomic Analysis for a similar, but more intuitive, introduction to revealed preference. + +For a short critique of revealed preference see Rothbard's Toward a Reconstruction of Utility and Welfare Economics. +
]]> + + 169 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 87 + + + http://valuron.wordpress.com/ + + + + + + + 0 + 0 + + + 88 + + + http://valuron.wordpress.com/ + + + + + + + 87 + 0 + + + 89 + + + + + + + + + + 87 + 1 + + + + + + + + + + + + + + + 90 + + + http://valuron.wordpress.com/ + + + + + + + 0 + 0 + + + 91 + + + + + + + + + + 90 + 1 + + + + + + + + + + + + + + + 92 + + + http://valuron.wordpress.com/ + + + + + + + 91 + 0 + + + + Stigler Chapter 1: Introduction to Economic Analysis + http://www.econpointofview.com/2013/09/stigler-chapter-1-introduction-to-economic-analysis/ + Wed, 25 Sep 2013 16:23:48 +0000 + + http://econpointofview.com/?p=181 + + earlier post, I am working through Mas-Colell to learn Samuelsonian microeconomics. As a foil, I am also studying price theory and praxeology through George Stigler's Theory of Price and Murray Rothbard's Man, Economy, and State, respectively. Through this, I hope to develop a more complete understanding of "microeconomics" than any book alone. +

Introduction to Economic Analysis

+The logic elaborated by Stigler is easier for beginning economists and laymen. It is accessible from page one. Following Lionel Robbins, Stigler's focuses on resource allocation1 and- you guessed it- the "determination of prices." Stigler needs a theory of the consumer and producer to carry this out, called "price theory." Most economists today would call it micro. + +For Stigler, price theory makes statistical claims about the real world. He uses an example of searching for a car to show the power and simplicity of price theory. Economists theorize that a car buyer will keep searching for a better deal until the buyer believes the additional cost of searching outweighs the potential benefit of a lower price. This common sense argument is then translated into economics jargon as +
To maximize his utility, the buyer searches for additional prices until the expected savings from the purchase equals the cost of visiting one more dealer.  Then he stops searching and buys from the dealer who quotes the lowest price he has encountered. (pg 2)
+This example theory must be tested in two ways, logically and empirically. First, consider if the proposition is not true. That means the person will keep looking even when the anticipated gain is smaller than the assured lost of time and energy. While people may do this from time to time, consistent wasteful action cannot last. The theory is logically sound. + +For the noneconomists, maximizing utility requires a lot of assumptions that are not necessarily true. Logic is not enough. It must also be valid. Price theory requires empirical evidence. Fortunately, The quote above leads to testable hypotheses. People should search longer on goods with diverse prices across sellers. This is a testable hypothesis and when tested, generally it has been proven right. People spend more time shopping for homes or cars than eggs. This is why economists assume rationality. People tend to act rationally and because of that price theory is a powerful tool for predicting behavior. + + +

Good Theory

+Many theories exist, but an economist must sort the good from bad. For Stigler, a good theory requires two attributes. It is "more or less" true and applies to a "large" amount of cases. The difficulty arises because these two attributes are partly incompatible. It is easy to come of with theories that are true, such as stock prices fall on October 29th, 1929. This theory is true, but since it is so specific it does not aid prediction. It is also easy to come up with a theory that is general- car sales increase in odd-numbered years. While this theory is general and provides a prediction, it is not "more or less" true. This is the balancing act that price theory economists must do. For Stigler,  a good theory will "yield predictions better than those which can be reached with any alternative theory" (pg 7). Relative predictive power is the key. + +Even though economists are notoriously bad at prediction, only a better theory can beat a worse theory. Predictions inside and outside of economics are not perfect. This is not sufficient to reject a theory. Man is fallen, so everywhere there is error. Instead, the price theorist must have a better theory. Until he has better, he must use the best of the worst. If the best theory is to flip a coin, flip a coin. + +Stigler contrasts good theories with theories that have no predictive power. These "theories" are just tautologies. For example, to say that a firm should equalize marginal cost and marginal revenue in order to maximize profits is a mathematical statement of a maximum. This "theory" does not help the economist predict what a real firm will do. + +As I quoted in another post, developing a good theory is not an easy task. +
The goal of the economist is not merely to train a new generation in his arcane mystery: it is to understand this economic world in which we live and the other ones which a thousand reformers of every description are imploring and haranguing us to adopt. This is an important and honorable goal. + +It is not an easy goal, however, or one which is now or ever will be fully achieved. A modern economic system is of extraordinary complexity. Imagine a three-dimensional jigsaw puzzle, consisting of roughly 100 million parts. Some parts touch against, let us say, 1,000 other parts. (This is each family deals at one time or another with that many employers, banks, retail stores, domestic servants, and so on.) Other parts touch- let us be conservative- 50,000 other parts (firms that sell to retailers and buy from other firms and hire laborers and so on). It would be enough of a task to fit these 100 million pieces together, but the real difficulties have yet to be mentioned. The pieces change shape quite often- a family has twins; a firm does the next best things and invents a new product. The economist has the interesting task of predicting (in the aggregate) each of these movements.
+This difficulty explains why "many important economic phenomena cannot be explained" (pg 8). + +Formality + +The first chapter of Stigler is clearly informal. As I have copied in my summary, Stigler uses vague terms "more or less", "better", or "rational" without formally defining these in a way that more modern textbooks would require. Yet Stigler stresses logical precision and empirical evidence when developing a theory. Throughout the rest of the book, Stigler insists he will follow all the rigor required of a modern (1987) textbook. Stigler sees this as a mixed blessing, but admits formality and precision advances the economic science. +

Analysis

+Stigler starts out with a "big picture" introduction to economics which is refreshing. There is no questions about the goals of price theory (prediction) and his general approach to developing theory. Stigler stresses logic and empirical evidence throughout the first chapter. Stigler immediately notifies readers of the goal of economics, prediction. Many Austrians would argue that true theory is separate from history or prediction. For Austrians, theory is about developing a logically coherent explanation of human action. If the logic is true, those predictions which are possible will follow. Although, Austrians are extremely wary of prediction. For a fun look at this difference in method, see this debate between Robert Murphy and David Friedman. + +While the introduction might seem rather soft in the world of MWG, This is not true. True, Stigler attempts to engage the reader. All reading is a conversation and Stigler is a lot more fun to talk with than other writers. Engagement is important, no matter what "scientists" say (See McCloskey). Conversation is not the opposite of rigor. Those who dismiss any textbooks besides Mas-Colell should have a quick glance through Stigler. It just might dismantle some prior ideas as it did with me. Besides being a key role in the training of two generations, Stigler shows that rigor can exist outside of a quasi-real analysis course. +
]]> + + 181 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Sneering at the Other Guy + http://www.econpointofview.com/2013/09/sneering-at-the-other-guy/ + Wed, 25 Sep 2013 19:34:39 +0000 + + https://econpointofview.wordpress.com/?p=197 + + + +Too many economists, including myself on many occasions, talk down about economists they have not yet attempted to understand. All camps are guilty: Keynesian, Monetarist, Austrian, Post-Keynesian, or whatever. This habit may help develop an "us vs them" feeling, but it does not advance thinking or the science. + +Again, Deirdre McCloskey inspires me to correct my ways. She is a key reason I am working through Theory of Price and Mas-Colell with a better attitude most who discover economics through Mises and Hayek. Deirdre writes + +
Let me put down the following challenge to the people who think they hate, just hate, neoclassical price theory. Go work through a serious book about it—not the “theoretical” micro that Guerrien and I both think is silly---and do the applied problems. If you can’t get inside the hundreds of empirical exercises in, say, my book, or in the applications of price theory as they occur (obscured by nonsensical existence theorems) in the neoclassical literature then you don’t really know what the tradition of Marshall-Wicksell-Friedman-Coase-Alchian is about, and you are not qualified to sneer at it, right? Doesn’t that sound fair? I think so, and I would apply it to my own understanding of Marxian or institutional economics. (emphasis added)
+I don't mean, nor take Deirdre to mean, that you cannot criticize a theory until you are an "expert" on it. Read everything with a critical eye, even if it is your first exposure. Instead, she challenges the post-autistic crowd to not "sneer" until they understand the literature. It is a small request. + +Understanding Alchian does not require a serious neoclassical economist. Alchian's textbook is accessible to the new reader; I speak from experience. Unfortunately, people often dismiss a theory before even trying to understand it. This is dangerous, especially towards a tradition as influential as neoclassical economics. To encourage ignorance through "sneering", without even attempting an understanding, is the mistake. I would say the same about Marx. Clearly people thought he had something important to say, so there is likely something of value in Das Kapital. Remain open to the possibility that it could be valuable, until you understand why it is not. I can criticize the labor theory of value or exploitation theory at the same time. + +As someone relatively new to the economics, this means not sneering at basically everyone. Instead, I must try to understand their theory. Contrary to her intentions, she also challenged me to give the "theoretical" she deplores a chance. I urge others to try the same with whomever they have sneered at. + +P.S. I love the word sneer. It is a wonder of the English language. + +(Update: Jonathan Catalan was influential in opening me up to new ideas. He does not have a single post on his intellectual growth, but has clearly developed throughout the life of his blog)]]> + + 197 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Hanging Out at the Lower Bound + http://www.econpointofview.com/2013/09/hanging-out-at-the-lower-bound/ + Fri, 27 Sep 2013 11:00:08 +0000 + + http://econpointofview.com/?p=203 + + + +(Also posted at The Voice) + +After three weeks of math brush-up courses and a week of fall term, it is nice to know we can "start" the year here at BGSE. While cava and food were incentives to attend, there was another reason. Professor Otmar Issing, President of the Center for Financial Studies and former member of the Executive Board of the European Central Bank, was giving the opening lecture on monetary policy. While there are about as many opinions about monetary policy as people, Otmar Issing has the academic and policy credentials to deserve a serious listen. He isn´t some no name student on a blog. + + + + +Life at the Lower Bound + +It is not easy being a central banker, especially at the zero lower bound (ZLB). The models used for the last 80 years (arguably) lose their relevance once the rates central banks directly control drop any more. Instead, central banks (specifically the Federal Reserve System of the United States) choose unorthodox policies, such as quantitative easing and forward guidance. + +Professor Issing correctly warns of the inherent problems of unorthodox policies. Central banks are breaking new ground and, as with anything new and exciting, it is impossible to know the full risks. The known risks are scary enough. + +Quantitative easing, through direct purchases of assets, is bound to have a distributive affect as Professor Issing notes. If the Federal Reserve is purchasing mortgage-backed securities, this will inevitably direct real assets and liquidity into this market. This could be good or bad, but clearly central banks directly impact specific markets and firms more than traditional interest rate manipulation. + +Another unorthodox policy that Professor Issing addresses is so-called "forward guidance." The Federal Reserve attempts to lower long-term interest rates by assuring the public it will continue to force rates down in the future. Since short-term rates cannot fall any more at the ZLB, forward guidance intends to encourage more investment and close the "output gap." It hopes to make longer term investment "cheaper." Therefore, investments, specifically long-term investments, will be undertaken which would not be profitable without this intervention by the Federal Reserve. This is a concern with artificially low rates in general and especially for artificially low long-term rates. +

Improved Models in this Difficult Time

+Central banks find themselves in a very difficult spot. They are at the ZLB, but think that the economy still needs "stimulus." How does it know how much to simulate and when to stop, or at least slow down? It is the question that keeps central bankers up at night. Issing does not believe that GDP or inflation targeting is possible or will give correct guidance to central bankers. Central banks cannot target real variables, only nominal. Professor Issing suggests something easy to say, but hard to do. + +By incorporating money and credit into economic models, Professor Issing argues that banks can have a better understanding of the nature of the data. +
Monetary developments are a kind of summary indicator of asset price development. A thorough analysis of monetary aggregates considering also e.g. the old concept of inside versus outside money can deliver valuable information on risks emerging in the banking sector. Money and credit – more than real variables – contain information for signaling asset price booms which later might turn out to become very costly. Hence, a central bank which integrates the analysis of monetary developments into its strategy will have a compass for how to deliver its best contribution to preserving financial stability, too.1
+Professor Issing seems hopeful that concern for money and credit in models can help central bankers respond to the problems addressed earlier. He makes one. + +1. For more on Professor Otmar Issing´s speech, check out his paper on the same subject. +
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]]> + + 203 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Rothbard Chapter 1: Fundamentals of Human Action + http://www.econpointofview.com/2013/09/rothbards-chapter-1-fundamentals-of-human-action/ + Sat, 28 Sep 2013 12:21:40 +0000 + + https://econpointofview.wordpress.com/?p=218 + + part 1 and part 2), here is an introduction to Austrian economics through Rothbard's Man, Economy, and State (MES). Rothbard (in the pink glasses above) avoids the distinction between micro and macro, but I will call MES micro. + +As with Mas-Colell with microeconomics and Stigler with price theory, the first chapter lays out the framework for praxeology. In many ways, Rothbard is a foil. A foil is not an opposite. Instead, Rothbard asks different questions. He is an eel to keep me critical. +

Praxeology

+(Note: Throughout I use "actor" for consistency. See the bottom of my About page.) + +Published in 1962, he begins his analysis with the assumption that the reader will just follow and develop an understand of what praxeology and economics is. MES is laid out like other treatises on the early 20th century, such as Wicksteed (1910), Taussig (1911), and Fetter (1915) and new readers would not question the method. Either way, Rothbard assumes the reader will follow and does not start out with a long explanation of epistemology, heuristics, etc, like Mises in Human Action + +However, in 2013, Rothbard´s economics (henceforth just economics) is so unfamiliar to most other economists that I will start with a simple explanation. Praxeology and its subdivision economics use logical deduction, similar to Euclidiean geometry. For praxeology, there is one axiom, the action axiom. Some of the steps are not "realistic", but the deduction is valid. Throughout the analysis, Rothbard adds some empirical claims. Rothbard presumes that people will accept these claims, such as leisure is a consumption good. + +Just as Mas-Colell starts with the axioms of "completeness" and "transitivity", Rothbard starts with "action." If these axioms, whether from Rothbard or Mas-Colell, are not true, then the rest of the analysis does not follow. The former claims that the axiom if "self-evident", while the latter assumes the axioms. Mas-Colell uses "proofs", immitating the mathematicians, and Rothbard uses "logical deduction." For both authors, economics only explains the implications of the axioms. (For more, see the Appendix to chapter 1 of MES, Rothbard´s AER article on the topic, or this ungated article.) + +As with all of my summaries, I am going to accept the author's method as true when possible. + + +

We Know that Men and Women Act

+Praxeology is the study of purposeful human action, compared to non-human action or mere reflexive action. This axiom is "self-evident." All action is only taken by individuals. Saying that the government or the people acted is a just a phrase. The government does not act in any way beyond the individual actors. + +An actor seeks to replace some state with a better through actions. This action can be "inactive." Since man acts, he must believe that some state is better than other possible options. Notice that this action must take place at a specific time to change the future. It is impossible to alter the present. Inherent in the action axiom is uncertainty. If actors know the future completely, then they cannot act to change it. Time and uncertainty are closely tied with the idea of action. Action in equilibrium does not make sense. +

Means and Ends

+If I am typing, it is because I prefer this to all other opportunities at this moment. I rank it about others. This ranking can never be turned into a quantity. It is meaningless to say I prefer typing X times more than I prefer eating. Rothbard does not use utility functions. + +To achieve his preferences, or ends, actors use means. These are  goods. Action requires a subjective belief that the actor can alter his future through these means. Anything an actor believes he cannot alter is not a means, but a general property of the circumstance. Since all action occurs in time, time is always a means. + +All means are scare. If a mean was not scarce it would not require action. Therefore, all action is necessarily a choice between ends. Choosing one preference requires that the actor not choose an alternative. This choice is called economizing. It is a trade between one end and another. The study of choice or trade are common descriptions of economics. + +Since an actor uses goods for the subjectively most desirable end, each additional good of the same type (subjectively in the mind of the actor, not physically) is used for a less important purpose. From this, Rothbard derives the law of diminishing marginal utility. + +Rothbard distinguishes between consumers' goods, which directly satisfy wants, and producers' good, which do so indirectly. Again, the emphasis highlights the distinction between authors. Rothbard introduces producers' good and a structure of production in the early pages. Producers' goods that are closer to an actor´s ends wants in time are "lower order" compared to the "higher order" goods. MES is attempts to explain the "structure of production.". +

Savings and Investment

+ + +Rothbard uses Robinson Crusoe economics to start the topic of production. When Robinson Crusoe first arrives on his deserted island, the berries available from nature and leisure are the only available goods. Through the law of diminishing marginal utility, Rothbard shows that Crusoe collect berries until he prefers leisure to more berries. As Crusoe wants to increase both goods, he must become more efficient in gathering berries. He must come up with better strategies or develop producers' good. + +The producers' goods that will help are either naturally occurring, land, or previously made items, called capital. The capital can only be created though a reduction in consumption. Crusoe must sacrifice leisure or berries in order to build a gathering stick. This reduction need not be absolute, only relative to possible consumption without savings. + +At this point, savings and investment are interchangeable. Crusoe saves to invest in a stick. Since savings delays consumption, the additional capital lengthens the time of production. Austrians refer to this as the "roundaboutness" of production. + +The berries directly satisfy wants, while the stick only satisfies his wants through the berries. The stick has no value by itself. All consumers' goods are valued relative the the ends they satisfy directly, while producers' goods derive their value from consumers' goods which they help to produce. This is a subjective evaluation by the actor and extremely difficult in a modern economy. +

Analysis

+(Note: I have a bias towards Austrian economics, though it is flawed. I am just making my priors known.) + +As stated earlier, praxeology is strange to economists in 2013. Yet, it is powerful for understanding economic reasoning. Rothbard compacts lots of economics into 70 pages. For the new reader, it is exciting. To an experienced economist, the beginning are boring compared to the heart of the book, but this is the case with all three authors. + +Besides the method, which is a big "besides", Rothbard's economics should be agreeable to most economists. While his stress is different, with a focus on time, uncertainty, and subjective value scales, I cannot find anything substantive that contradicts Mas-Colell or Stigler. Rothbard is not constructing a heterodox theory, but is interacting with mainstream theory. + +The foundation of all three methods are sound and are difficult to dismantle from within. The flaws appear once the theory goes beyond the basics. I will delay most methodological analysis until further. The main problems, of all three approaches, are inherent in the method and it is unfair to criticize too much now. + +One problem might exist since Rothbard assumes savings equals investment. This explanation hopefully grows through the rest of MES. With Crusoe, it is not a dangerous assumption, but might be in a modern complex monetary economy. + +Praxeology is not concerned with prediction. This extremely limits the subject. Austrians emphasize the distinction between pure theory, such as MES, and economic history/prediction. Stigler shows off what economics can do during the first chapter by applying his theory. I would like to see an Austrian version. +
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]]> + + 218 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Mas-Colell Chapter 2: Consumer Choice + http://www.econpointofview.com/2013/10/mas-colell-chapter-2-consumer-choice/ + Wed, 02 Oct 2013 11:07:09 +0000 + + http://econpointofview.com/?p=236 + + Chapter two elaborates choice, inherent in the preferences of chapter 1 of MWG. Specifically, it is about consumer choice in a market economy. This is an ambiguous term, but here it means a setting where consumers trade at known prices. +

Commodities

+While everyone uses the word commodity, Mas-Colell defines it as a good available for purchase or trade. All available goods make the commodity vector or bundle. + +Each good incorporates time and location. Good xi can be an apple now in the consumer's apartment. Consumers must approximate "now". It could be a few seconds or a year, depending on the situation. The proper approximation will depend on the specific choice. Also, there is nothing limiting each xi to only physically identical goods. While Mas-Colell is not explicit, these are subjective goods. If Budweiser and Miller are interchangeable (my Wisconsin friends just gasped) to the consumer, they are the same commodity. + + + +

Consumption Sets and Budgets

+Given a commodity space, only some specific goods are physically and institutionally available to the consumer. For example, the consumer cannot consumer more than 24 hours of leisure in a day. For now, there are only positive bundles. The consumer chooses from this consumption set. His choice does not depend on goods that are not available. The writers assume the consumption set is convex. (Note: Most normal consumption sets are convex so I will not elaborate.) + +The real choice the consumer faces is also limited by his budget or wealth. He can only consume what he can afford. No matter many Lamborghinis are available, he only has $200. The sum of all prices, which are assumed to be given, multiplied by the quantities consumed must be less than the budget. To add jargon, every affordable set of commodities is called a Walrasian or competitive budget set. + +For a budget to make sense, all commodities must trade at known prices or exchange rates, every commodity must have a price. Otherwise, it does not make sense to talk about a budget. This is similar to the completeness axiom for rational preferences. +

Demand Functions

+ + +For each budget and set of prices, the consumer prefers a certain consumption bundle. Actually, there can be multiple preferred bundles, but we will ignore those cases for now. The set of bundles a consumer will pick at each price makes up a demand function. To simplify the analysis, Mas-Colell assumes the budget is fully spent. If he has money remaining, he will spend it on something. In order to do the math that economists love, Mas-Colell also assumes continuity and differentiability. + +To better understand demand functions, it is natural to ask how they change with changes in the prices or the budget, the two parameters. Since we assume differentiability, calculating the change is easy if we assume we know the demand function. To find how consumption of goods change with a change in wealth, called the wealth effect, simply compute the derivative of the demand function for each good with respect to wealth. If the consumer is richer, he will consume more of certain goods. He could consume less, but that is not the case with normal goods. + +The effect of a price change of one good on another can be similarly calculated, by taking the derivative with respect to the changing price. Economists call this the price effect. If the price of one good increase, the demand will normally change. + +Note only relative price changes matter. If all prices increase in the same proportion, the proportional consumption will stay the same. It will be lower, since the budget is still restricting consumption. +

Weak Axiom of Revealed Preference

+Much of the second chapter applies the weak axiom of revealed preference to budget sets. I will not go through the math, but try to explain the logic. Remember from chapter 1 that the weak axiom says that if I always choose x from a bundle of x and y, y can never be picked from new bundle x,y,z. This makes sense. Why would another added option, z, make me change my preference to y? + +Imagine two optimal- on the demand function- bundles for a certain budget, B and B*, with corresponding prices, p and p*. If the consumer can afford the bundle B at the prices of p*, the consumer still chose B*. + +This means consumer prefers B* over B when both are available. If he could afford B* at p prices, then he would choose B*, but he chooses B at p. This consumer will choose B over B* only when B* is not affordable. + + +This relates to the original weak axiom, since it shows that introduction of new options from a different budget will not make the consumer change his preference for B* over B. (For a formal definition, check out page 29.) + +From this, Mas-Colell shows that demand and prices move in opposite directions. If the price of a good rises, consumers purchase less. Obvious to most economists, it might impress some mathematicians. +

Analysis

+While choice is more interesting than preference, chapter two is still an introduction. Readers learn a few interesting results, such as substitution effects. But after much struggling with the mathematics, I am not closer to understanding the economy or individuals. After reading one chapter in Rothbard or Stigler, I feel like I am learning economics. It does not feel that way with MWG. I need patience. It is a a marathon, not a sprint. These concepts and strategies will hopefully build a solid foundation for the rest of the book. If I wanted to learn the basics, I would reread Economics in One Lesson. + +This chapter is limiting, because of its focus on a market economy. Whether economics is the study of action, choice, or allocation, the subject does include more than trading of commodities. I would prefer to see "trading" that includes internal tradeoffs at "prices" of the opportunity cost. I cannot adjust Mas-Colell´s model to do this, but maybe someone can. + +This is not the place to have the debate on whether preferences, utility functions, or consumption bundles are differentiable. However, it does seem important. Almost all the analysis of so far relies heavily on this assumption and it is not defended at all. Again, I will have to wait to see more how useful the assumption is. At this point, Rothbard's analysis seems much more realistic and informative. Again, it is early and I had strong priors for Rothbard. My Bayesian updating will necessarily take time. +
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]]> + + 236 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Supply and Demand to the Rescue + http://www.econpointofview.com/2013/10/supply-and-demand-to-the-rescue/ + Thu, 03 Oct 2013 18:00:05 +0000 + + http://econpointofview.com/?p=263 + + I thank God for the coordination possible through supply and demand under prices. + +Economics is most exciting when it is counter-intuitive. It teaches us that artificially supporting exports to "get more money" for a country leads to less goods or that price ceilings of rent actually lower the availability of "affordable" housing. + +Don Boudreaux posted another counter-intuitive insight on why "necessary" occupations make little money. Prof. Boudreaux uses marginal product theory to explain wages. It is just supply and demand, which everyone should remember from econ 101, but most people forget. He wrote +
...We in modern society should be pleased that so many occupations that are essential to the maintenance of human life and civil order pay those who work in those occupations so little relative to what workers in many other and less-’essential’ occupations are paid. + +At first, this insight is counterintuitive.  How often do you hear friends and acquaintances lament, or express befuddlement over, the fact that the pay of people who work as paramedics, as police officers, as firefighters, or as home-health-care providers is only a tiny fraction of the pay of professional athletes, Hollywood stars, or opera divas?... + +It’s an understandable sentiment.  But when you know economics, this reality – so upsetting and mysterious to so many – is also understandable.  And this reality becomes, at some level at least, a cause of celebration rather than lamentation. + +First-responders’ pay is as low as it is because there are plenty of people able and willing to work as high-quality first-responders relative to the ‘need’ that we have for first-responders.  With so many highly skilled and dedicated people already working as first-responders, the value of the additional first-response services that we’d enjoy if we hire one more equally skilled and dedicated person to work as a first-responder is very low.  So we’re – rightly – unwilling to pay very much to hire this additional first-responder.  It makes no sense to pay an additional, say, $100,000 annually to get labor services that produce an additional, say, $30,000 worth of output. + +So understand our good fortune!  We live in a society blessed with an abundant supply of high-quality live-saving labor services... + +First-responders would be better off.  They would each be paid very handsomely for their services.  But many more of us would, as a result of this wage-raising scarcity of first-responders, die in automobile accidents and home and workplace fires.  High-quality first-response services would be very scarce and, hence, very highly priced.  Fortunately for us, our world has an abundance of high-quality first-responders.  It’s a blessing that we get such essential life-saving and life-enhancing services at relatively low costs.
+I, for one, am thankful for all the great first-responders and teachers who are willing to work. Yes I wish everyone could make more money and I hurt for the families who struggle to get by. But, scarcity is omnipresent and the laws of supply and demand hold. + +  +
]]> + + 263 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + How I Learned the Little Economics I Know + http://www.econpointofview.com/2013/10/how-i-learned-the-little-economics-i-know/ + Fri, 04 Oct 2013 18:19:09 +0000 + + http://econpointofview.com/?p=271 + + + +What does the coolest guy I know do in his free time? Okay, maybe not coolest I know, but definitely the coolest writer on this blog. + +He reads through economics (text)books. He cannot be the only one.......... + +I wanted to throw together my list of the best ways to learn basic economics, generally microeconomics. Professors who have been teaching the subject for years have great insight, but I can add a "students" voice. Economics is fun and with the right book, everything changes. You don't have to be like me or the guys above. + +I have not worked entirely through every listed book, but I have read all through the *'s. Those which I have no finished, I read enough to grasp the style and level. None of these were for class, just a nerd by himself. Most of my comments are therefore mostly about self-learning. + +Non-textbook Economics +
    +
  1. Basic Economics: A Citizen's Guide to the Economy- Thomas Sowell*: The most important book in my intellectual life. It is why I am studying economics. After reading this book, I have not looked back. For concerned citizens, it elaborates the profoundness of the economic way of thinking. If you only read one economics book ever, make it Thomas Sowell.
    2. +
  2. Economics in One Lesson- Henry Hazlitt*: If you do not have enough patience for the 500 pages of Thomas Sowell, pick up this classic by Henry Hazlitt. While the age shows in the examples, it is fresh in argument. Most of my sloppy thinking can be cured through more exposure to Hazlitt.
    3. +
  3. Economics for Real People: An Introduction to the Austrian School- Gene Callahan: Before he turned away from Austrian economics, Gene Callahan wrote a great introduction to all of economics. It is an introduction to economic thinking with rightful praise for the Austrian insights.
    4. +
  4. The Armchair Economist: Economics & Everyday Life- Steven Landsburg*: The Freakonomics of the 90's, if Freakonomics taught economic logic. There are so many little things in life that economics illuminates. Why is popcorn so expessive at the movie theatre? I bet your answer is wrong, check Landsburg.
    5. +
  5. The Law- Frederic Bastiat*: Almost 200 years old, this is a fun introduction to political economy. Politics and economics are one whole. You cannot read it without being impressed by Bastiat as a writer.
    6. +
+Top Principles Textbooks +
    +
  1. Economic Way of Thinking- Paul Heyne, David Prychitko, Peter Boettke: I wish this was the first textbook I had read. It is the closest thing to a blend between textbook and general read. It is casual enough for the above section, but it equally suited here.
    2. +
  2. Principles of Economics- Greg Mankiw*: The most popular textbook of this generation, Mankiw does a good job explaining basic concepts. He is clear, but not very exciting. It reads like a textbook.
    3. +
  3. Economics: Private and Public Choice- James Gwartney*: This was the first textbook I read. It has a strong emphasis on public and private choice, obviously. I enjoyed that, but it is not as well written as the two books that surround it here.
    4. +
  4. Economics- Paul Krugman, Robin Wells: Krugman is a great writer and it shows. However, it is relatively dry for the exciting world of economics. Also, if you are more likely to listen to Krugman than Sowell, at least pick this up so you get some economics.
    5. +
+Top Intermediate Micro Textbooks +
    +
  1. Exchange and Production- Armen Alchian and William Allen*: If you want to solve problems and get down in to the hard details, read this classic. No better textbook exists for learning economics. If you are a patient beginner, you can work through it. If you are more advanced, you will not find it easy.
    2. +
  2. Price Theory- David Friedman*: I have a fondness for price theory because of this book. It uses logic, math, theory, and data to weave a complete picture of economics. It probably has the best graphs of these books for the visual learners, but is heavily verbal. Friedman could explain these same topics without drawing a single supply or demand curve. (Note:I put together the PDF for David Friedman so I encourage you to use it. Any faults on it are due to my impatience.)
    3. +
  3. Applied Price Theory- Deirdre McCloskey: This book is similar to David Friedman's but a little more difficult. Deirdre is one of my favorite economists, so of course, I enjoyed this book. While the above books work for beginners with some math background and lots of patiences, this book is not.
    4. +
  4. Intermediate Microeconomics- Hal Varian: This book is good for people who have taken a principles course and are ready for a little more difficult problems. It feels like an upgrade of a principles book with harder problems but without the heavy focus of logic of Alchian or Friedman. Nevertheless, it is great for learning textbook economics.
    5. +
+I love reading different authors on the same topic. I urge people who are new to economics or relearning to look for many authors and more variety than I have here. + +Note: The list is fairly free-market, but I think that reflects the nature of basic economics. Most new readers could not tell Krugman's from Mankiw's. +
]]> + + 271 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 103 + + + + + + + + + + 102 + 1 + + + 102 + + + + + + + + + + 0 + 0 + + + 43 + + + http://www.daviddfriedman.com + + + + + + + 0 + 0 + + + + + + + + + + + + + + + 44 + + + http://econpointofview.com + + + + + + + 43 + 0 + + + + + + + + + + + + + + + 46 + + + + + + + + + + 0 + 0 + + + + + + + + + + + + + + + + + + + 47 + + + http://econpointofview.com + + + + + + + 46 + 0 + + + + + + + + + + + + + + + + + + + + + + + 613 + + + + + + + + + + 0 + 0 + + + 614 + + + + + + + + + + 0 + 0 + + + + Stigler Chapter 2: Prices and the Enterprise Economy + http://www.econpointofview.com/2013/10/stigler-chapter-2-prices-and-the-enterprise-economy/ + Sat, 05 Oct 2013 11:48:00 +0000 + + https://econpointofview.wordpress.com/?p=278 + + All economic systems, whether markets, socialist, tribal, even Robinson Crusoe, must do three things. +
    +
  1. Produce certain goods- As Rothbard explained, there are always multiple goods to produce, even with the same inputs. Every good that is produced means that another good was not. This is the opportunity cost.
    2. +
  2. Produce goods in a certain way- There are multiple ways to produce any good. Each economic system must have a procedure for determining the method of production.
    3. +
  3. Divide goods in a specific way- Once produced, they goods must be allocated to individuals.
    4. +
+In this chapter and throughout most of the book, Stigler addresses how an enterprise economy completes these tasks. Stigler only defines an enterprise economy as the basic essential of Western societies over the last two hundred years. The economy can also be called a market as in Mas-Colell.) + +In an enterprise economy, a decentralized process-not specific people- accomplishes the three required tasks. The Theory of Price is an attempted to explain this process. + +A market economy consists of two parts, produces and consumers. Stigler calls them business firms and households, respectively. Of course, many households produce and all firms consume. However, to simplify the analysis, they are separate. There are also additional parts, such as governments and other organization, which do not fall into either category. Stigler ignores these complications for the moment. + +Even with these assumptions, the three problems above are massive. How does an enterprise economy, such as the US with roughly 10^8 households, thrice as many consumers, and 10^7 business firms. They are producing, allocating, and consuming many different goods and services. It is difficult to estimate this number. Are all hamburgers one type of good or are McDonald's burgers different from Burger King. There is no real answer. + +Fortunately, in an enterprise system, prices direct the three problems above for such a decentralized system. These prices, while fallible, are remarkably effective as directing the messages of production and consumption. +

Signals

+Prices signal the willingness to part from or acquire goods through offers made when buying and selling. Economists like to say every consumer and producer votes for goods and services through this buying and selling. Although, unlike a political vote, these votes occur constantly and about one particular issue at a time. Consumers do not vote whether they want Budweiser of Miller for the next for years, only for the next can (or keg). Consumers can even vote none of the above. Producers make a similar vote. They are the two sides to every transaction. As Stigler says +
"there is a deep symmetry between buying and selling and the economy theory of the two is identical." (Emphasis added.)
+

Incentives

+As stated above, these goods often have many uses. Even the most primitive societies could produce many more goods than they do, even ignoring technology advancements. I could use my labor to make paintings. However, prices create an incentive for consumption and production. Since no customer is willing to pay for my paintings, I have an incentive to not use my labor for painting, but something else. + +The consumption side is identical. Consumers have an incentive to buy goods that at in abundance relative to demand. Eat raspberries in the summer; ice-skate in the winter. The prices convey the relative abundance or shortage and encourage producers and consumers to act accordingly. + +People respond to these incentives. Every consumer is looking for the cheapest price. Every producer is looking for the dearest price. Price theory does not claim that price is the only reason in decisions. It is an incentive to economize effectively. + +People do not enjoy the scarcity that high prices convey. As soon as the price of gasoline goes up, people are mad at the prices. Stigler rightly compares this to being blaming the thermometer for it being 90 degrees. The prices convey the underlying abundance and scarcity. +

Analysis

+For economists who fail to understand the roles of prices, a lot of them, this chapter is an important start to the study of microeconomics. Prices are powerful signals and incentives. It is impossible to understand an enterprise economy until comprehending the price structure. However, Stigler correctly warns that prices are fallible, especially when incorporating future supply and demand. The scarcity reported by high prices can be created to raise prices. This monopoly theory is the heart of monopoly theory. + +While prices are powerful, they are part of a small part of exchanges. Price theory, obviously, focuses on prices. However, it is narrowly applicable (a negative characteristic according to Stigler) compared to a theory based on action like Rothbard or preferences like Mas-Colell. That will weigh against the accuracy of its predictions.]]> + + 278 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Adrian Peterson Should Rarely Touch the Ball + http://www.econpointofview.com/2013/10/adrian-peterson-should-rarely-touch-the-ball/ + Sun, 06 Oct 2013 10:54:10 +0000 + + https://econpointofview.wordpress.com/?p=284 + + MRBethel_0190 + +(I couldn't help but use an old football picture of me.) + +Anyone who has seen A Beautiful Mind knows game theory can explain dating strategies, although the video is not a Nash Equilibrium. + +http://www.youtube.com/watch?v=2d_dtTZQyUM + +The key is to choose the best outcome relative to what other people are doing. + +Game theory can also explain something more important, football. Not what people in Spain call football. I am talking about the American gladiator fight known as football. + +Football is a great laboratory for the game theorist. It has discrete plays. There is a short time to strategize between plays. This time could lead to more "rational" actions. There is an easy way divide plays (pass or run). The benefit of one team comes at the cost of the other. And the goal of any single play is simple, gain yards. These attributes make the model easier to work with and possibly more realistic. + +As I've said before, economics can be counterintuitive. For football, game theory says that a good quarterback can lead an offense to pass less. How?  + +A simple model of football involves two possible moves for each team. The offense chooses to run or pass and the defense picks a run or pass defense. If the defense guesses right, the offense loses yards. If they guess wrong, the offense gains yards.The expected gains/losses are below. +

 Slide1

+

In this example, there is no dominant strategy for either team. Instead, each must split their actions between run and pass.

+

The offense will run the ball a proportion (q) of the time. q* is the best action for the offense and it is when the expected yardage for each run or pass is the same.  If they were different, the offense should choose the one with the higher expected gain. This wrong q would not be a Nash Equilibrium.

+

Two simple equations solve the problem-

+ +
    +
  • if defense picks run, the expected gain is -3*q + 6*(1-q)
    • +
  • If defense picks pass, the expected gain is 3*q - 6*(1-q)
    • +
  • These are equal at q*: - 3*q + 6*(1-q) = 3*q - 6*(1-q) => q*= 2/3
    • +
+

If the offense passes the ball more the 1/3rd of the time, the defense will react by playing a pass defense more often. This will result in more sacks and loss of yards for the offense. The optimal strategy is 2/3rds run plays and 1/3 pass plays.

+

Now, the offense brings out a stud quarterback. They now are a passing threat. The gains/losses are again below.

+

Slide1

+

The calculation is redone-

+ +
    +
  • If defense picks run, the expected gain is -3*q + 15*(1-q)
    • +
  • If defense picks pass, the expected gain is 3*q - 6*(1-q)
    • +
  • These are equal at q*: - 3*q + 15*(1-q) = 3*q - 6*(1-q) => q*= 7/9
    • +
+With a better quarterback, the offense will now run the ball MORE OFTEN. Since the defense knows about the quarterback, they will adjust their action. They will pick a pass defense more often. + +We can generalize the problem to a general case- +

Slide1

+Again, redo the calculation- +
    +
  • If defense picks run: Expected gain is -a*q + c*(1-q)
    • +
  • If defense picks pass: Expected gain is b*q - d*(1-q)
    • +
  • Setting these equal to each other: - a*q + c*(1-q) = b*q - d*(1-q) => q*=(c + d)/(a + b + c + d)
    • +
+I do not expect Bill Belichick to change his strategy from this example. And, off course, the Vikings should not pass the ball more than they run. + +Does this mean the model is a poor predictor? What assumptions need to be changed or added in this model? The simple model still teaches to think about both players in any situation. + +(Note: This post is inspired by Mike Shor.) +
]]> + + 284 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 49 + + + + + + + + + + 0 + 0 + + + + + + + + + + + + + + + 50 + + + http://econpointofview.com + + + + + + + 49 + 0 + + + + + + + + + + + + + + + + Mas-Colell Chapter 3: Classical Demand Theory Part 1 + http://www.econpointofview.com/2013/10/mas-colell-chapter-3-classical-demand-theory-part-1/ + Mon, 14 Oct 2013 19:20:48 +0000 + + http://econpointofview.com/?p=312 + + + +In economics, it is common to say that people maximize their happiness. What does that mean? How can we develop a model for maximizing happiness? + +While chapter 2 focuses on choice rules as the basis for a theory of the consumer, chapter 3 returns to preferences. From these preferences, MWG develops a theory of consumer demand. Much of this chapter reiterates the first chapter. Part of this post will look familiar. +

Axioms and Assumptions

+MWG assumes rational preferences. Rational preferences must be complete and transitive. Chapter 1 explained these. They are central to microeconomics. + +In addition to the axioms, which can never be violated in this analysis, MWG adds more assumptions. They may not always hold in reality or be used in every model, but simply the model. This is always the trade-off. + +Desirability- + +Consumers always want more. They never have "enough". While these seems silly, at some point I have had enough ice cream and become sick, MWG extends the time-frame. 2 gallons are too much for today, but not for a year. This is different from Rothbard, who looks at specific action at a specific time. + +Also, MWG is only looking at goods. Everything consumed is desirable. Bads, such as pollution, become goods simply by reframing the problem. Consumers might not want more pollution, but they can want more clean air. Here the good is clean air. This change does not affect the fundamental nature of the problem. + +Convexity- + +Throughout this chapter, MWG assumes that preferences are convex. Convexity is a mathematical term, but has an economic interpretation.  As the consumer receives more of a good, say apples, he will want each additional unit less than the previous, relative to other goods. This makes sense in most cases. This formulates "a basic inclination of economics agents for diversification." This is the diminishing marginal rate of substitution.  + +It is a little disappointing that assumptions so central to the analysis of demand are just that, assumptions. Yes,they are realistic in most cases, but not always. The student of methodology in me is saddened. Nevertheless, the analysis trots on. +

Preference and Utility

+We use these assumptions to construct a utility function. With a utility function, MWG can turn economics into calculus. However, even the assumptions made so far are not enough. One more in needed. + +MWG assumes that preferences are continuous. If preferences are continuous, then it is possible to create a continuous utility function. While continuity means something specific in mathematics, for the economists it has two important parts. + +First, every good can be broken into smaller and smaller goods. Consumers can have 2 beers or they can increase their consumption to 2.00000000001 beers. This may seem silly, but it has a more realistic explanation here at page 110. Instead of thinking of consumption at one particular time, consumption can be turned into a rate of consumption. Another partial beer at one moment might seem odd, but one extra beer consumed over a year is starting to approximate a continuous change in beer consumption. + +Second, and less controversial, each small change in a consumption bundle has a small change in utility. The consumer's "utility" does not all of a sudden jump when he has a bit more of a good. + +As a textbook, MWG makes these assumption clear, but does not defend them or acknowledge their problems . I will not harp on these too much more. From now on, we will just assume that preferences are continuous and are represented by a continuous and differentiable utility function. +

Maximization

+Assuming a utility function with the above characteristics and rational actors want to maximize their utility, consumer behavior is turns into a simple system of equations. + +The standard is the Utility Maximization Problem (UMP). Consumers will maximize their utility function based on some constraint. The common constraint is wealth. A consumer only consumes what he can afford, i.e. quantity of all goods multiplied by its price is less than his wealth. + +For each set of prices and wealth, at least one bundle is the best. Most the time this will only be one bundle, like the top ranked bundle in Rothbard. The function that assigns the best bundle for any set of prices and wealth is the Walrasian demand function. Given any prices and wealth, the rational maximizing consumer will choose a specific bundle, x(p,w), to consume. + +The solution to this problem is simple when the utility function and constraint are "normally behaved." + +First, the consumer will spend all of his money. This comes from our assumption that more is better. + +Second, the consumer will choose that proportion of goods relative to their prices. The rate that the consumer will trade goods and stay just as happy, his marginal rate of substitution, is equal to the price ratio. If it were not so, the consumer could trade one good for another at their market prices and get more utility. This would not be a maximum. + +Minimization + +This same problem can be examined in a multiple ways. The most common alternative way to view this is as an expenditure minimization problem (EMP). What is the least amount a consumer can spend to reach a certain level of utility? The math is slightly different, but the concept is the same. The UMP computes the utility of a maximizing agent given wealth and the EMP computes the minimum wealth need to reach a  utility level. The constraint and the max/min function are reversed in the two problems. + +MWG uses these properties to show some of the results already shown in chapter 2, namely, the law of demand. Prices and demand more in opposite directions. Demand curves slope down. +

Analysis

+The chapter of consumer demand is extensive. I decided to break it up for convenience. + +The dual approach of MWG is confusing, but helpful. Some results repeated, once using choice rules and the other using preference relations. It feels redundant, but the math is different. + +MWG spends most of the chapter proving things that do not seem important and assuming things that seem important. While it is nice to prove that continuous preferences lead to continuous utility functions, that is not the problem. The questionable step is the continuous preferences. The mathematician in me is left somewhat satisfied, but the economist is deeply skeptical. + +2 1/2 chapters in and I have learned a lot of math formalism, but little clear economics. It is unlike any book I have ever read. That is a good thing. +
Related articles
+]]> + + 312 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Stigler Chapter 3: Consumer Behavior + http://www.econpointofview.com/2013/10/stigler-chapter-3-consumer-behavior/ + Tue, 22 Oct 2013 17:58:03 +0000 + + http://econpointofview.com/?p=330 + + (Photo Courtesy of EcoNomNomNomics)[/caption] + +Prices provide information and incentives. But how do consumers respond to these price signals? Chapter 3 begins to answer this. + +It might seem daunting  to understand consumer responses. We are unique and respond differently. However, Stigler claims +
"In the response to price and income changes, consumers behave in a tolerably reliable and predictable way. The invariably obey one law as universal as any in social life; they buy less of a thing when its price rises. Their buying propensities are a stable function of prices and income..." (pg 20)
+This stable relationship forms price theory. +

The Price of the Goods

+Prices, usually talked about as dollars or euros, are simply the exchange ratios between two goods or what consumers have to give up for the good. If a hamburger is a dollar and a drink is 50 cents, two drinks exchange for one hamburger. The money facilitates this exchange. When Stigler talks about price, he means exchange ratio between goods. + +From this, we know people demand more of a good when the price falls.  Fewer other goods are required to obtain it. + +However, the demand depends on other factors. It is important to explicitly hold these constant throughout the analysis. The other factors are +
    +
  1. Prices of other goods
    2. +
  2. Income of the consumer
    3. +
  3. Tasters or preferences of the consumer
    4. +
+Only with everything else constant can price theorists analyze relationships. +

Downward and Continuous Demand Curves

+The most stable and true aspect of these relationships is that prices affect consumption. The graph of these two quantities is the demand curve, like the one at the top. + +Demand curves slope down, the famous "Law of Demand." If the price of a good rises, people demand less. This law always holds. It is an empirical rule and impossible to "prove", like MWG and Rothbard attempt. However, the examples are everywhere, if we have the right understanding of price as opportunity cost. Unfortunately, Stigler does not emphasize this. + +The claim that demand curves are continuou is more bold. An infinitesimally small change in price will change demand by an infinitesimally small amount. These seems odd. Can the price of apples rise 0.000000001 cents? If the price of apples rises, will a consumer buy .000000001 fewer apples? No. + +Unlike MWG, Stigler attempts to defend continuous changes as an approximation reality. Stigler adds three reasons continuity makes sense, on top of the one I mentioned about rates of consumption. +
    +
  1. Through rental or joint ownership, a consumer can use part of a good.
    2. +
  2. Consumers can vary the quality and size of a good. This changes the problem from demand for a specific good to a demand for a more general good. Stigler does not call this is a different good, unlike Rothbard. Rothbard claims that a demand curve applies only to goods that are subjectively the same.
    3. +
  3. Markets better approximate continuous functions. Not every consumer will cut consumption with small changes in price, but some will. Then the market, as a whole, has reduced consumption.
    4. +
+How responsive demand changes are to price changes is the slope of the demand curve or the elasticity of demand. It is negative, since price increases drive demand decreases. + +Besides the direction, it is hard to say much about elasticities in general. "The only general rule is that the elasticity of demand will be (numerically) greater, the better the substitutes for the commodities" (Pg 24). If a consumer can switch between similar goods, then when prices change in one consumers will switch to the close alternative. + +Elasticity also depends on the time-frame. Demand curves are more elastic over longer periods. If the price of oil rises, most people will not change their consumption tomorrow. However, if it stays up, people will discover alternatives to use less oil. + +This analysis of quantity adjustment to changes in price is at the center of price theory. However, we have so far assumed that everything, besides price, remains constant. This is rarely true and Stigler mentions how three other changes affect demand. +

Related Factors

+The prices of related goods are the second factor in demand. Demand for hot dogs will depend on the price of buns (complement) and the price of hamburgers (substitute). The change in price of one good affects the demand for a related good. We could create a cross-elasticity between these goods, if needed. + +The demand curve only makes sense if the prices of substitutes and complements is held constant. This is rarely true, making headaches for economists. Nevertheless, it is important to distinguish between the direct effect of changes in price with the indirect effect of changes in related prices. + +The third factor in demand is income. Consumer will consumer different quantities depending on income. Just with cross-elasticities of goods, this change is positive or negative. The consumption of some goods increases with income. These are normal goods. Sometimes the consumption will decrease with income. These are inferior goods. As college students get jobs and more income, they often decrease their consumption of ramen noodles. + +
+Tastes are the fourth factor. If the consumer's tastes change a lot, then it would be impossible to analyze these consumers. These unobservable changes in taste would overpower and change in prices, income, or prices of other goods. + +However, Stigler believes that tastes are stable, since stable relationships exist between prices or income and demand. Even apparent differences in tastes, such as old people ride motorcycles less because they like riding less, is not actually a different in tastes. Instead, it is a difference in costs, since older people are more likely to get seriously hurt in an accident. + +An explanation that relies on differences in taste is no explanation at all for the economist. You cannot predict or understand the nature of actions if tastes are the driving factor. Instead, Stigler assumes that tastes are fairly consistent across people. +
If a prediction is made on the basis of an economic analysis that assumes tastes to be fixed, and if the prediction is confirmed by experience, then the neglect of tastes has been justified." (Pg 39)
+Stigler makes two assumption about tastes. First, human wants are never fully satisfied. They are insatiable. Secondly, tastes are varied. People want different goods.  Both of these assumptions are found in MWG and Rothbard. +

Analysis

+The easiness of price theory makes it extremely attractive, compared to the cumbersome nature of Rothbard and MWG. It provides an easy tool for analysis. But, is it the right analysis? That is the important question. + +Stigler completely ignores utility theory. There is are no preferences, mapping of indifference curves, or utility functions. This leaves price theory less comprehensive. However, it also avoids the most questionable aspects of microeconomic theory. He does not need to make all the questionable assumptions about preferences to arrive at the answer. Instead, price theory focuses on what can be observed, prices. + +This emphasis is not perfect. Stigler switches between the observable price to the unobservable cost without being explicit. It would be nice to see this clearly. Price and costs are different, though related. + +Stigler also switches between individual consumer demand to market demand without always being clear. Specifically, that market demand is more continuous than individual demand is not an argument for continuous consumer demand. The focus should stay on individual actors. I understand why Stigler switches. It makes the story easier, but it is begging the question. +
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]]> + + 330 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More Free Educational Resources Online + http://www.econpointofview.com/2013/10/more-free-educational-resources-online/ + Fri, 18 Oct 2013 20:06:28 +0000 + + http://econpointofview.com/?p=334 + + favorite writers, has put his lectures online through his blog. + +I have spent my Friday night listening to his first lecture on the Economic Analysis of Law from 2012. It is interesting and I plan to listen to the audio version on my daily commute. Here are some other courses that Prof. Friedman has put online for our pleasure- +
    +
  • Intellectual Property Theory
    • +
  • Legal Systems Very Different From Ours
    • +
  • Economic Analysis of Law
    • +
  • Legal Issues of the 21st Century
    • +
  • Analytical Methods for Lawyers
    • +
  • Computers, Crime and Privacy
    • +
+I urge everyone to check these out. Maybe your commute will be more educational for a few weeks. + +How am I supposed to do my problem sets with these online? +
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]]> + + 334 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2013/10/well-put-my-friend-11/ + Sun, 20 Oct 2013 14:40:58 +0000 + + http://econpointofview.com/?p=338 + + + +Israel Kirzner spent an entire career trying to convince a majority of the economics profession they were wrong. Economists have failed to incorporate uncertainty, which Kirzner tries to correct in his magnum opus Competition and Entrepreneurship. + +He also attempted this mighty task in academic journals. In a 1997 article in the Journal of Economic Literature called "Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach", Kirzner tries again to explain the errors of standard Samuelsonian models and why the Austrians (Kirzner) are at least aiming correctly. +
At the individual level Austrians have taken sharp exception to the manner in which neoclassical theory has portrayed the individual decision as a mechanical exercise in constrained maximization. Such a portrayal robs human choice of its essentially open-ended character, in which imagination and boldness must inevitably play central roles. For neoclassical theory the only way human choice can be rendered analytically tractable, is for it to be modeled as if it were not made in open-ended fashion, as if there was no scope for qualities such as imagination and boldness. Even though standard neoclassical theory certainly deals extensively with decision making under (Knightian) risk, this is entirely consistent with absence of scope for the qualities of imagination and boldness, because such decision making is seen as being made in the context of known probability functions. In the neoclassical world, decision makers know what they are ignorant about. One is never surprised. For Austrians, however, to abstract from these qualities of imagination, boldness, and surprise is to denature human choice entirely.
+When Austrians talk about uncertainty with Samuelsonian economists, they are talking past each other. Samuelsonian economists call Knighting risk uncertainty. Austrians follow Knight in his definition of uncertainty. + +A Samuelsonian model, even a stochastic one, will never be able to include true uncertainty. Never is a bold word, but it appears impossible given present knowledge. However, I cannot account for uncertainty about the future, so we truly do not know. + +  +
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]]> + + 338 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + It's a Small World, After All + http://www.econpointofview.com/2013/10/its-a-small-world-after-all/ + Tue, 22 Oct 2013 18:08:02 +0000 + + http://econpointofview.com/2013/10/22/its-a-small-world-after-all/ + + + + 361 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Jumping to Conclusions + http://www.econpointofview.com/2013/10/jumping-to-conclusions/ + Wed, 23 Oct 2013 11:30:51 +0000 + + http://econpointofview.com/?p=362 + + + +Conclusions are easy to draw. I can look at any study and draw many different conclusions or policy prescriptions. That does not mean I am right or even that the data supports my argument. + +Floyd Norris of the NYT Economix fell into this trap yesterday. He claimed, indirectly, that the US federal government is not bloated. I take bloated to mean too big or too intrusive. To argue this, he cites the latest job numbers. +
In September, before the government shutdown, the government had 2,723,000 employees, according to the latest job report, on a seasonally adjusted basis. That is the lowest figure since 1966.
+I was not aware of this interesting statistic. However, it is difficult in statistics and empirical work to find data that actually leads to the conclusion that people hope to draw. + +The data do not speak for themselves. This is not "proof" whether the government is too big or not. It is not even clear evidence. Mr. Norris has to throw in two major assumptions that he does not tell the reader. + +1. The first assumption is that the number of employees is what people mean by "bloated" or at least a very good approximation. There are a number of different ways to measure whether a government is too big. Why not look at amount of government spending? With the same burden of proof that Mr. Norris requires, change since 1962, this measure would lead to the opposite conclusion. + + + +I am not arguing what the above graph actually tells readers. I do not know what is the best estimate of "bloatedness." But let us at least be honest and not jump to conclusions with explaining why number of employees is a good approximation. If it is not a good approximation, the argument falls apart. + +2. Even if the number of employees is a good approximation, the conclusion is not clear. Mr. Norris assumes that the 1962 levels were not bloated. If the federal government was bloated in 1962,  the same amount of employees today might mean it is still bloated. To tell a similar story- I was fat in high school. The fact that I was the same weight in college does not prove that I was not fat in college. + +I know why people take these shortcuts. I, regretfully, take them too. But they does not mean it is a good thing. Instead, let us be honest about our assumptions and let readers know.]]> + + 362 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Talking Past Each Other + http://www.econpointofview.com/2013/10/talking-past-each-other/ + Tue, 29 Oct 2013 14:49:00 +0000 + + http://econpointofview.com/?p=376 + + + +(Also posted at The Voice) + +While deep methodological differences exist across economists, many disagreements involve "talking past each other." Each side uses similar words to discuss fundamentally distinct, though related, concepts. This is especially a problem with every-day language words and leads to more confusion than understanding. + +One problematic term is information. Everyone believes they have a reasonable definition and that others have the same concept in mind. This is unfortunate and stagnated the discussion. Only through clarity of thought and language can these issues be resolved. +

Complete and Perfect Information, or Ignore for Now

+Doing what was necessary for early models, the economists started easy. They ignored it. They approximated that every actor knows everything. That made life easy. + +Since Marshall and Walras, economics focused on equilibria. Starting from perfect competition, complete and perfect information are crucial. How do supply and demand equilibrate? Everyone knows everything. After a few easy steps, boom, supply=demand. + +While all economists admit perfect information is an untrue assumption, it is still the default in many models. +

Information as Commodity Xn

+Stigler believed that academics should understand that information is not free. Academics make their living by selling information. +
And yet it occupies a slum dwelling in the town of economics. Mostly it is ignored: the best technology is assumed to be known; the relationship of commodities to consumer preferences is a datum.
+Instead, information was mostly ignored until Hayek in 1937 and 1945. With his inspiration, economists tried to take information seriously. Information is not "given" to actors. It is an important part of economic activity and the market is an efficient means transmission. + +George Stigler, in the "The Economics of Information", pushed Samuelsonian economists to study information. + +For Stigler, information is another commodity. Its cost is a "search" cost. Buyers and sellers do not know all prices and preferences. Most goods have many different prices at different locations.  Each store visited to learn the price costs time and effort. Due to these search costs, we should not expect that sticker prices are uniform across a market. It costs buyers and sellers to arbitrage these differences away. + +This leads to the realization that like any other commodity, there is an ideal amount of information. It is the point where the marginal search cost equals the expected marginal benefit in reduced price. Actors may not have prefect information, but they are rationally ignorant. + +In Stigler, this ignorance is symmetric. Neither buyers nor sellers know the differences exist. The equilibrium will not result in marginal cost = marginal price = marginal value, but it will arrive at a close approximation to that, with information costs as the "error" term. +

Asymmetric Information

+In the 1970's, Stigler's model was greatly expanded to include asymmetries. George Akerlof, Michael Spence, and Joseph Stiglitz are the godfathers of this field and together won the Nobel Prize in 2001 for their "analyses of markets with asymmetric information." + +Though everyone is still rationally ignorant, not everyone has the same costs of information and this asymmetry can change the equilibrium of markets. There is an inefficiency in the market since mutually beneficial trades do not take place. One party does not know that the trade is beneficial. Adverse selection, morale hazard and moral hazard become problems that lead to screening and signaling as remedies. Earlier models ignored these costs, which often produced different conclusions. + +While some of the conclusions are different between asymmetric and imperfect information, they are models within the same framework. Costs of information change the equilibrium. This framework leads to powerful conclusions. It is understandable why economists use it. As I've said in other posts, it is really hard to find any problem with a model, using that model. +

Information and the Market Process

+However, some economists were not convinced and developed a different model with a fundamentally different understanding of information. + +This part of economics was also inspired by Hayek, but read him differently. To them, Hayek was not arguing simply that the market is a cost-effective way to send information. Instead, the process of buying/selling/transacting/cooperating within a market system generates new information that would not otherwise exist. + +It is not that the information was very costly and now, because of the market process, it is cheaper so actors buy it. The supply/cost curve of information does not suddenly shift. Instead, the curves are first created through the process. +

Where to Go?

+Integrating these two "types" of information into models would benefit economics. This is not easy. If I could do it, it would be in the AER, not on a blog. Yet, difficult does not mean impossible or unimportant. + +Either someone develops a theory that includes both concepts adequately and concisely to distinguish between the two types (such as Frank Knight roughly did with the ideas of uncertainty and risk) or we will continue to talk past each other.]]> + + 376 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2013/10/well-put-my-friend-12/ + Thu, 24 Oct 2013 20:29:42 +0000 + + http://econpointofview.com/?p=401 + + Peter Boettke Peter Boettke[/caption] + +I am doing some work on the economics of information. It is a fascinating field and I will have more posts soon. I just wanted to share this great comment from Pete Boettke's 2002 article, "Information and Knowledge: Austrian Economics in Search of Uniqueness." +
"The knowledge that defines the equilibrium state of affairs emerges within the process leading to that equilibrium state rather than existing anterior to that process. Without the market process to generate it, the relevant knowledge would not exist. Economists, Hayek warned, cannot continue to assume given knowledge. A secondary point of that essay1 was to suggest that the logic of choice is a necessary component of an explanation of the market process, but it is not sufficient. The logic of choice must be complimented with empirical examination of how learning takes place within alternative institutional settings." (Pg 267, Emphasis Added)
+Boettke is reminding us of two important things. First, the market process generates information that is not "given." It does not exist ex ante, waiting to be discovered by actors who are willing to pay the search costs. It definitely is not "given" in the perfect and complete information sense. Instead, it comes from within the market. Most economists do not appreciate or understand this point. + +Secondly, Boettke urges economists, even those who understand the first point, to remember the institutions. Different arrangements generate different information and only through empirical analysis can we know the types of information generated. "Markets" tend to generate information about profit opportunities, that is opportunities for mutual gain between people. Extractive regimes tend to generate information about profit opportunities, that is opportunities for self gain through extraction. + +1. Hayek's 1937 essay "Economics and Knowledge."]]> + + 401 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + What I'm Reading + http://www.econpointofview.com/2013/10/what-im-reading-2/ + Sun, 27 Oct 2013 18:05:52 +0000 + + http://econpointofview.com/?p=438 + + MWG, Stigler, and Rothbard), I am always trying to read stuff that I want to read for its own sake. Some reading is a consumption good. +

Economics

+

Cost and Choice by James Buchanan

+I think of myself as a subjectivist and think I understand subjectivist economics. In this book, James Buchanan takes it to another level.The most important concept in economics is opportunity cost, which is a completely subjective idea in the mind of an actor. It is something we can never measure. How then can we use it in analysis? James Buchanan builds his story through the history of thought on how to apply opportunity cost to economics. It has been very interesting. +

Time and Ignorance by Mario Rizzo and Gerald O'Driscoll

+Somewhere between philosophy, epistemology, and economics, lies Time and Ignorance. Rizzo and O'Driscoll are trying to explain two extremely difficulty subjects in one book. Two subjects that economics does not have a good answer for. I probably won't get through this anytime soon, but it is intriguing. +

Non-Economics

+

The Signal and the Noise by Nate Silver

+A book on prediction does not seem like something for an economist who enjoys Mises and Hayek, but this book is great. It has changed my mind on so many things about prediction. We all need to make predictions all the time in life. Why not try to do it right? To say that prediction is impossible, while a good impulse, does not get me very far. Instead, this book treats prediction like a "science." Not in the sense that we can find big T truth, but in the sense of applying a systematic approach to analysis. This book has turned me into a Bayesian. +

Witness by Whittaker Chambers

+This is my favorite book and I "reviewed" it before. I recommend it to everyone. The second time is just as enjoyable as the first. +
]]> + + 438 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Mas-Colell Chapter 3: Classical Demand Theory Part 2 + http://www.econpointofview.com/2013/10/mas-colell-chapter-3-classical-demand-theory-part-2/ + Wed, 30 Oct 2013 15:23:55 +0000 + + http://econpointofview.com/?p=449 + + MWG People Reading MWG[/caption] + +Note: This chapter was long so the summary has two parts. The first part is here. + +Out of the utility maximization problem (UMP) and the expenditure minimization problem (EMP), MWG develops four different functions that help understand consumer demand. Two are from the UMP and two from the EMP. +
    +
  1. Walrasian Demand Function x(p,w)- I have money and goods cost a certain price, what bundle of goods will I buy?
    2. +
  2. Indirect Utility Function v(p,w)- With some money and prices, how happy can I become?
    3. +
  3. Expenditure Function e(p,u)-  I want to be*this* happy. How much do I need to spend?
    4. +
  4. Hicksian (or compensated) Demand Function h(p,u)- If my wealth could be compensated to reach a level of utility, what goods would I buy?
    5. +
+These distinctions are subtle, but each explains certain characteristics of demand. Also, economists can measure some of these, at least in theory. While we never be able to measure utility and therefore cannot estimate the Hicksian. However, in theory we can estimate the Walrasian. Therefore, through the Walrasian can be used to test the Hicksian. + +Each of these represents a different economic concept. These concepts and connections between them make up a bulk of the third chapter. +

Wealth and Substitution Effects

+Much of economics deals with price changes. If the price of a good goes up, people buy less of it. This is clear. However, this change in behavior has two different theoretical parts. + +Consider gasoline. When the price goes up, people consume less because some people switch to other options such as natural gas or wood. This is call the substitution effect. However, people also consume less because they are relatively poorer. I have less real wealth, so I consume less. This is the wealth effect. In reality it is impossible to tell what part of the change in consumption is due to each, but it helps to break them apart theoretically. + +Most of the time when economists talk about price changes they ignore the wealth effect. This is a good estimate if the good is a small part of someone's budget. A change in the price of brown sugar does not cut my real wealth in any meaningful sense. + +In the Hicksian demand function, the wealth effect does not exist since wealth is "automatically" compensated to cancel it out. Because the wealth effect is not a problem, the Hicksian focus on the substitution effect. A substitute for a good is another good for which consumption increases when the first good's price increases. The consumer switches between the goods. Because the preferences are assumed to be convex, every good has at least one substitute. There is always something to switch between. +

Welfare Evaluation

+MWG goes through a long mathematical proof showing that preferences can be inferred from people's actions. Therefore, we can know people's real preferences and judge whether people are better or worse off. This is how economists can do welfare analysis. + +If the price of a good goes up, consumers of that good are worse off. They will be unable to consume as much. This is obvious. The tricky part is when MWG tries to quantify how much better off a person is. + +Basically, how much would the person be willing to pay to avoid or make the change? If he would pay $20, we can say that he is $20 better or worse off. With this, welfare analysis across people is the summing of all of these quantities. To be even more fancy, it is an integration of all of these quantities. +

Analysis

+This part of chapter three was much more in depth mathematically. Some very simple economic concepts were explained in great detail in mathematics. It is an exercise in deriving economics without needing to know economics. A pure mathematical theorist could get to the same results, but not use the same terminology. + +Yet, it is helpful to be so explicit with some fuzzy subject. The distinction between wealth and substitution effects can be blurry in the real world and in our minds, but when put into a specific function, they are clear. They are clear if you understand the math. + +I still cannot follow how we got from utilities are ordinal to they are cardinal and we can attribute a dollar amount to them. I believe I follow the math derivation, but not the methodological process. It will forever be in my mind until someone explains it. +
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]]> + + 449 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Lars Hansen- The Nobel Third Wheel + http://www.econpointofview.com/2014/01/lars-hansen-the-nobel-third-wheel/ + Thu, 02 Jan 2014 15:47:35 +0000 + + http://econpointofview.com/?p=476 + +

+(Note: I thought I had published this post earlier, but never did. It might seem a little random to publish this today, because it is random. However, I think Lars Hansen's work is important and decided to still publish, belatedly.) + +It is not very often that I can say a Nobel Laureate did not get enough attention after his award. I think that is safe to about this year's winner, Lars Hansen. + +His co-Laureate's Gene Fama and Robert Shiller had been household names (okay, only a weird subset of households) for a long time. Business magazines, newspapers, and economics blogs would discuss the two figures often. This was often the case because caricatures of Fama's and Shiller's work fits into a headline- "Market is ALWAYS Rational" or "Market is Irrational." + +While neither of these headlines are true of their work, they are catchier than one about Hansen- "Parameters can be Better Estimated." I would not read that newspaper and I blog on economics. If I brought up Fama's and Shiller's work at a party people might discuss. If I brought up Hansen's work, I would hear crickets. But just because that is true, does not make it right. Hansen's work is important and people outside of economics Ph.D. programs should be aware of it. +

Who is he?

+Lars Hansen got his Ph.D. from Minnesota in 1978. He is a Minnesota macroeconomist from the days of the freshwater/saltwater divide. His time at Minnesota overlapped with two other famous macro Nobel Laureates, Thomas Sargent and Chris Sims. Since 1981, he has been at the University of Chicago economics program. +

What did he do?

+Along with his co-lauretes, Lars Hansen won the Nobel for “for their empirical analysis of asset prices." He is most famous for developing an econometric technique known as generalized method of moments (GMM). It is a complex technique that helps improve estimations with fewer assumptions than traditional estimators. It is not a simple idea and even Tyler Cowen basically punted when trying to explain GMM. He quotes from some lecture notes- +
Unlike maximum likelihood estimation (MLE), GMM does not require complete knowledge (BCA: read assumptions) of the distribution of the data. Only specified moments derived from an underlying model are needed for GMM estimation. In some cases in which the distribution of the data is known, MLE can be computationally very burdensome whereas GMM can be computationally very easy. The log-normal stochastic volatility model is one example. In models for which there are more moment conditions than model parameters, GMM estimation provides a straightforward way to test the specification of the proposed model. This is an important feature that is unique to GMM estimation.
+Basically, it allows the econometrician to do more with fewer assumptions about the data. John Cochrane describes it as follows- +
Like all of Lars' work, it looks complex at the outset, but once you see what he did, it is actually brilliant in its simplicity. The GMM approach basically says, anything you want to do in statistical analysis or econometrics can be written as taking an average.
+I cannot improve on Cochrane's explanation and so will leave it to him. It takes a little work, but Cochrane shows the beauty well. I encourage you to follow the link. For now, we economists (and people who care about economics) can thank Lars Hansen for making our understanding less bad. +
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]]> + + 476 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Alumni Research- Macro Imbalances and Culture + http://www.econpointofview.com/2013/12/alumni-research-macro-imbalances-and-culture/ + Tue, 03 Dec 2013 10:25:04 +0000 + + http://econpointofview.com/2013/12/03/alumni-research-macro-imbalances-and-culture/ + + + + 477 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2014/01/well-put-my-friend-13/ + Thu, 02 Jan 2014 22:19:14 +0000 + + http://econpointofview.com/?p=489 + + + +This comes from page 40 of the Liberty Fund edition of Cost and Choice by James Buchanan- +
In one sense it might be said that the neoclassical economist has succumbed to the temptation to make his whole theory more general than its methodology warrants. This temptation has been increased by the parallel, and equally confused, logical theory of economic choice, which itself is completely general but which lacks predictive content. This purely logical theory, sharply distinct from the classical in its predictive implications, finds its origins in the subjective-value theorists, but its more explicit sources are Wicksteed, the later Austrians, and the economists associated with the London School of Economics. In full flower, this is the “subjectivist” economics espoused by Hayek and Mises to which I earlier made reference. Some reconciliation between the genuinely scientific theory of economic behavior and the pure logic of choice is required. The achievement of this reconciliation is one of the major purposes of this exploratory study in which the notion of opportunity cost becomes the analytical coupling device.
+Cost and Choice is Buchanan's attempt to topple the dominant cost theory, which separates cost from choice. All textbooks start out by defining cost as forgone opportunities. However, soon they start talking about costs in an objective sense, such as the costs that a firm faces. This is completely separate from the original logic of choice. + +Neoclassical (or Samuelsonian) economists make this sacrifice to have predictive power. A purely subjective theory has can predict little. However, they then make the mistake of drawing normative conclusions from this framework. Buchanan thinks this is too great of a task for this method. + +Buchanan's proposal, if taken seriously, requires a renewal of much of the normative understanding of economic theory. Traditional welfare economics is impossible under Buchanan's method, which might be why so many are afraid of it. +
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]]> + + 489 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Rothbard Chapter 2: Direct Exchange Part 1 + http://www.econpointofview.com/2014/01/rothbard-chapter-2-direct-exchange-part-1-2/ + Tue, 07 Jan 2014 18:08:37 +0000 + + http://econpointofview.com/?p=504 + + + +Long ago, I posted on the original chapter on Rothbard. This continues his Austrian magnum opus. +

Interpersonal Action

+The first chapter of Rothbard explained how individuals act in isolation to achieve ends. Now, he moves on to actions involving more than one person. + +Rothbard starts with violent action. This is unique in the second chapter of a treatise/textbook. For most of MES, Rothbard is explaining action in a free-market. In order to understand voluntary exchange, it separated from other types of exchange. + +Violent action requires that the gains for one individual come at the expense of the another. Actions under violence are fundamentally different from free exchange. Rothbard's logical deduction (praxeology) assumes a voluntary contractual society. + + +

Exchange

+All action is exchange. Chapter one dealt with intrapersonal exchange. However, most of MES is the study of interpersonal exchange. +
"The major form of voluntary interaction is voluntary interpersonal exchange. A gives up a good to B in exchange for a good that B gives up to A. The essence of the exchange is that both people make it because they expect that it will benefit them; otherwise they would not have agreed to the exchange. A necessary condition for an exchange to take place is that the two goods have reverse valuations on the respective value scales of the two parties to the exchange." (emphasis in original- Pg 85)
+
The last sentence is important to remember. In a voluntary exchange, each party at the time of exchange values the good he is receiving above what he exchanges. This is a necessary condition for exchange.
+
+
However, it is not sufficient. Both parties must know that the other party is willing to trade. This requires knowledge of the other person's assets and subjective ordinal rankings. With knowledge and inverse rankings, an exchange will occur.
+
+
The diminishing law of marginal utility explains when the trading ends. A marginal unit trades if each actor receives something with a lower ranking than what he gives. Other units do not matter. Only the marginal unit matters. Rothbard constructs a chart that is similar to a supply and demand graph. In dealing with direct exchange, we need two charts, because both goods must have a supply and demand that intersect.
+
+

from page 88 of MES

+

+

+The x's represent the ranking of the item being given up by person A and B, respectively. The circles are the item received. The third exchange does not occur, because person B (on the right graph) does not value the marginal unit in the third exchange above the lowest ranking of the item he has. + +
+

Exchange-Value and Production

+In chapter 1, Robinson Crusoe only values means because of the ends they directly satisfy. They have use-value. With exchange, goods can have exchange-value. +
"The existence and possibilities of exchange open up for producers the avenue of producing for a “market” rather than for themselves. Instead of attempting to maximize his product in isolation by producing goods solely for his own use, each person can now produce goods in anticipation of their exchange value, and exchange these goods for others that are more valuable to him." (pg. 89)
+Now an actor can produce for use or exchange. Rothbard stresses that in either case, since all valuation is about satisfying ends, it is the consumer who drives production. All value, ultimately, comes from consumption. If consumers suddenly stop valuing wine, producers will lower the exchange value ranking of wine. This might lead to fewer producers, but it was the consumer's changing use value that initiated everything. +

Division of Labor

+Up to this point, Rothbard has implicitly assumed that both parties are exchanging different goods. In order for them to exchange different goods, they must have relatively specialized in obtaining those goods. This specialization can result from differences in nature-given factors or differences in the desirability and skill of labor. If I do not mind farming corn and it is easy for me, it makes sense for me to, again relatively, specialize in corn production if you hate it. + +The odd situation is when you are better at both type of production than I am. Here it pays for you to specialize in the production where you have the greatest relative advantage. Ricardo had a simple proof of this two hundred years ago. Rothbard quotes Kenneth Boulding, but I like the Michael Jordan story. Even if he is a great typist, it does not pay for Jordan to type. He is better at playing basketball or underwear commercials. + +Rothbard stresses how this simple idea of comparative advantage, derived from the action axiom, explains the existence of society. Again, this is uncommon ground for my friends who only read Varian and MWG. +
"Thus, in explaining the origins of society, there is no need to conjure up any mystic communion or “sense of belonging” +among individuals. Individuals recognize, through the use of reason, the advantages of exchange resulting from the higher +productivity of the division of labor, and they proceed to follow this advantageous course." (pg. 100)
+

Conclusion

+It is incredible how different the feel of MES is than MWG or Stigler, even though nothing contradicts each other. + +It makes some sense, since Rothbard is writing a treatise. However, Rothbard believes MES can be a textbook, but economics cannot be separated from the rest of social thought. It can be highlighted but never separated. + +In one sense, this is good. Rothbard is explicit about the rest of his social philosophy. He openly assumes voluntary society. In MWG, this is assumed and not mentioned. As always, Rothbard's approach has an opportunity cost. + +The most striking difference here from MWG and Stigler is Rothbard's introduction of knowledge. Here he stresses the importance knowledge. In the opening of other texts, agents are assumed to know about possible gains from trade and exploit them. Austrians have always had a unique emphasis on knowledge and learning. + + +The most frustrating part in MES is how basic it is. Of course, trade only happens when both parties think they will benefit and know about the opportunity. I understand that Rothbard is building up a theory and the foundation is important. Also, this book is meant to be used by laymen and these basic tools for modeling are important and sometimes forgotten. + +For example- We all have wondered why an exchange does not happen. "Why don't they just do this?" Rothbard tells why. There are only three obstacles. +
    +
  1. One of the parties is not aware of the gain, in which case it is in the interest of the knowing party to spread his knowledge.
    2. +
  2. The parties do not have reversed valuations of the two goods, in which case the third-party who is wondering does not know what he is talking about.
    3. +
  3. Some sort of violence (state-sponsored or not) is inhibiting the exchange, in which case the theory Rothbard explains does not hold.
    4. +
+Keeping these three things in mind when wondering "why not" will help us all clear our thinking.]]> + + 504 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + The Landscape is Changing + http://www.econpointofview.com/2014/01/the-landscape-is-changing/ + Fri, 03 Jan 2014 16:50:41 +0000 + + http://econpointofview.com/?p=507 + + + +Earlier I retweeted an article from Bloomberg on part of the changing landscape for new economics Ph.D's. + +With the current AEA meetings happening now in Philly in snow or shine, it discussed the new opportunities available to economists. +
The American Economic Association’s annual meeting kicks off today and EBay won’t be the only technology company aiming to tap more brainpower at what doubles as the discipline’s premier job fair. In the past few years, Google Inc. (GOOG), Amazon.com Inc. (AMZN) and Microsoft Corp. (MSFT) have amassed teams of in-house economists to make sense of the oceans of data they’re collecting. + +The trend has also been a boon for researchers handed some of the world’s richest and largely unexamined treasure troves of human behavior. + +“It used to be that if you got a Ph.D. in economics, you went to government, you went to academics, you went to a consulting firm, or you went to Wall Street,” said Greg Rosston, deputy director of the Stanford Institute for Economic Policy Research and a lecturer at the university near Palo Alto, California. “Now there’s another option.”
+"Another option"- While most Ph.D. economists are looking for academic jobs, it is nice to know the private-sector has opportunities for those who do not want the ivory tower. The problems which companies like Amazon and Google are working on and the data they have to help would have been unimaginable just a few years ago. Now, it is here. + +It is an exciting time for data-driven economics. The econ point of view is the key to understanding these new questions and companies are starting to take notice. This is part of the reason my school, the Barcelona GSE, has added a new Master in Data Science. + +  +
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]]> + + 507 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + A textbook graph that even Augusto Costa and Cristina Kirchner should be able to understand + http://www.econpointofview.com/2014/01/a-textbook-graph-that-even-augusto-costa-and-cristina-kirchner-should-be-able-to-understand/ + Sun, 05 Jan 2014 11:27:32 +0000 + + http://econpointofview.com/2014/01/05/a-textbook-graph-that-even-augusto-costa-and-cristina-kirchner-should-be-able-to-understand/ + + + + 526 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Rothbard Chapter 2: Direct Exchange Part 2 + http://www.econpointofview.com/2014/01/rothbard-chapter-2-direct-exchange-part-2/ + Thu, 09 Jan 2014 16:00:03 +0000 + + http://econpointofview.com/?p=541 + + + +Terms of Exchange + +We have already learned that an exchange only happens if both traders have inverse rankings of the two goods and that each knows a trade is possible. Even in direct exchange, this trade leads to prices. However, these prices are not in dollars or euros, but simply a rate of exchange. If a cow trades for 5,000 berries, the prices of the cow was 5,000 berries. The price of 5,000 berries is 1 cow. But why 5,000 berries and not 4,000? + +In chapter one, we learned that all action maximizes psychic revenue. The actor wants the highest possible ranking. Similarly, in any trade, the goal is the highest possible ranking, if it is above the psychic costs. This cost is what the actor gives up in the trade. It is his next best option. + +It could be the cow he physically trades or something else he could get for a cow. Assume the actor has the following value scale of goods he can have- +
    +
  1. 5,000 berries from trader A
    2. +
  2. 100 fish from trader B
    3. +
  3. 4,000 berries from trader C
    4. +
  4. 1 horse from trader D
    5. +
  5. 1 cow from holding
    6. +
+Even though the person traded the cow for 5,000 berries, this is not the cost. The cost is 100 fish, his next best alternative. Also, clearly the actor prefers to deal with trader A than with trader C. The seller will always prefer the highest possible selling price and, conversely, the buyer will always buy at the lowest possible price. This give and take between buyer and seller determines the price of a good. +

Determination of Price

+In order for a trade to occur the highest buying price must be above the lowest selling price. If our above trader is selling a cow, the price in grapes must be above the 100 fish on his ordinal ranking. If we build a similar scale for the other trader, we will have the same conclusion. In an isolate exchange, this is all we can say about the price. It is not very satisfying. + +However, trade is often not isolated, because there are multiple buyers and sellers on the market. Imagine that for the above ranking, 4,999 grapes, would be below 100 fish, so that 5,000 is the lowest acceptable price for the seller. Now, one more seller of cows for grapes enters the market. This person is willing to sell a cow for 4,900 grapes. Clearly, the buyer will no longer trade with the original seller, but switches to the new entrant. + +How does this affect the price? Well now, the price is somewhere the lowest possible price from the lowest seller and the lowest price from the second lowest seller. Similarly, for buyers. the price is somewhere “at or below the maximum buying price of the most capable buyer and above the maximum buying price of the next most capable buyer” (pg 110).  As more buyers and sellers enter the market, this logic continues. + +This has some standard economic results. If more and more buyers enter the market, the price must remain constant or rise, since these new entrants might raise the maximum of the most capable or second most capable if they are that person. The same for sellers. More sellers will lead to a lower price. More sellers and buyers will lead to an increase is quantity exchanged. +

Supply and Demand

+

The graph from page 120 shows this. Notice the demand and supply curves are not continuous. Instead, at any price, a discrete number of new buyers and sellers might be willing to trade. This is standard supply and demand, derived from ordinal value scales, compared to maximizing a utility function, which is the standard method. From this framework, we can do all the comparative statics that are usually done with supply in demand.

+ +

Specialization and Production of Stock

+Up to this point, the analysis has revolved around a given stock of goods. However, all goods must be produced. Even seemingly nature given goods requires effort to find and use. + +As alluded to earlier, production requires a division of labor or specialization. Rothbard echos Adam Smith (Book I Part III- That the Division of Labour is Limited by the Extent of the Market) and David Ricardo (comparative advantage) when he states +
"the further an exchange economy develops, the further advanced will be the specialization process. The basic of specialization has been shown to be the varying abilities of men and the varying" (pg 153-154)
+These two attributes drive production, and therefore amount of goods (wealth) in an economy. Now the supply is from those who originally had the good and those who produced it, because it has exchange value. + +Adding in production does not change the underlying supply and demand framework from above. Now, however, the goods have both use-value and exchange-value. If the ranking of the market price of a cow is above the ranking of the cost of raising a cow for certain individuals, they will enter the market and be a new seller. This will push the price down, again, standard supply and demand. +

Conclusion

+This chapter dealt with supply and demand in a unique way. Instead of assuming producers and consumers from the beginning, it starts from human action. Actors want to maximize their revenue and so trade. This develops into markets. + +Notice that actors want to maximize psychic revenue and not psychic revenue minus psychic costs, i.e. psychic profit. In fact, the meaning of psychic profit is meaningless since we cannot subtract our fifth ranked cow from our first ranked 5,000 grapes for a profit of 4. It is wrong on two levels. First, adding and subtracting ordinal numbers is silly. Secondly, the fifth ranked cow is not the cost. The cost is the opportunity cost, which is the next best available alternative. + +Without psychic profits, welfare economics cannot exist. I have written this before. This is a big problem for economists who view themselves as social planners who should make the world a better place by some measure of welfare or psychic profits. It also makes modeling collective action extremely difficult, even for economists from similar viewpoints. + +Rothbard commits to ordinal rankings, opportunity costs, and subjectivism. Unless the reader pays attention to that, this whole process seems like a waste time. He spends almost 100 pages deriving supply and demand. For other textbooks, it takes a few questions. The other textbooks take shortcuts. Again, this has it benefits. Basic price theory is much easier to understand quickly, though supply and demand often lose their connection to action and exchange. Whether that trade-off has a higher ordinal ranking than Rothbard's method is why I am learning both. +
Related articles
+ +
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]]> + + 541 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Muses of Blogging + http://www.econpointofview.com/2014/01/muses-of-blogging/ + Wed, 08 Jan 2014 14:00:45 +0000 + + http://econpointofview.com/?p=550 + + + +Noah Smith posted a list of his "Heroes of Blogging." For Noah- +
"These are the bloggers not just whose blogs I enjoy - there are a huge number of those - but who I think are using their blogs to do something really unique, invaluable, and positive for the world."
+In a twitter exchange, Noah elaborated- + +I decided to emulate Noah (imitation is the sincerest form of flattery), but with less acclaim. These are my "muses of blogging." I have no idea whether they are doing something invaluable or positive for the world. + +Yet, I read everyday, because these blogs inspire me. So this is a simple list of the bloggers who inspire me as a blogger and economist. I think they will inspire others and hopefully they are changing the world for the better. + + + + + +Daron Acemoglu and James Robinson- They started their blog to promote Why Nations Fail, which is about the importance of political institutions. By blogging, they show that top academic researchers at the height of their academic careers (compared to Krugman who is past his peak) can still engage broader audiences. Even though they do not engage to the level of most bloggers with comments and responses, seeing their musings on topics which are not already published is a constant inspiration for blog posts and scholarly research. + +Peter Boettke + +Pete Boettke- He is the most frequent blogger at one favorite blog, Coordination Problem, and posts on political economy and the market-process. These are my two main interests within economics and Boettke is always a source of inspiration. Constantly, Boettke reminds me that economics is an important topic to pursue passionately. The blog also includes career advice for someone pursuing scholarly economics from an Austrian tilt. + +John Cochrane- At my heart, I am a microeconomist. Micro makes more sense to me. However, most of the best blog debates are about macroeconomics. Cochrane writes so that even I can understand what he is saying. I think he is the clearest macroeconomist online. His posts on New Keynesian vs. Old Keynesian stimulus were ah-ha moments for me. He does not shy away from extremely complex ideas and still works to make them understandable to dummies like me. His posts include everyday language and complex equations. It is a rare talent. Also, as a top-tier academic, it is fun to see him battle with other economists. Part of the fun in economics are the debates and debates should be heated, though respectful. Cochrane follows this approach. + + + +Jonathan Finegold- My blog is almost a poor imitation of Jonathan's. Most clearly, my chapter by chapter summaries follow directly from his posts on Keynes' General Theory. He is a young guy with an open mind who is trying to genuinely work through economic ideas. He comes from an Austrian point of view, but does not reject Krugman or Keynes without trying to first understand them. Instead, he works through the ideas and then tried to refute them without allegiance to any school of thought. + +David D. Friedman + +David Friedman- While he blogs about economics less than I like, I always enjoy David Friedman's posts. He is a clear writer and ruthlessly applies economic logic and admits what are truly difficult questions that he does not have an answer for. If I do not think David Friedman would understand my economic reasoning, it is probably because my reasoning is bad and needs updating. His posts on law and legal systems are superb and different from any blog I have ever read. I have learned more about Muslim law in the law few months than I ever imagined. Also, he blogs about nerdy stuff like WoW, which also keeps me happy. + + + +Tim Harford- I almost feel bad putting him on this list. In many ways, economics blogs enjoy being a small isolated group. We are a band of loners fighting against the outside world who fails to listen. Yet, Harford is HUGE. His books are popular and his blog probably gets more views than all the others on this list combined. I have to put him, because no one is a better writer when explaining basic microeconomics principles. Almost everyone else on this list is an economist first. Harford is a journalist and it shows in his quality. When I feel myself writing like an economist, which is not a compliment, I read more of his blog (or Deirdre McCloskey, David Friedman, Steven Landsburg). + +English: Head shot of economist Robert P. Murphy + +Robert Murphy- Free Advice might have been my first exposure to the "econ blogosphere." After reading books and watching lectures by Murphy, I somehow ended up and his site and it has been in my RSS feed ever since. He keeps economics light-hearted and fun. He is the best Austrian at dismantling non-Austrian macro. He is open-minded and thoughtful. Yet, he is not afraid to challenge the orthodoxy, whether within Austrian or neoclassical economics. He continues to learn and grow as an economist, compared to many who seem to have the answer and now are just letting other people in on the secret. Plus, he openly blogs about Christ in a blogging world which generally is hostile to the Word. Keep up the fight, Bob. + + + +Noah Smith- Noah is the original economics student blogger. He invented the sport. He was one of my original inspirations after one of my professors started talking about a punk-kid who was blogging. While economics is important, life is also supposed to be fun. Noah always keeps people reminded of it. Some people are probably turned off by his humor. If you can handle the snark, it is enjoyable.  If you are patient, you will learn some stuff some finance and macro. + +Mark Skousen + +Mark Skousen- Most econ bloggers and followers might find this one strange. Mark is not a popular blogger and does not blog often. However, his blog was one of the first I discovered. His book, Economics on Trial, was the first economics book I read. I'm sure I understood none of it, but he was my original muse. For this, I always make sure to follow his blog and his monthly posts are enjoyable. He is an original thinker with inspirations from Austrians and Chicago-school and he works to integrate them. The BEA is putting his idea for a new measure of national wealth into practice. His statistic is clearly inspired Austrian capital theory, although not internet Rothbardians.  + + + +Simon Wren-Lewis- I discovered his blog rather late, but thoroughly enjoy it. There is nothing flashy about his blog, Mainly Macro. There are no goofy pictures or snarky comments. Instead, he just clearly discusses macro questions with an emphasis on policy. Every post tackles tough questions. Whenever I see a post by him, I know I will learn something. He is another one of the macro writers who makes me feel like I understand what he is saying, though I rarely completely agree. + +I hope there are bloggers on this list that you do not follow, but you will start. They will challenge, teach, and inspire you in 2014. They did so for me in 2013. +
]]> + + 550 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Keynes on General "Price-Levels" + http://www.econpointofview.com/2014/01/keynes-on-general-price-levels/ + Thu, 09 Jan 2014 18:46:17 +0000 + + http://econpointofview.com/?p=634 + + The General Theory on outlining the relationship between the aggregate supply function and the aggregate demand function. To me, a price-level is just an aggregate across prices. It is a simplification for looking at the whole economy. + +That is why I was surprised when I reread his take on price-levels in chapter 4. +
"the well-known, but unavoidable, element of vagueness which admittedly attends the concept of the general price-level makes this term very unsatisfactory for the purposes of a causal analysis, which ought to be exact. Nevertheless these difficulties are rightly regarded as 'conundrums'. They are 'purely theoretical' in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance to the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary."  (emphasis added-Pg 32 of my pdf version)
+Price-levels are not unnecessary for historical analysis. Instead, they are unnecessary or improper for any causal theory, which is Keynes's endeavour. If anyone one can elaborate on why this aggregation is unnecessary, but supply and demand aggregation is vital, I will be grateful.]]> + + 634 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Mas-Colell Chapter 4: Aggregate Demand + http://www.econpointofview.com/2014/01/mas-colell-chapter-4-aggregate-demand/ + Sun, 12 Jan 2014 19:58:40 +0000 + + http://econpointofview.com/?p=639 + + + +After developing classical demand theory for individuals, it is natural to try to extend this to many consumers. MWG address three possible questions and solutions, which he calls the econometrician, the positive theorist, and the welfare theorist. +

The Econometrician

+
"The econometrician is interested in the degree to which he can impose a simple structure on aggregate demand functions." (pg 105)
+The econometrician has some aggregate data on different variables. He is looking for a simple way to analyze it and knows his classical demand theory. Is there a simple way for him to combine these two ideas? + +The first and obvious way to look at aggregate demand requires a simple summation of individual demand. Each consumer has a (Walrasian) demand function, which depends on prices and his wealth. Adding them together results will result in an aggregate demand function for each good in the economy- + + +

x(p,w1,....,wN)= ∑xi(p,wi)

+Unfortunately, it still depends on each individual's wealth. This has not helped. + +However, the econometrician does have information on W, the overall wealth. When will the demand for each good, x, only depend on prices and overall wealth? Or, put another way, when will two separate distributions of a certain wealth result in the same aggregate demand function? + +This will only happen under very specific situations. We need a demand function when a small decrease in the wealth of one consumer will cause him to eat less apples. With W held constant, that means that someone else has an increase in his wealth. That consumer must increase his consumption of apples exactly as much as the first consumer decreased. That means the overall demand only depends on the total wealth. This is pretty unlikely. + +The reason for this difficult is that we have asked a lot of the theory. We have said that any distribution of wealth must have the same demand, whether egalitarian or dictatorial. Surely, in the real world, any distribution is not necessarily possible. What if we restrict the possible distributions and only deal with a smaller set? + +It turns out that if some distributional rule determines individual wealth, then we can aggregate. For example, if the government plays some role is redistributing wealth, each individual's wealth depends on the total wealth, or wi(p,W). Now, our simple summation works- +

x(p,W)= ∑xi(p,wi(p,W)) or

+

x(p,W)= ∑xi(p,W)

+

Aggregate demand only depends on the prices of goods and W. This looks just like chapter three consumer theory. The econometrician can construct a model with demand based on prices and W and find parameters. Yay! for the econometrician.

+ +

The Positive Theorist

+
"The positive (behavioral) theorist, on the other hand, is interested in the degree to which the positive restrictions of individual demand theory apply in the aggregate. This can be significant for deriving predictions..." (pg 106)
+The positive theorist wants to know whether properties of individual demand hold for the aggregate. Specifially, when does our new fancy aggregate demand satisfy the weak axiom of revealed preferences (WA)? The WA is almost the cornerstone of MWG's consumer theory, because it turns logical preferences into a coherent utility function. + +Unfortunately, aggregations do not necessarily satisfy the WA. In fact, MWG shows that a simple aggregation of two demand functions does not satisfy the WA. Preferences satisfy the WA if and only if they also follow the law of demand for compensated price changes. + +Reminder: The compensated law of demand says if two bundles, X and Y, are affordable and I always chose Y, I prefer Y. Therefore, given any set of prices and wealth where I chose X, Y must not have been affordable. Otherwise, I would have picked it. The formal version seems different. + +However, the WA is satisfied for an aggregate if every consumer's demand function satisfies an uncompensated law of demand. If the price of a good goes up, all consumers must consume equal or less, even without a wealth compensation. This is reasonable. It is the way people typically talk about the law of demand. Yet, it is not derived from utility maximization. It needs to be imposed here for aggregation purposes. + +With the uncompensated law of demand imposed on all consumers, the aggregated demand function now satisfies the WA. +

Positive Representative Consumer

+MWG defines a positive representative consumer . This "consumer" can be thought of as solving the maximization problem for the total budget set. This is the aggregate demand function. + +However, to really solve this problem and draw the welfare implications (which economists love) for the economy, the economist needs to construct a utility function for the representative consumer. Up until now, there have only been budgets and demand functions without any mention of welfare. Now, MWG wants to move into a different territory. +

The Welfare Theorist

+
"The welfare theorist is interest in the normative implications of aggregate demand. He wants to use the measures of welfare change derived... to evaluate the welfare significance of changes..." (pg 106)
+To discuss social welfare, MWG defines a social welfare function. This is someway to aggregate utilities; the result is whatever we call social welfare. It is simply a definition. A few simple examples are the utilitarian and the Rawlsian welfare functions. The former is a simple addition of the utilities. The latter takes the lowest utility as the social utility. Therefore, if the representative agent's maximization problem maximizes the social welfare function, however defined, then the agent is a normative consumer. The agent is an aggregation of all utilities. + +Now the economist can make welfare interpretations. Usually this takes the form of asking whether the "distribution" of wealth maximizes the social welfare function. +

Conclusion

+One of the first things every microeconomics textbook or class starts off saying is that the value of a utility function is meaningless. We, economists, construct utility functions so that they are easier. This simplification hopefully allows for better predictions. That is the trade-off. The theory is more removed from real human decisions than an ordinal ranking or a preference relation, but these other two methods are practically difficult. + +Chapter four extends this idea to the aggregate. MWG is finding when an aggregation is a meaningful representation of multiple people. The representative agent or aggregate demand function are not real things. They are tools for thinking and if they help in making predictions they might be worth the cost. + +Up to third section, MWG has kept everything fairly uncontroversial. They are constructing a predictive theory and looking for better estimates. However, again, their method has run short and they want to reach welfare. To do that, they need to stretch, exposing some holes, and make bold claims. + +They take a shortcut with the utility function. They disconnect their theory from its foundations. However, they seem forget this shortcut when trying to draw normative implications. As I have written before, this is one of the troubles with forgetting the purpose of specific models, just as people can draw the wrong implications from praxeology.]]> + + 639 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Money, Growth, and the Materialistic Society + http://www.econpointofview.com/2014/01/money-growth-and-the-materialistic-society/ + Mon, 13 Jan 2014 19:04:41 +0000 + + http://econpointofview.com/?p=656 + + We only care about things that are bought and sold. Everything is about markets. This is a complaint often levied against economists. + +On page 214 of Man, Economy, and State, Rothbard argues something I have never heard in this exact way. When discussing the increase in production and goods that are possible in a monetary economy, Rothbard argues- +
"As a matter of fact, the existence of the money economy has the reverse effect. Since, as we know from the law of utility, the marginal utility of a unit of any good diminishes as its supply increases, and the establishment of money leads to an enormous increase in the supply of exchangeable goods, it is evident that this great supply enables men to enjoy unexchangeable goods to a far greater extent than would otherwise be the case. The very fact that exchangeable consumers’ goods are more abundant enables each individual to enjoy more of the nonexchangeable ones." (emphasis in original)
+His reasoning is simple diminishing marginal utility. Monetary economies are so rich that they care less about consumer's goods. + +This is true for me. I am mostly interested in things that money cannot buy, experiences, relationships, and knowledge. However, 300 years ago, you can be certain I would be very concerned about basic consumer's goods.]]> + + 656 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2014/01/well-put-my-friend-14/ + Tue, 14 Jan 2014 12:15:46 +0000 + + https://econpointofview.wordpress.com/?p=660 + + Nobel lecture- + +
The most important lesson for public policy analysis derived from the intellectual journey I have outlined here is that humans have a more complex motivational structure and more capability to solve social dilemmas than posited in earlier rational-choice theory. Designing institutions to force (or nudge) entirely self-interested individuals to achieve better outcomes has been the major goal posited by policy analysts for governments to accomplish for much of the past half century. extensive empirical research leads me to argue that instead, a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans. We need to ask how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of more effective, equitable, and sustainable outcomes at multiple scales.
+ +As I said in yesterday's post on materialism, people have diverse interests. They also have creative solutions to solving problems that economists think are impossible, i.e. Prisoner's Dilemna. The entrepreneur in people is a powerful force, but the only for good under proper institutions. This is the economic question of today.]]> + + 660 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Rothbard Chapter 3: Indirect Exchange + http://www.econpointofview.com/2014/01/rothbard-chapter-3-indirect-exchange/ + Wed, 15 Jan 2014 16:31:50 +0000 + + http://econpointofview.com/?p=662 + + direct exchange plays an important role in Rothbard's move from human action to a modern economy, it plays a small role in modern economies. If I want a car and have corn to trade, it is unlikely that I find someone who wants that much corn and looking to sell a car. In jargon, we lack a double coincidence of wants. It would be quite the coincidence if a trade is acceptable for both parties. Anything more complicated than a banana for the rest of a snack-pack is nearly impossible. Even that trade is hard. + +Emergence of Money + +Suppose Ava has corn and would like to buy Bob's wheel-barrow. Unfortunately, Bob wants tobacco and not corn. However, after some searching, Ava finds a third person, Carl, who will buy corn for tobacco. Ava makes this trade, not for tobacco's use-value, but for its exchange-value. She want to sell the tobacco for a wheel barrow. This is indirect exchange. For Ava, the tobacco is just a medium of exchange. + +More generally, for what goods will Ava sell her corn?  She wants something that she can trade easily in the future, since she does not actually want to use the medium of exchange, something with high marketability. + +The level of marketability is a self-enforcing mechanism.  If Ava sells her corn for a highly marketable good, Carl is more likely to buy the marketable good (and therefore sell his wheel-barrow), because he can use it as a medium of exchange too. Over time, a few goods develop as common media of exchange. We call this money. It is a tricky term and there is no black/white definition of what is money and what is not. + +Rothbard highlights a few characteristics that make a good marketable and increase its exchange-value as money- +
    +
  1. Desirability by others
    2. +
  2. Divisibility
    3. +
  3. Durability
    4. +
  4. Transportability
    5. +
+The exact good used as money cannot be determined by praxeology or economics. However, through history, gold and silver have been very common, though not the only form. Keep this in mind when evaluating possible monies, such as Bitcoin. +

Money and Specialization

+Money allows for more specialization. This is key. In a direct exchange economy, nothing but the lowest production goods and consumption goods can exist. Ava could never buy a house with corn, but she can with money. Now, more complex arrangements are possible. + +Producers can specialize in production, sell their goods for money, and buy other producers' goods with that money. "Nearly all exchanges are made against money, and money impresses its stamp upon the economic system" (pg 195.) +

Balance of Payments

+On top of the specialization, money allows for an accounting system of transactions, which Rothbard calls "a balance of payments." Ava sells her labor as a programmer and some old clothes and purchases money. This is an odd terminology for modern readers, but it is exactly what she is doing. The total amount of purchased money is Ava's income. + +Similarly, Ava sells some money and buys food, new clothes, and a lawnmower. These make up Ava's expenses for that period. Any difference between income and expenses results in a change in cash balance at the end of the period. If Ava purchased $1,000 of money and sold $800, she has a cash balance of $200. + +Simple accounting shows that this $200 change in cash balance must come from someone else. For the economy, the amount of money bought and sold must equal zero. Since both decisions to add to the cash balance (save) or subtract from it (dissave) are made by actors pursuing their goals, both are making the best choice. In fact, net savers is impossible. There is no need to worry about a balance of payments. When all accounts are included, it is zero. +

Production and Money

+Above, Ava sold money for consumers' goods. However, people also sell money and buy inputs in the production process. Unlike sellers of labor, sellers of producers' goods need to buy inputs before they are able to sell anything. They need to buy invest in factors of productions. Rothbard calls these actors capitalists. They spend money on producers' goods and can also be called producers. + +It is important to note that producers must buy goods in anticipation of selling. Investors are always engaged in entrepreneurship, because they are looking to the future. If entrepreneurs can forecast accurately, the production process can be quite complex. Money is a vital signal in forecasting. Already, we can see the roots of Austrian business cycle theory. + +However, to obtain the money for investing, the producer (or someone connected with him) has to save money. This necessarily involves a restriction in consumption. Readers of chapter one will start to notice the parallels. For an actor alone, investment requires a reduction in his consumption. This lengthens the production process. It is the same with a monetary economy, except now the reduction can be further removed from the actual investment. The reduction in consumption reveals itself in the form of an increase in cash balance. Producers can also borrow, but that is for later chapters. +

Producers as Maximizer

+Just like everyone in direct exchange, producers want to sell for the highest price, the most money. They want to buy at the lowest price, the least money. If they are successful, the cash-balance of the "producer-side" of an actor will have a positive cash balance, which is often called an accounting profit.  + +This profit system simplifies thinking. Information is a scarce resource and money allows for a simplification in thinking. Instead of comparing the ranking of all the consumers' goods bought from the revenue and the inputs, the entrepreneur can now simply look at his profit. It is a shorthand signal for his efficiency. The producer tries to maximize this profit from production, which allows for more goods to be consumed by the "consumer-side" of an actor. Remember, consumption what we call the means to ends and are always the goals of action. + +This maximization requires a key ceteris paribus qualifier. The producer wants to maximize profit, everything else being equal. If the production process requires work he does not enjoy the profit is not his only consideration. He might rank the higher (expect) profit and the worse work lower than the lower profit work. In that case, he will undertake the latter. He maximizes his psychic revenue. +

Conclusion

+For Rothbard, money is vital to an economy. It expands trade, the division of labor, and the production process. Yet, there is nothing magical about it. Money is just a special type of commodity. Actors buy and sell it, based on preferences for money. + +This is different from money in other textbooks, which treat money as neutral afterthought. Rothbard considers money vital in expanding trade and the ability to calculate in production. Both of these aspects are different from Samuelsonian textbooks and come from differences in their understanding of knowledge. + +With perfect knowledge and friction-less exchanges assumed in other texts, money is meaningless. I know I can sell my car for 1,000 bananas, because I know other people will buy 400 for a iPad, 300 for a TV, 100 for a Netflix membership, and 100 more for suit. + +When economists assume perfect knowledge and market clearing, money does not help. Money is simply added to mimic the real world. Once we add frictions, then finally, money impacts the economy. +
Related articles
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+On page 63 of Knowledge and Decisions, one of my all-time favorites, Thomas Sowell reminds readers how expensive knowledge is. Particularly, one of the favorite business relationship for people to complain about, the farmer and the dreaded "speculator", is actually less costly for everyone than the alternative- +
The fact that costs differ vastly with respect to individual knowledge and preferences creates an opportunity for people who specialize in bearing particular kinds of risks. A farmer may have considerable knowledge of how to grow a particular crop, but little knowledge of the economic data or complex principles which cause the prospective price that he can expect for his harvest to vary by large amounts as of planting time. Someone else who has specialized in studying the economic facts and principles may have a much narrower range of expectations of future prices for that crop, even if he could not actually grow the crop himself if his life depended on it. Either individual could directly acquire the knowledge that the other possesses by investing the time needed for both the theoretical understanding and the practical experience to apply it. A less costly alternative may be to transact with one another on the basis of their existing knowledge.
+Sowell is giving social scientists insight and giving everyday people advice. Look for those who know more than you about a topic and trade (knowledge) with them. + +  +
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]]> + + 679 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + I Feel Like I'm Taking Crazy Pills + http://www.econpointofview.com/2014/01/i-feel-like-im-taking-crazy-pills/ + Tue, 21 Jan 2014 20:57:50 +0000 + + http://econpointofview.com/?p=478 + + + +Economists are strange. Nuts might be a better word. Sometimes I feel like Mugatu taking crazy pills. It is painful to say. Everyone wants to fit in. + +I would love to be cool, but not everyone thinks about opportunity costs, diminishing returns, and revealed preference. For some reason, I hear crickets when I talk about this stuff at parties. (Pro tip: Never explain to friends or family that they get paid according to their marginal product. Accept that they are underpaid. It's not worth the fight.) + +However, there is no reason to hide our quirks. Instead, I am proud. This is what keeps everything interesting. It is the spice of life. + +Economics is not boring, although the textbooks try to make it so. It is the most exciting thing in the world, because economists look at the world differently. They (can I say we yet?) ask different questions and find unique, reasonable results. Talking with someone who has integrated economics into her every thought is inspiring. She is a clear and creative thinker. I hope that will be me someday. + +My first exposure to this economic point of view was Thomas Sowell. In his books, I learned about important unintended consequences. Yes, proponents of a policy might claim it does X, but the world is too complex. It might do the exact opposite. + +For many non-economists, this does not make sense.  Intentions = results. For example, if rent control is supposed to help renters, then it must help rents. Any difference in opinions come from differences in goals. + +Good economists are contrarian thinkers without trying to simply rebel. The best example is Steven Landsburg's Armchair Economist. In that book, which everyone should read, Prof. Landsburg asks and answers many questions that other people think they know, but are wrong. For example, why do theaters charge high (a relative term) prices for popcorn? + +A non-economist will simply say something like they can or they have some sort of power. A poorly trained economist will answer that in the theater the popcorn stand is a monopoly and can charge whatever price it wants. + +Prof. Landsburg demolishes this thinking step by step with such clear thinking that the answer seems obvious afterwards. I won't spoil the fun, so you will have to learn for yourself. There are many other gems throughout. + +Recently, this unique economic thinking reared its head to me a few times. + +One example is from a few months back. UC-Irvine economist Richard McKenzie wrote an article for EconLib where he argues that riding bike might be worse for the environment than driving a car. My point here is not to argue in favor of the proposition or not. + +Instead, only people who have absorbed the economic point of view, whether formal economist or now, will even ask this type of question. Usually, people will simple stop at stage one. The car uses more energy than my bike does, so the bike is better. To borrow an idea from Thomas Sowell, they do not dig deeper to second or third stage thinking. + +However, as Hayek taught us, the economy is more complicated than that. Our actions affect others, who might then change their own actions. This will create a ripple. No person is an island. We are in an integrated system. + +http://www.youtube.com/watch?v=IYO3tOqDISE + +Biking requires an increase in food consumption. Food does not just fall on our plate, but instead requires lots of people, miles, and energy to arrive on our table. Our choices affect the entire system and the price system can approximate the cost of our choices on others. +

BUY LOCAL!

+Everyone I know seems to think the "buying local" is a good thing. Maybe. However, most people do not even question why that is so. It is taken as gospel, not reasoned through. Instead, it is assumed as an answer or only reasoned an inch deep. The stage one thinking is that buying local provides resources for that local business, which allows them to earn a living and possibly employ others. Everyone can see that. We need to look at the unseen as well. + +When judging whether something is good, the economic thinker always asks, compared to what? If you did not buy the local good, what would you have bought? Assuming "local" is more expensive (if it is not, then you are just buying the best priced good), you would have bought other cheaper goods. + +Instead of spending a dollar on that local egg, you could have bought one for 50 cents from the grocery clerk. You would still have another 50 cents to spend on bread. (I know these numbers are silly.) Now, you can help one farmer and one baker out. You are just following the invisible hand. + +The first common objection to this is that our "local farmer" gets more of the proceeds than the other two. The other two send money off to some evil corporation with a smiley face that slashes prices. Again, we are suffering from stage one thinking. If the people selling non-local products could get a better deal by farming local, why don't they do it? Instead, working for a grocery store is a better deal. So the grocery clerk, the baker, and you are all better off. It's a win, win, win. + +http://www.youtube.com/watch?v=BBO1_XBrbzQ + +My point here is not to claim that buying local is not a good idea. It might be. That is a case by case question that should be reasoned through. My point is simply to point out that the costs and benefits of buying local (or any other fad) are not always clear. Instead, we need to clear our thinking and reason through the analysis. Only then, on reflection, can we understand whether our intention is the real result. + +So put on those economic glasses like my favorite economists above and take a new look at the world. Otherwise, we are just Pollyanna hoping for the best.]]> + + 478 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Two Ways to Paint, or Teach Economics + http://www.econpointofview.com/2014/01/two-ways-to-paint-or-teach-economics/ + Thu, 16 Jan 2014 13:34:41 +0000 + + http://econpointofview.com/?p=666 + + Going through MWG, Stigler's Theory of Price, and Rothbard's Man, Economy, and State, at the same time has brought out many similarities and differences between them about what it means to do economics. More clearly, my process has highlight the differences in teaching economics. + +I sound like a broken record, but Rothbard's process seems fundamentally distinct from either MWG or Stigler, even if his results are not very different early in the books. While reading chapter 3 in Rothbard, I developed an image of two painters that helps me think about it. + +[caption id="" align="aligncenter" width="242"]Sarah Solis Carvalho (Painting) Sarah Solis Carvalho (Painting) (Photo credit: Center for Jewish History, NYC)[/caption] + + + +One has an immense canvas to paint and starts in the middle, which is the heart of the painting (human action). He spends a relatively long time on the center, compared to its size, because it is the key. Everything revolves around that point. Slowly, he works out, step by step, but everything connects to the layers inside of it. Everything draws the eye back in. The picture might look simplistic to people who do not see the pattern and its beauty. + +[caption id="" align="aligncenter" width="350"]English: Oil painting by Victorian painter Wil... English: Oil painting by Victorian painter William Powell Frith (Photo credit: Wikipedia)[/caption] + +The other painter has an equally huge canvas, but creates two focal points. He starts by building one focal point in isolation (consumer theory) and then the other (producer theory). At this point, they could be two paintings, sold separately. Slowly, the painter starts to connect the two focal points. However, the two points never fully blend. + +When viewing one side of the painting, the viewer's eye starts at one focal point (producer theory) and moves from there. Everything on a side is connected with that point. When viewing the other side, the viewer's eye does that same, but with the other point. It is very hard to look at both points at the same time. However, the picture is coherent. The sides do not clash, but are distinct. The picture might seem hectic and overly complex when first glanced at. + +Are the painters different, the paintings different, or are these just two ways to do the same thing?]]> + + 666 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + How Twitter Makes Me Slightly Less Dumb... Slightly + http://www.econpointofview.com/2014/01/how-twitter-makes-me-slightly-less-dumb-slightly/ + Fri, 17 Jan 2014 17:59:42 +0000 + + http://econpointofview.com/?p=698 + + + +Many people, especially academics, do not understand Twitter. 140 characters is very limiting for people familiar with 60 page Econometrica papers. Research requires deep-thinking. The skeptics I talk to see downsides. +
    +
  1. It is very fast-paced.
    2. +
  2. It involves reacting to comments without deep consideration.
    3. +
  3. Things on Twitter can better learned without Twitter.
    4. +
+I completely agree with the first; it requires a filter. I partially agree with the second; it requires self-discipline to stop and think. I completely disagree with the third; Twitter has a comparative advantage. Yesterday proved this again for me. + +I tweeted a link to an old quote from my blog about Austrians', particularly Kirzner's, emphasis on Knightian uncertainty, compared to other economists. While I believe my blog post is fair, the comment I gave it on Twitter did not accurately represent my original point and Marc Bellemare, rightfully, called me out. + + +Professor Bellemare explained that many other economists and him were working on these issues, but under a different term, ambiguity. So I asked him for some references and within minutes I had sources to check out. + +Boom, boom, boom. Just like that, I had three references. And the articles were fascinating. I spent last night reading through papers and getting a broad understanding of the idea (sorry problem sets, I will get to you soon). + +Within the last ten years, a group of economists have worked to take this concept and apply it from experiments to panel data. It has not been fully integrated into more common models the way risk aversion has, but it is a growing field. It is definitely an area I want to keep updated on. + +How would I have found this without social media, specifically Twitter? I would have had to been conversing with someone at my university who is working in this area. Now, my program is large, but a lot of specialties exist beyond what my immediate contacts know. + +This was not a rare occurrence on Twitter. Twitter (and this blog) have exposed me to much, much more. Some is uninteresting to me. Some is not. Still, it would be much tougher without these social media tools and I urge everyone to give them a try. I am so thankful for all I have learned from these economists. + +Start getting email updates to blogs. I have recommendations on the right side of this page, plus my favorites here. Join Twitter- follow me for good measure ;). Use Facebook for intellectual gain between pictures of cats. + +After trying one of these, if you do not see the benefit, come back to this post and call me a liar. Until then, tweet on.]]> + + 698 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Mas-Colell Chapter 5: Production + http://www.econpointofview.com/2014/01/mas-colell-chapter-5-production/ + Mon, 20 Jan 2014 17:58:32 +0000 + + http://econpointofview.com/?p=719 + + + +For readers who accept and enjoy Mas-Colell's treatment of consumer theory (the first pillar of his teaching method), producer theory (the second pillar) is smooth sailing. The concepts are parallel to consumer theory, but with less concern mess along the way with budgets and turning ordinal preferences into cardinal utility functions. +

Production

+For Mas-Colell, production is a black box. Some inputs enter the firm and some outputs leave the firm. Put another way, firms buy some goods and sell others. The netput of this process is the production vector 1. Most economists do not care how rubber turns into a tire or seed into corn. All of that occurs within the black box, the firm. + +Of course, at anytime, firms need specific inputs to produce specific outputs. Any plans that are possible make up the production set. Just like the consumption bundle in consumer theory, production sets have some specific assumptions. The two key assumptions, which are not always obvious but key, are "No Free Lunch" and "Free Disposal"1. + +While these have specific mathematical explanations, they have intuitive interpretations. No free lunch means that it requires inputs to get outputs. Nothing is free. This is obvious, but sometimes forgot. Free disposal means that firms can get rid of inputs at no cost. While this is more controversial, it basically allows us to rule out "too much stuff." We can always get rid of the stuff we do not use. + +Firms look to choose the best possible production vector out of all the possibilities. This is just like consumer theory, except the firm's constraint is technology and not its budget. + +The easiest example involves multiple inputs and one output, resembling Rothbard's first explanation of production as a combining of at least two goods into another good. Using this framework, economists discuss a marginal rate of technical substitution (MRTS). This is the analog of the consumer's marginal rate of substitution. The MRTS is the rate that the firm can trade between two goods and keep output constant. A farmer could produce the same amount of corner with less acreage and more fertilizer. + +The right combination of inputs will dictate the best production vector or schedule given the technology. Again, this mirrors consumer theory, where a consumer tries to pick the best combination of goods to maximize his utility within his budget. +

Profit Maximization

+The natural next question is "what is the right production schedule?" Words like right or best are hard to work with. Instead, economists try to be slightly more specific. + +While utility maximization drives consumers for Mas-Colell, profit maximization drives producers. This seems more natural. Most people do not like the image of humans as computer like calculators of joy and pain. A few more people believe that firms try to make the most money possible, whether the "should" or not. + +Mas-Colell does give a little explanation about the origin of profit maximization. Why do firms want to maximize profit, instead of maybe revenue? The answer is actually connected to consumer theory, although readers do not learn this until after everything else about production. There is a link. + +There are 2 steps. (1) Individuals want to consume as much as possible, so they always want a bigger budget to buy goods. (2) Individuals own firms and receive part of the profits. Every owner wants the company to maximize profits so that he receives a bigger paycheck, thus increasing his budget in step (1). +

Firm as Computer

+Just as Mas-Colell assumed that consumers were perfect price takers, he assumes firms are too. The price of inputs and outputs is set by "the market" outside any firm influence. This turns the profit maximization problem into a simple calculation of inputs and outputs given prices. + +With prices as given, one requirement of profit maximization is cost minimization. Firms produce a specific level of output  to minimizes costs. If they did not, firms could cut costs for the same amount of sales and have more profits. We assumed profit maximizers, so they must also be cost minimizers. + +In order to cut costs, the firm will substitute between possible inputs until the MRTS is equal to the ratio of prices. This is the same calculation that the consumer does. For a specific output, say 10 bushels of corn, the cheapest production is when these rations are equal. If not, firms could cut costs without cutting output. + +Once the firm has found the way to minimize costs for every level of ouput, now they decide how much to produce. It is almost trivial at this point. The profit maximizing output is, as is common in economics, when marginal cost equals marginal benefit (MC=MB). In this case, when the marginal cost of inputs equals the marginal price of sales (MC=P). If marginal costs are below marginal price (the market price), then the firm could produce one more unit and sell it above costs, increasing profits. But, we assumed profit maximization, so this is not what the firms do. If marginal costs are above, the reverse in true. +

Law of Supply

+There is another important parallel between consumer and producer theory. For consumers, utility maximization and the weak axiom of revealed preference lead to the compensated law of demand. For producers, profit maximization and decreasing returns to scale of production lead to the law of supply. +
Quantities respond in the same direction as price changes... If the price of an output increases (all other prices remaining the same), then the supply of output increase; and if the price of an input increases, then the demand for the input decreases.-Pg 138
+The first sentence follows directly from MC=MB. If the market price of a firm's output increases, they can now produce more before MC=price. The second sentence follows from the MRTS logic. If the price of one good, say land, rises, the ideal bundle for production will then involve less land and more of a substitute, say fertilizer. + +Notice that this law does not have the compensated qualifier. Since the firm does not have a "budget" in the sense a consumer does, a firm does not experience wealth effects, but only substitution effects. A drop in prices does not make a firm richer since it does not have a budget. +

Aggregation

+This difference between compensated and uncompensated is important when it comes to aggregating supply. While Mas-Colell spent a chapter dealing with the issues of aggregating demand, because of problems from the wealth effects, aggregated supply is just a page. The fact that consumers follow compensated law of demand makes this tricky. Here, with a simple law of supply, aggregation amounts to simply adding the firms' supply. + +Without the qualifications of chapter 4, Mas-Colell can build a simple aggregate supply function based on aggregate quantities. He can build a maximization for the representative firm, which maximizes profit for the industry. He can also draw welfare implications since all the profits can simply be added to mirror the utilities of consumers. These are the three things he attempted in chapter 4. + +Yay for simplifying away the problems. +

Analysis

+The claim that firms maximize simple profit functions is much more convincing than consumers maximize simple utility functions. While I do not believe that firms actually make every decision to maximize profits, it at least approximates close enough that I can believe predictions based on producer theory. How well this holds in reality is an empirical question and depends on the situation. + +For this reason, I enjoy Mas-Colell's discussion on production. This chapter involves a much clearer justification for the assumptions made. It is nice to see Mas-Colell try to explain some assumptions from real human decisions- though it relies on consumer theory which already skipped this step. Nevertheless, he is still trying. + +However, as with consumer theory, producer theory sucks economics of all life. There is no discovery; no decisions are made. All of the interesting workings of firms are ignored through the black box. Firms are complete price takers and turn into simple computers. People turn into robots. + +Assuming all possible productions are known and prices are known, a computer can run a firm. Of course, some people will believe this claim, but I do not. After working in different firms, this idea is way too simple. Yes, this is econ 101 and models need to be simple, but the model already assumes away the real production part. Producer theory is just buying and selling. + +How do firms discover how to produce? How do they learn more efficient mechanisms? Without a Hayekian understanding of prices, these questions, which are fascinating, are dead-ends. Mas-Colell's firms respond to the incentives of prices, but they know everything from the first page. They producers are simply robots. This is different from Hayek and Rothbard and I believe less interesting. + +
+ +1. Some of the other important assumptions in Mas-Colell are +
    +
  1. Production set is nonempty.
    2. +
  2. Production set is closed.
    3. +
  3. Firms can produce zero.
    4. +
  4. Outputs cannot be turned back into the same inputs.
    5. +
+
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+

I don't get welfare analysis. I don't. If you do, please let me know.

+

In posts on Stigler, MWG, Rothbard, and Buchanan, I have questioned the use of welfare analysis in economics. I can regurgitate the expressions that welfare economists use, but the supposed benefits of the model confuse me. That's why I am appealing to the brighter minds online.

+

The standard picture is below. In any market with a market-clearing price, P, there are certain consumers who would pay more if they had to. How do we know they would pay more? Stop asking stupid questions. We know everything. Well, we assume we know everything about everything that the person wants, that's how. OK. Let's ignore that problem for now.

+ +

The most willing person is at point A. He would pay A dollars, but only pays P. Lucky him. Therefore, he receives a "surplus" of A minus P dollars.  This approach similarly holds for producers. There is someone who would be willing to sell at price E. Instead, he sells at P and gains P minus E. Big money.

+

The gap in dollars is some sort of "welfare".  For this post, I'm not even worried about the comparison between dollars and utility here. I will act like a conversion between dollars and utils exists- we can't reject all premises at once.

+One popular corollary of this is a deadweight loss, depicted below. For example, if governments tax a good, the buyer now has to pay P1 and only Q1 of the good sells. Fewer people benefit from trade, because the tax discourages the marginal traders from trading. The colored area is the deadweight loss, because the potential benefit goes to no one. It is simply lost. + + + +From this, economists derive a crude utilitarian analysis which tries to maximize the colored size, the left triangle, on the first graph. A greater area means people are better off. It is trying to measure benefits minus costs. The consumer surplus is the analog of a producer's profit. A rational consumer/producer maximizes benefit minus cost. + +The problem is that economists are creating a symmetric theory for an asymmetric world. This idea does not work for consumer theory. The cost of buying one of the goods above is not the price P, but the next best thing I could have done with that money, i.e. opportunity cost. Repeat after me, cost means opportunity cost. Economists learn this on day one and forget it on day two. + +Therefore, even assuming we can use money as a measure of utility, the benefit is the willingness to pay and the cost is the willingness to pay for the next best option. This difference is then the "profit." However, this cannot be shown using the started supply and demand graph.  The above graph does not show profit, but benefits minus some constant.  It is like a producer was trying to maximize revenue minus 200 dollars. This does not make sense. + +The person on the far left could have a next best option, which is really good, thus making almost no "profit." A person in the middle might have no other good option, thus making a large "profit." All that graph shows is revenue. + +The confusion reared its head when I was thinking about an extreme example. Suppose there is a market for marijuana. One day the government decides to ban it and the ban actually works. Graphically, the price is forced above the highest consumer's willingness to pay. Then the whole triangle on the left half is a deadweight loss. There is no consumer surplus. + +This does not make sense. I am not left with zero surplus. Instead, I choose to spend my P dollars on something else, where I gain a surplus. I move to a new market, with a new supply and demand, and earn a surplus there. + +The problem, on top of comparing utilities, stems from the partial equilibrium analysis used in standard welfare analysis. While it makes sense to talk about a company's profit in one market, it does not make sense to talk about a person's profit in one market. Profits can be separated across markets. People's welfare is necessarily a general equilibrium concept. My welfare from work cannot be separated from my welfare from home. + +This is the classic partial versus general equilibrium debate. The common reason for doing partial equilibrium analysis is that it is more manageable. It is easier to focus on one market. This makes sense when the goal is making predictions. + +However, when economists try to do pseudo-philosophy through welfare analysis, the prediction benefit disappears and we are left without the general part of general equilibrium. Looking at someone's welfare in one market will clearly obscure the picture. The profit of this approach is negative. + +Again, the method that economists use falls short before the point where they want to use it. Let's stick to using partial equilibrium because it allows for predictions. If we want to do more, say provide a cost/benefit analysis, we need to use general equilibrium and incorporate opportunity cost.]]> + + 723 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 82 + + + http://twitter.com/Rumplestatskin + + + + + + + 0 + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 83 + + + http://econpointofview.com + + + + + + + 82 + 0 + + + + + + + + + + + + + + + + + + + 84 + + + http://www.TheBigQuestions.com/blog + + + + + + + 0 + 0 + + + + + + + + + + + + + + + + + + + 85 + + + http://econpointofview.com + + + + + + + 84 + 0 + + + + + + + + + + + + + + + + + + + 86 + + + http://twitter.com/Rumplestatskin + + + + + + + 656 + 0 + + + + + + + + + + + + + + + + + + + + Advice I Took To Heart + http://www.econpointofview.com/2014/01/advice-i-took-to-heart/ + Mon, 27 Jan 2014 20:18:32 +0000 + + http://econpointofview.com/?p=753 + + Theory of Price instead of doing my problem sets, I am reminded of advise from Deirdre McCloskey (pg 489) that I took to heart- +
But if a world famous economist suggest casually in conversation that you might want to read, say The General Theory of Employment, Interest and Money, I want to see you buying it that very afternoon, skipping your econometrics homework, and going back to the professor with the book thoroughly read, asking her to discuss it with you.
+The great part about the blogosphere is that world famous economists are always recommending stuff to read. The hard part about the blogosphere is that world famous economists are always recommending stuff to read. Sometimes they even discuss them with dumbies like me. + +Or maybe this is just my excuse for skipping my econometrics homework... + +  +
]]> + + 753 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Stigler Chapter 4: The Theory of Utility Part 1 + http://www.econpointofview.com/2014/01/stigler-chapter-4-the-theory-of-utility-part-1/ + Wed, 29 Jan 2014 14:49:26 +0000 + + https://econpointofview.wordpress.com/?p=763 + + + +In similar fashion to Mas-Colell, Stigler is creating a dual theory. One side is producer theory, which describes behavior under the goal of profit maximization. The other side is consumer theory, which describes behavior under the goal of utility maximization. +

Utils

+Profit maximization has a clear meaning, at least from an accountant. Utility maximization is more complex. What the heck is a util? "The answer- that a util is a unit of utility- itself has zero utility" (Page 43) Why would someone maximize it? Utils, and utility theory, is an attempted to reduce enjoyment/pleasure/happiness/utility down to one value. More utils means the person is happier. + +Utility theory came into economics in the 19th century through psychological explanations. Starting with their godfather, Jeremy Bentham, these theorists saw human behavior as a product of increasing pleasure and decreasing pain. The net of this would be a person's utils. This psychological theory reaches its pinnacle with the work of Francis Edgeworth's Mathematical Psychics. (While this might be the best book title ever, most economists only remember Edgeworth for his famous box.) + +This theory fell apart over time. Stigler claims economics has abandoned this simple calculus and +
The simple measure of utility, the comparisons of utilities derived by different people, the use of interpersonal utility comparisons to support public policy proposals- all were gradually abandoned in part or in whole. What was retained was the concept of what we may term a rational consumer. Pg 43
+Now economists do not care about measuring utils, since the value of a util is meaningless. Instead, utility functions allow for ranked preferences to become a single number. While Stigler admits it is impossible, he assumes that all goods and bundles of goods are compared and ranked for consumption. + +A compete ranking is impossible for several reasons. First, we can never truly separate out exchange and consumption value. Stigler is trying to isolate the latter. Secondly, it involves an enormous number of combinations. Do you prefer 2 tables, a chair, and a ham sandwich above 4 apples, 10 elephants, 3 sandwiches, and a glass door? Also, Stigler claims that sometimes people are indifferent. Although Rothbard would disagree, indifference is a popular concept in economics. How do we rank two goods that the consumer is indifferent between? + +Nevertheless, Stigler still constructs a utility function and the always popular indifference curves to represent preferences. The number of utils does not matter, only the ranking. If two options bring the same utility, the consumer is indifferent and these two option fall on the same indifference curve. It is simply a graph that showing a utility function. It is much easier to digest than a ranking system comparing every possible combination of goods. + +At this point Stigler has made no further assumptions about what is rational. Any set of preferences can be represented by indifference curves, although they could be quite strange. +

Limits on Preferences

+This openness causes some problems, because the standard is too weak for meaningful and workable analysis. How can economists make predictions, if literally any beliefs are possible? Stigler adds a few assumptions to make life easier. + +First, he assumes that all goods are good. We want more of every good. Even bads, such as pollution or Nickelback music, become goods through redefining the term as "absence of Nickelback." This leads to downward sloping indifference curves. If I have more of one good, I must have less of the other to be indifferent. Having only goods also ensures that a higher indifference curves are better. Saying that the consumer always to maximize utility mean that he wants the highest possible indifference curve, away from the origin. + +Second, he assumes that goods are continuously divisible. While Austrian often work in discrete rankings, Stigler, just like Mas-Colell, acts like every good can be divided again and again. This assumption allows for indifference curves to actually be curves, instead of discrete points. + +This also ensures that indifference can exist. Assume I prefer 9 apples and 14 bananas (9,14) to 1o apples and 10 bananas (10,10), which is prefered to 9 apples and 11 bananas (9,11). If I can infinitely split my bananas, there exists some amount of bananas with 9 apples (9, X) that is indifferent to (10,10). Indifference is not just assumed, but result from assuming divisibility. +

Convexity and the Budget Line

+Stigler also assumes that indifference curves are convex to the origin. As a historian of economic thought, Stigler explains how the assumption developed. + +Originally, economists used introspection to prove convexity. The utility theorists mentioned earlier assumed that consuming goods produced utility. However, each extra good provided less and less utility, the famous diminishing marginal utility. + +If each extra good X provides less and less utility, less and less of good Y is required to stay on the same indifference curve. This changing rate of substitution is represented by the slope of the indifference curve, which decreases away from zero consumption of a good. + +While this is a true analysis and often used to explain convexity, Stigler sees one problem with it. This introspective analysis implicitly assumes a world with one good and that the marginal utility only depends on the amount of the good. However, goods can affect the marginal utility of each other. If I have more bread, each unit of butter is better. If I have no bread, butter does not much appeal. This connection across goods breaks the clear link between decreasing marginal utility and convex preferences. + +Instead of simply assuming convexity like Mas-Colell, Stigler insists that it is an empirical observation. Empirically, economists know indifference curves are convex. To understand why, we need to analyze the constraint on consumers, their budget. +

The Dreaded Budget

+The fact that consumers cannot have all the bread, butter, and absence of Nickelback that they want is simple. They cannot afford it. While most of this chapter has not included money, it is easier to think  in terms of money. Each consumer has a certain amount of money and can only buy that much. + +This translates into a budget line when put on a graph. For a consumer choosing between two goods, it is a line that marks off what a consumer can buy, like the straight lines in the picture below. Without the constraint of a budget, improving utility is easy: consume more of any good. With a budget, the consumer needs to make trade-offs. + +Should he spend money on this or that? Bring it full-circle, he will choose the bundle that maximizes utility. Combining the budget with indifference curves shows that the highest indifference curve (the most utility) is where the budget touches the curve at one place. + +This touch can happen in two ways. First, the consumer could choose to spend all of his income on one good shown by U1 below. The last small bit of money is better than spending a penny on a car (the car breaks the divisibility assumption). +

+

Another possible indifference curve could be tangent to the budget, such as U2 above. This happens when the rate of substitution between money and cars, shown by the slope of the prices, is the same as the ratio of prices.

+

Stigler claims that U2 is more common. People consume multiple goods and this happens when the indifference curves are convex like U2.

+ +

Mr. (or Ms.) Rational Consumer

+But I thought we were trying to analyze rational consumers. None of this is about rationality. We are putting stuff on graphs. + +What makes an actor rational? Some definitions range from the weak or almost meaningless1 to obviously exaggerated2. Stigler's rational consumer is somewhere between. + +For Stigler, a rational consumer satisfies three criteria- +
    +
  1. His tastes are consistent.
    2. +
  2. His cost calculations are correct.
    3. +
  3. He makes those decisions to maximize utility.
    4. +
+Consistent tastes is a minimal requirement. It is like transitivity in Mas-Colell. If he prefers A to B and B to C, he must prefer A to C. It does not say whether these preferences are "logically harmonious." People can gamble and buy insurance at the same time. + +Correct Calculations is a stronger requirement on preferences. Stigler elaborates with a few examples. + +One example is about a Christmas fund. People have two options for Christmas savings. The first is the bank where the savings will earn interest (the book is really dating itself with this example). The other is a Christmas fund that will not earn interest and the money cannot be withdrawn. + +However, people do use Christmas funds. This requires the introduction of another good, protection against future lack of willpower. Stigler is quick to point out that if the analysis ends here, any action is justifiable. In order to keep up the predictive power, we must consider the exchange as involving two goods, one is the interest and the other is protection against lack of will power. We still can predict then. If interest rates rise, it will become relatively more costly for people protect against themselves. We should see a drop in Christmas funds when interest rates rise, which Stigler claims is true. + +Another example is more important, interesting, and controversial. Rational people will pay the same amount for the same bundle of goods. People are indifferent between a $2 beer with a $5 burger compared to a free beer and a $7 burger. They can calculate. However, as anyone who looks at "buy one get one free" can tell, this is not always true. People do not always calculate correctly. + +However, if we assume people cannot calculate this, what do we predict? Given two identical options, the consumer acts differently. Until a better theory of when exactly these errors in thinking occur develops, such as behavioral economics, economists stick to the assumption that costs are correctly calculated. + +Maximizing utility is the last characteristic of a rational consumer. It is the heart of the argument. This chapter starts off by saying that utility maximization is the mirror of profit maximization. However, this is the most controversial assumption, at least with non-economists. + +Clearly, the skeptic does not try to minimize utility, because he is alive. How can we prove that people maximize utility? Stigler points to introspection. Our actions try to achieve our goals. It is a Rothbardian type of argument. + +What would it mean to not maximize utility? It would mean that a person could be happier, but choses not to be. To the believer in rationality, this wins the argument. To the skeptic, this is not enough evidence. Stigler assures the reader that there is more evidence. For now, he is happy with introspection. +

Analysis

+This chapter is the most interesting chapter in my journey yet. It may seem like the same old theory, but from a methodological point of view. Stigler highlights the difference between the different authors. Sometimes he is right. Sometimes he is wrong. + +As someone who has read a fair amount of Mises and Rothbard, I cannot help but smile when economists talk about "utils." Still, I am glad to see Stigler defend his use. Mas-Colell has a qualifier that the number of utils is meaningless, but leaves it at this. Stigler goes deeper. + +I doubt some of Stigler's claims though. Has economics really abandoned the utilitarian calculus? Do economists really not try to make interpersonal comparisons of utility? Mas-Colell cannot even finish three chapters without interpersonal comparisons. My own microeconomics courses went through basic consumer and producer theory and then *bam* comparing utilities. + +Of course, Stigler in 1982 cannot be held accountable for modern economics. Yet, in the next part of this chapter, Stigler goes on to develop an idea of consumer surplus, which seems awfully close to trying to measure utility through money. Economists sometimes forget the earlier limitations they placed on their theory. James Buchanan has a great quote here. + +His three assumptions about tell a lot about Stigler's method. Instead of just making assumptions to limit the subspace of an equation so it is solvable, Stigler attempts to prove each one differently. He does not have a universal criteria, but it is more ad hoc. His first assumption is for clarity. Redefine the variables so that everything is good. His second assumption is for simplicity. It is easy to work with continuous goods and functions than with discrete functions. His third assumption comes from empirical evidence. Consumers seem to have convex preferences, so we should just assume that. These assumptions do not need an explicit definition, such as those in Mas-Colell. Instead, they are reasonable assumptions that people can understand. + +Luckily, Stigler is always clear about why he is taking these short cuts. It is to increase the applicability and predictability of a theory. Of course, restricting a theory means that Stigler's economics is not very good at explaining some aspects. As always, there is a trade of between breadth and predictability. Stigler comes down on predictability. Of course, some Austrians will say that economists like Stigler are deceiving themselves into thinking they have predictive power. + +There are many more gems for methodology students. I urge others to pour over it. + +
+ +1. Consumer did X, because he wanted to. He acted on his beliefs. He is rational. This is closely related to the revealed preference argument introduced in Mas-Colell. It is more of definition than an explanation. + +2. This type includes caricature economic-man who maximizes simply maximizes his income with perfect foresight. Often associated with rational-expectations, this is more a straw-man than economics promoted by Sargent or Lucas. +
]]> + + 763 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Farmer on Equilibrium vs. Optimality + http://www.econpointofview.com/2014/01/farmer-on-equilibrium-vs-optimality/ + Tue, 28 Jan 2014 15:17:04 +0000 + + https://econpointofview.wordpress.com/?p=765 + + here, here, and here), Roger Farmer highlights an important dimension of the debate- +
The problem with classical models is not the equilibrium assumption; it is the optimality implication. The idea that the current state of affairs is socially optimal is so obviously at odds with the existence of mass unemployment that it has given equilibrium theory a bad name. In very simple models, equilibrium and optimality are the same thing. But that conclusion is a very special implication of some equilibrium models. It does not hold in general. That idea is key to reconciling Keynesian economics with equilibrium theory.
+The most common attack on classical models is "how can an equilibrium have mass unemployment?" Since most people are concerned about optimality, it should be the bigger question, not defining whether or not we are "in" equilibrium or disequilibrium. This point gets lost in translation on the blogosphere and I'm glad Roger Farmer pointed it out the difference. + +Nevertheless, I disagree with Prof. Farmer in one regard. Economics' modern obsession with equilibrium analysis misses the dynamic structure of the market-process that can only be included in disequilibrium analysis.]]> + + 765 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Nobel Laureates as General Experts + http://www.econpointofview.com/2014/01/nobel-laureates-as-general-experts/ + Thu, 30 Jan 2014 14:30:53 +0000 + + https://econpointofview.wordpress.com/?p=774 + + Chris House responds to a recent statement by Ed Prescott on monetary policy, but goes a step deeper than other responses. He is concerned about the treatment of Nobel Laureates as general economics experts. + +
All of the Nobel winners are extremely smart. They are a special group though. Nobel Prize winners have typically devoted their entire careers to a rather narrow study of a particular area. I’ll use Paul Krugman as an example. Paul Krugman’s opinions on trade have to be taken very seriously. When it comes to the best understanding of international trade, Krugman is the master of the universe. When he moves on to topics outside of trade however, his assessment loses a lot of its authority. Krugman is an excellent economist so it’s perfectly reasonable to expect that his opinions on heath policy, tax policy, business cycles, finance, etc. will be reasonable and it’s worth listening to him. That said, he is not an expert on any of those topics the way he is on trade.
+ +He goes on to stress that Nobel Laureates are awarded for groundbreaking work, not consensus building. We should keep that in mind when reading or listening to them. + +The whole article is worth reading.]]> + + 774 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2014/02/well-put-my-friend-16/ + Sat, 01 Feb 2014 15:03:48 +0000 + + https://econpointofview.wordpress.com/?p=778 + + Man, Economy, and State. + +
Ex ante (a person who acts) appraises his situation, present and prospective future, chooses among his valuations, tries to achieve the highest ones according to his “know-how,” and then chooses courses of action on the basis of these plans. Plans are his decisions concerning future action, based on his ranking of ends and on his assumed knowledge of how to attain the ends. Every individual, therefore, is constantly engaged in planning. This planning may range from an impressive investment in a new steel plant to a small boy's decision to spend two cents on candy, but it is planning nevertheless. It is erroneous, therefore, to assert that a free market society is “unplanned”; on the contrary, each individual plans for himself. + +But does not “chaos” result from the fact that individual plans do not seem to be coordinated? On the contrary, the exchange system, in the first place, coordinates individual plans by benefiting both parties to every exchange. In the second place, the bulk of the present volume (Man, Economy, and State) is devoted to an explanation and analysis of the principles and order that determine the various exchange phenomena in a monetary economy: prices, output, expenditures, etc. Far from being chaotic, the structure of the monetary economy presents an intricate, systematic picture and is deducible from the basic existence of human action and indirect exchange.
+ +Just because sometimes things appear chaotic does not mean that there is no order. Instead, human institutions and interactions develop a spontaneous order. + +We economists need to differentiate between things we do not understand and seem chaotic and things that are actual chaos.]]> + + 778 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Why Are The Models Wrong? + http://www.econpointofview.com/2014/02/why-are-the-models-wrong/ + Mon, 03 Feb 2014 17:16:52 +0000 + + http://econpointofview.com/?p=781 + + writes: +
The most important thing I have learned from the data over the last few years is that inflation targeting does not work as well as I thought it would. The most important thing I need to figure out is why inflation targeting doesn't work as well as I thought it would. Inflation targeting does not separate real shocks from nominal shocks as well as I thought it would. But I don't really know why inflation targeting failed to separate real from nominal shocks as well as I thought it would.
+Economists have not fully disentangled the differences between nominal shocks, generally blamed on bad monetary policy, and real shocks, generally blamed on technology. + +Real shocks are unlikely to stop. However, for a while, economists hoped that real shocks would not turn into nominal shocks by wise inflation targeting. Now wise NGDP or NGDPL targeting will prevent nominal shocks from becoming real. + +My own impression is that the idea of separating the nominal from the real is doomed from the start. Money is too important in economic planning to be passive in an economy. Most economists would agree with me on this, although Ed Prescott remains strong. Money is also too complex to be managed by the Fed. Most economists would not agree with me on this. + +However, until economists understand why our models and understanding of money are wrong, we are navigating blindly (or at least in the fog) and the Fed seems doomed to turn nominal into real and real into nominal for the foreseeable future. +
Related articles
+]]> + + 781 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + The Role Of Political Economist + http://www.econpointofview.com/2014/02/the-role-of-political-economist/ + Mon, 03 Feb 2014 19:21:10 +0000 + + http://econpointofview.com/?p=785 + + social planner" for a society, it was refreshing to read this from Pete Boettke- +
The task of the political economists is to assess alternative institutional arrangements with respect to their impact on the ability of free individuals to realize peaceful social cooperation and productive specialization.  This does require mastery of the technical principles of the discipline of economics, which not everyone can possess.  But with those tools in their possession, the economist still does not have any claim to privilege position in the democratic decision process that constitutes collective action.  All he can do is offer his proposed reforms as hypotheses to be tested in the public conversation.  He can try to persuade his fellow citizens of the value of his perspective, but he has no expert claim to impose his solutions on the body politic.  Buchanan's work is both a counsel of humility while also being a cause for hope that reform can improve our situation.
+We economists must stay humble in our role as observers of society. We are certainly not social engineers or social planners with any advanced understanding of how to manipulate people within an economy. +
]]> + + 785 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Stigler Chapter 4: The Theory of Utility Part 2 + http://www.econpointofview.com/2014/02/stigler-chapter-4-the-theory-of-utility-part-2/ + Tue, 04 Feb 2014 19:32:06 +0000 + + http://econpointofview.com/?p=788 + + + +Stigler spends a long time developing utility theory. He claims that abstract utility with its questionable foundation is a useful tool, because of its predictive power. Though the foundations are not great, the results justify it. Stigler spends the rest of chapter four showing off the power of utility theory. +

Consumer Behavior

+In order to test the predictive power, we obviously need to make some predictions from our model of utility maximization. Stigler sticks to mostly graphical predictions that involve reaching the highest indifference curve that is still within the consumer's budget. The graphs allow economists to do comparative statics. If one aspect changes, how does that affect the consumer's bundle? + +One type of change is variations of income. On a graph, this corresponds to a shift of the budget, illustrated below. Normally, when people are richer they consumer more of a good, hence normal goods. Other times, when a consumer is richer, he consumes less of this good. The classic examples are ramen and potatoes. As college graduates start making money, ramen consumption declines. These are inferior goods. + + + +While not a formal prediction, the outline of utility theory's predictive power is starting to form. This model of normal and inferior goods suggests which types of goods will increase with wealth. Inferior goods convey the idea of "buying because it is cheap." This is simply a definition, but it clarifies the thinking. + +The second comparative static involves changing prices. On the graph, a change in prices represents a change in the slope, since the slope is -dpY/dpx. With most goods1, increases in price lead to decreases in consumption. This is the classic law of demand. + +To better understand this mechanism, economists differentiate two effects of changing prices. For example, when the price of gas goes up, I am relatively poorer and buy less gas in terms of quantity. The price change creates a wealth or income effect. + +Also, gas becomes relatively more expensive, compared to the train. Now I can buy more train tickets for each gallon of gas, so I switch some consumption to train tickets. I get more bang for my bung. This is the substitution effect. In the real world, these effects are always entangled. However, the distinction is a tool for thinking through changes in prices. +

Prediction

+The most obvious prediction of this is that demand curves are downward sloping. Stigler dismisses this prediction, since all known demand curves are downward sloping. This is too general to really be a prediction, although it is always important to keep in mind. + +Instead, Stigler focuses on some basic predictions. The first underlies the law of one price. Assume two identical goods are selling for different prices. If we assume the consumer is trying to buy and then consume as much as possible, it follows that he only purchases the cheaper good. Since only the cheaper seller actually sells anything, the market will have only one price. Stigler does not make this jump to the law of one price, but it is there. + +Utility theory has also clear predictions about how people react to changes in relative prices. Suppose an entrepreneur wants a nice office making monetary profits. Those are his two goods. A new regulation or tax makes it harder for him to make monetary profits, thus raising the "price" of profits2. It is relatively easier to build a nice office than earn profits. + +The model we have constructed predicts that regulation will result in lower profits and nicer offices.  This is testable and comes from the substitution effect. We can also say that the entrepreneur is worse off because of the regulation because it raises prices. This comes from the wealth effect, since the entrepreneur can no longer reach his earlier preferred combination of profits and office. +

Utility Theory as Bridge

+Stigler also believes that utility theory provides a bridge between the objective actions taken by individuals and the subjective preferences. Utility theory says that a consumer will buy the bundle of goods within his budget that gives him the most utility. Therefore, if a bundle of goods, say 4 apples and a TV, was within the consumer's budget and the consumer does not choose it, it would be worse off with the apples and TV than  with what he chose. + +This idea motivates cost-of-living indexes, which are popular in economics. If a consumer has $1,000 more income in 2014 than 2013, is he better off? Right away, we do not know. There is one way to tell. If he could afford exactly what he chose last year and does not choose it, then he is of course better off. If he could not afford last year's bundle, he is at a lower indifference curve. The index attempts to compare the costs of bundles across time. Comparing utility and saying if 2014 is better requires constant preferences, which is a strong assumption. + +The other two applications of welfare analysis are closely related. The first is consumer surplus. If I would have paid $10 for a great burger, but ended up getting it for $5, people say it is a "good deal." Consumer surplus is a way to conceptualize this. Stigler defines it as the gap between what I would have paid and what I did pay. Stigler does not claim that this measures any sort of true psychic utility, but more surplus is clearly better than less. + +One application of this is price discrimination. If the seller of that burger knew I was willing to pay $10, he would have preferred to charge me $10. The better he is a discriminating a price, the "better" side of the deal he will get, even though we know that both parties are better off in any voluntary exchange. +

Analysis

+For Stigler, economics is prediction. The only way we know that we understand something is if we can predict it. He constantly stresses this. If I claim to understand football games, but do no better than a coin flip in predicting winners, I probably don't know that much about football. This importance of prediction is different from the view of Austrian view, who love to disparage Samuelsonian economics' obsession with prediction and its failure to predict future economic outcomes such as GDP. + +However, in this chapter, Stigler is stressing a much more Austrian-friendly approach to prediction. He is not saying that if the price of a good goes up $1, the agent will consume .25 units less. He never does the calculus of a maximization problem to find the exact change in demand. Instead, he makes directional, ceteris paribus, predictions. This is what Austrians do. The model is a tool to understand ideas, instead of a simple input/output algorithm which tells the economist exactly what will happen. + +The foundations of utility theory are too ad-hoc and shaky to move Stigler's approach. He is much more hesitant about his claims on utility and somewhat justifies his assumptions.  He clearly has some attachment to authors, such as Rothbard, who reject utility theory. For example, Stigler is clear that consumer surplus is how much more the consumer would pay. It is not a measure of utility. + +By the time of Mas-Colell, this hesitation is gone. Economics is applied utility theory. One can read this change as finally ignoring questions that were long ago settled or as closing off to outside criticism. I tend towards the latter. + +Economists need to be aware of all their assumptions and the baggage that entails. We need to know the limits of our assumptions and their predictions. If we make utility theory and welfare for predictive power, we should not use them to turn economics into a poorly thought through branch of philosophy. + +I'm still always worried when even talking about welfare and utility, since so many economists use the tool while forgetting the methodological limitations. In our interest as social scientists we ask, "how happy is she because of this?" Stigler already dismissed any idea of adding, counting, or comparing utilities. But economists love to ask "how big?" and not just which direction. It is a tough field to navigate. + +
+ +1. Giffen goods decrease in consumption when the price goes down. This is theoretically possible, since negative income effect for inferiors goods could be larger than the positive substitution effect. Giffen goods violate the uncompensated law of demand  which we discussed in MWG. + +2. The "price" of a good is not just the sticker price, but involves everything required to get that good. + +  +
Related articles
+]]> + + 788 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Human Capital Investment, Another Boom/Bust? + http://www.econpointofview.com/2014/02/austrian-human-capital-theory/ + Sun, 23 Feb 2014 14:40:18 +0000 + + https://econpointofview.wordpress.com/?p=808 + + + +Austrian business cycle theory (ABCT) received a lot of press due to the recent economic realignment (I'm not sure what to call it since any title presupposes an explanation). + +Austrians are different in their explanation of the business cycle. Clearly, Austrians emphasize words like malinvestment, boom, bust, or artificially lower interest rates. Unfortunately, most of these ideas are foreign to your average economist, at least in the way that Austrians use them. + +This is because the underlying explanation of ABCT is Austrian capital theory. The Austrian emphasize the structure of production. Growth in capital investment cannot be easily reversed when these investments turn out to not be profitable. There is not blob of capital, K, and there is no instantaneous corrects. + +The difficult correction explains the fluctuations in output. Always, capital is the underlying mechanism. This is the unique contribution of Austrian theory to macro, as I tried to show in an undergraduate project of mine on Austrian Business Cycle Theory and the Panic of 1907. + +Unfortunately, most economists after Frank Knight assume away capital theory. Either capital does not matter or the changes come from outside of "the system." + +A quick explanation for non-Austrians: When Austrians talk about investment, they discuss the lengthening of production. Originally, an actor can only satisfy his most urgent wants. I want food, so I find food. There is a close link between the goods and the wants. + +As capital accumulates through savings, the actor can then lengthen his production process. Instead of simply consuming berries, the actor can spend his energy building a stick which will indirectly lead to berries. The process required to eat berries is now longer, because it includes making a stick. Investment allows longer structures of production. The Hayekian Triangle below provides a visual representation. +

Hayek Capital Structure

+One of the factors that facilitates lengthening production is a low-interest rate. If people can borrow at low rates, longer production appears profitable. When Austrians talk about capital theory, the image is always of a manufacturer that can invest in better equipment and provide for further stages. + +My goal of this post is not to rehash all the arguments for or against Austrian business cycle theory or to decide what parts have been incorporated by others and which have not. Instead, I want to discuss another area of Austrian capital theory that I have not found addressed anywhere, human capital1. +

Is Human Capital Different?

+Discussing human capital in class, I realized that the Austrian theory has a unique viewpoint to offer on this topic too. Investment in any capital requires time and since capital is heterogeneous, it is costly or impossible to reverse. After spending 4 years studying physics, it is costly to readjust and start building my human capital in economics, trust me. + +If the underlying mechanism, heterogeneous capital with costly readjustments, is the same as other forms of capital. There is a generic human capital, but specific skills that sometimes can only be applied in specific situations. This is exactly like other capital.  Should we expect human capital to follow the same boom/bust cycle? + +Of course. Lowering the interest rate on investment in human capital causes people to lengthen their personal structure of production, possibly through more years of schooling. The mechanism is simple. The cost of school is lower, so people buy (invest) more of it. This could leave to a boom in education investment. + +Unfortunately, this boom will ultimately lead to a bust when the investments turn out unprofitable once interest rates rise. Some people thought an English literature degree was worthwhile at 2%  but not at 5% after student loan rates rise. This is a costly readjustment period, possibly involving new investment in other trades. Since this is only a market specific boom, it would not have the impact that an economy wide boom had in the 2000's. + +This is not a specific prediction of a collapse in the education market. Such predictions are difficult, if not impossible. Instead, it explains the types of forces that are operating. The fact that all human capital is not interchangeable can lead to costly readjustments. Other changes could offset this lengthening of production thus mitigating some of the problem, but if it goes on too long, it is bound to bust. + +
+ +1.Peter Lewin does have a related paper on human capital but has a different emphasis. + +  +
]]> + + 808 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 494 + + + + + + + + + + 0 + 0 + + + 503 + + + + + + + + + + 494 + 0 + + + + Entrepreneur and the Firm from an Austrian Perspective + http://www.econpointofview.com/2014/02/entrepreneurial-theory-firm-review/ + Sat, 22 Feb 2014 22:29:43 +0000 + + http://www.econpointofview.com/?p=829 + + Girl Scouts (the firm) allow entrepreneurship from within. This girl was aware enough to camp outside of a marijuana dispensary.[/caption] + +Firm theory is an awkward field for economists. Firms are inextricably linked to markets but utterly unlike markets. Economists believe they are excellent at explaining how people react to incentives in markets. Economists are not as comfortable analyzing command structures. Firms represent an odd middle ground. + +This is why firm structure is a relatively understudied field for economists. Economists can design the most complex auction system that satisfies X,Y,Z. Great, but when is the last time you participated in an auction? That is not to say auctions and auction theory is not important, but for the average person, firms are a huge part of their lives. One would think firms would be much more important to economists. Unfortunately, they are not. + +For many economists, the firm is a black box. Inputs go in (duh, its in the name) and outputs come out. Markets take over from there. Anything more explicit than that is beyond the scope of economics and belongs in the realm of management or business theory. You know, that soft gushy stuff, not the hard science of economics. + +This shortcoming of modern economics has peaked my interest in the field. You can understand why I was excited to hear about An Entrepreneurial Theory of the Firm by Frederic Sautet. Yes, the book is 15 years old, but hey, I'm new to this game and still catching up. +

+Sautet tries to answer a simple question: why do firms exist? It almost seems obvious, but economists have a habit of skirting the obvious. + +The standard answer goes back to Coase; markets are sometimes expensive. It would be expensive for me to go to an auction every time I wanted anything. Firms can lower transaction costs. Robbinsian economizer will want to step in to save money this money and creates a firm. + +Sautet agrees, along with almost everyone who has looked at the topic since Coase, that lowering transactions costs a role for the firm. However, Sautet is not convinced, nor I am after reading him, that this explanation is enough. + +Showing this requires an abstract model of an economy without transaction costs1. If firms still form in a world without transactions costs, clearly, the firm has other purposes. + +Most economists would say that in this model the firm has no role. Without transactions costs, all goods are already distributed to their most highly desired uses once in equilibrium. The firm adds no value. +

Where the Entrepreneur Fits In?

+Here is where Sautet provides an important addition. What if  the economy is in disequilibrium? Can the firm help direct an economy towards equilibrium? + +Sautet only assumed zero transactions costs in his model. He did not assume perfect information. Actors can still suffer from the Hayekian Knowledge Problem (HKP). The actors in this imaginary economy might not be aware of what they do not know and are unaware of possible equilibrating actions. + +In disequilibrium, an entrepreneur discovers these profit opportunities, and thus, push the economy towards equilibrium. This is the traditional Kirznerian theory of the entrepreneur. + +Sautet's addition is to embrace the role of the firm as a tool for the entrepreneur. The firm is a way to align the interests of multiple people and thus let their entrepreneurial insights work together. Yes, but why don't they just write contracts to align incentives? Plenty of work over the past 40 years studies how to align incentives. This typical examples are principle-agent problems. + +However, usual contract theory assumes that all possible states of the world can be put in a contract, thus aligning incentives. This is not possible in a world with a HKP. Entrepreneurship cannot be planned and therefore cannot be contracted. The insights of the entrepreneur are beforehand unknown to anyone in the economy and it is impossible to contract on something that is unknown. The actors cannot even trade for this information even without transaction costs, because it literally does not exist. + +The firm fills an important role. At the same time, it aligns incentives and deals with the unknown possibilities that cannot be put into a specific contract. It kills two stones with one bird. + +Sautet provides new insight and perspective on the nature of the entrepreneur, discovery, disequilibrium, and firm theory. The book is a nice short read and it seems fundamentally correct. While it is not a perfect book2, the Austrians are again asking the interesting questions. + +I am ashamed that it took me so long to discover Sautet. Hopefully this post encourages readers to glance through Sautet's work. This book was an invitation to inquiry (to steal a phrase from Pete Boettke) on a topic that is understudied. I know I will keep looking in the field. + +  + +
+ +1. Sautet has a long part on the purpose of abstract models at the beginning of the book that is wonderful. He contrasts his own use of an abstraction as an intellectual foil to the real world, compared to other economists who use this abstraction as a goal like in the case of perfect competition. + +2. Sautet spends most of his time engaging Hayek, Kirzner, Williamson, and Coase, instead of engaging the real world outside the window. This is a typical problem in Austrian economics. I love these economists as much as anyone, but you are not learning about the real world, nor are you convincing skeptics by appeals to "authority." + +  +
]]> + + 829 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 97 + + + http://www.economicthought.net/blog/ + + + + + + + 0 + 0 + + + + + + + + + + + + + + + + + + + 98 + + + + + + + + + + 0 + 0 + + + 99 + + + + + + + + + + 97 + 1 + + + 100 + + + + + + + + + + 98 + 1 + + + + Total Demand is a Forgotten Economic Tool + http://www.econpointofview.com/2014/02/total-demand-economic-tool/ + Mon, 24 Feb 2014 19:54:03 +0000 + + http://www.econpointofview.com/?p=850 + + biden demands his money

+Total demand is a useful tool for thinking through economic problems. Unfortunately, modern textbooks drop it completely. Searching through MWG, baby Varian, real Varian, Hirschleifer, David Friedman's Price Theory, and McCloskey's Applied Price Theory, I find no reference to this concept. It could be mentioned in passing in one of these books, but I did not find it today nor notice the idea when I have read through these books in the past. + +When I say total demand, I do not mean the demand of all consumers added together. That would be total consumer demand. I mean TOTAL demand, the demand of all people and not just those economics define as "consumers." Most authors do not see a difference, because they make the shortcut of dividing the population into producers and consumers. That division has many benefits, but it also has costs. The loss of total demand is one downside. + +While I do not blame those authors for cutting the concept (book space is limited), I would like to elaborate on total demand here on the interwebs without space constrictions. +

Producer Demand?

+The difference between total demand and total consumer demand is the producer demand. Wait, I thought producers supply, not demand. Again, econ often works in this dichotomous world. Producer demand is obvious from a simple point, producers do not sell at any price. + +I cannot go to the BMW dealership and offer $1 for the new i8. Why not? Because the producers also demand the car and their demand is above mine. By forgoing the dollar that I offer them, they are effectively buying the car for $1. If they did not demand the i8, they would sell it for any price and it was up to customers to bid it up from $0. + +This concept can be illustrated using a graph similar to the standard supply and demand. Here total demand is TD. It consists of consumer demand (D) and supplier demand (which is a reverse of supply, S).  The equilibrium price is where the total demand (TD) equals the total supply (stock), not just the standard supply. This supply is the amount that actually would exchange hands at a certain price. The TD/stock equilibrium price will be the same as the intersection of traditional D and S. +

demand

+One downside of the TD/stock graph is that it does not show how much of the good actually exchanges hands, usually labeled Q*.  The TD/stock graph looks the same if all the original holders of a good sell them or if none do. + +But why does the number of goods that actually exchanges hands matter? The counter-intuitive point is that it does not really matter. +

Economics as Toolbox

+Economists often describe economics as a toolbox. It is a field of study that helps us understand the world. TD/stock curves are another example of how clear economic thinking can improve our understanding and help us avoid a few fallacies. + +Some examples- Suppose only a few shares of a company trade in any day1. Skeptics will say that this does not reflect the "true" market price since the price would drop if many stocks came on the market. However, this drop would only happen in the current holders lower their demand to hold stocks. They will try to sell the stocks if the current market price is above their group evaluation of the "true" price. Instead, everyone who is holding the cash values it above the market price. An equilibrium price always reflects the price where total demand equals the stock. It is impossible for it not to. + +Now, imagine a frictionless world where all goods are spread evenly across the population. People would exchange until every good was in its most highly valued use. Now, imagine a world where the goods are originally given to these most highly valued ends. No exchanges occur and we are in exactly the same result as the first world. Which of these two worlds is better? Which of these two worlds has a high Q* and thus a higher GDP? Keep that in mind anytime you look at data. + +Let's now use the two above examples to highlight a third, more common, fallacy. This one goes back to a long way, but was popularized by Keynes. Imagine there is a good, say money, which has a low Q* in any time period. Some would be tempted to say that this money is idle or not "flowing" in some sense.  However, this does not show that the goods are idle or not serving their most valuable purpose. All goods are always possessed by someone. At any point, they are never "flowing." In the case of money, a low Q* only shows that most valuable use of the money is in cash-balances in some period. + +The question is not whether the money is idle, since it is obviously serving its most valuable purpose at the moment. Whether its most valued use is to those who had it last period or not is irrelevant. They are both the same thing. + +Remember this anytime that you complain about companies or banks "hoarding cash." The fact that Q* is small is not important. Instead, if worried, we should be asking why are banks holding money? What is the uncertainty that makes cash-balances the most desirable use of the money? Is it some distortion of incentives? Or is the world just naturally uncertain and banks want to hold money? + +This does not mean that the world is perfect. Man is fallen. Instead, it means that given the state of the world, everyone buying and selling in the way that is best, according to their beliefs. + +Again, clear economic thinking is key. + +
+ +1. This example comes from Stigler Theory of Price 4th Edition Page 90. + +  +
]]> + + 850 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Well Put My Friend + http://www.econpointofview.com/2014/02/well-put-friend/ + Tue, 25 Feb 2014 19:39:35 +0000 + + http://www.econpointofview.com/?p=874 + + If private rights can be policed easily, it is practicable to resolve the problem by converting communal rights into private rights. Contrary to some popular notions, it can be seen that private rights can be socially useful precisely because they encourage persons to take account of social costs. The identification of private rights with anti-social behavior is a doctrine as mischievous as it is popular. + +The instability inherent in a communal right system will become especially acute when changes in technology or demands make the resource which is owned communally more valuable than it has been. Such changes are likely to bring with them harmful and beneficial effects which can be measured and taken account of only by incurring large transaction costs under the existing property right structure. In such situations, we expect to observe modifications in the structure of rights which allow persons to respond more fully and appropriately to these new costs and benefits. The coming of the fur trade to the New Continent had two consequences. The value of furs to the Indians increased and so did the scale of hunting activities. Before the coming of the fur trade, the Indians could tolerate a social arrangement that allowed free hunting, for the scale of hunting activities must have been too small to seriously deplete the stock of animals. But after the fur trade, it became necessary to economize on the scale of hunting. The control system adopted by the Indians in the Northeastern part of the continent was to substitute private rights in land for free access to hunting lands. +Property rights and how they are defined have very different implications under certain situations. Sometimes social pressure can mitigate the problems of communal living. However, this is not likely to hold up well in times of drastic change or once social pressures fade.]]> + + 874 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Methodology and the Young Economist + http://www.econpointofview.com/2014/03/methodology-young-economist/ + Wed, 19 Mar 2014 16:00:45 +0000 + + http://www.econpointofview.com/?p=879 + + + +George Stigler, a man I am fond of reading and putting in goofy glasses on my banner, once said that economists should only do methodology once, when they are old and reflecting back on their career (at least I believe he said it: I cannot find the quote). Peter Boettke argues that Stigler was off by one. An economist should also do methodology early in his career when thinking of the type of economist he wants to become. I agree with Professor Boettke. Sorry, George. + +In many ways, this year has been my full-fledged attempt at understanding and discovering the type of economics I want to do. In my coursework at Barcelona, I am experiencing a fairly typical introduction to Samuelsonian economics. Maximize, maximize, and then when done, maximize again. This is my first true exposure to this one particular method and the experience has highlighted some of the costs and benefits. + +I am trying to conduct methodology outside of the classroom, too. Slowly, I am working my way through three different methods of basic economics with Rothbard, MWG, and Stigler- using the man's book to go against his professional advice. I know that next year in my PhD it will be more difficult to take the time and think about these big picture questions. This year has clarified the type of work I want to do and the type of program I want to attend (more on this in the coming weeks). + +With methodology always on the back of my mind, I was ecstatic to discover a PDF of James Buchanan's What Should Economists Do? I had read his opening essay of the same title before, but the book has much more depth. In this book, James Buchanan is asking all the questions I am asking at this point of my career, and coming to a lot better answers than I can. Buchanan has a unique insight into the differences between Austrian and Chicago economics, having worked with the best of both types. + +While I plan to have a longer post of this great work (after exams, wish me luck), I just wanted to encourage (both) readers of this blog to check out Buchanan's book. My friends, who are beginning PhD's next fall, are especially encouraged to give him a read. After that, read Peter Boettke's book Living Economics which tackles some of the same questions. + +It is too easy to go on auto-pilot. Buchanan forces us to take a step back and clarify what we are actually doing. I think we should know what we are doing before devoting our lives to a science. Or is it an art? +
]]> + + 879 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Big Announcement from my Small Blog + http://www.econpointofview.com/2014/04/big-announcement-from-my-small-blog/ + Mon, 21 Apr 2014 12:27:16 +0000 + + http://www.econpointofview.com/?p=888 + + good news, it is important in my small world. As many of you know, I am currently finishing up my masters at the Barcelona GSE. Luckily, this experience did not scare me too much, so I have decided to keep going with my formal economic training. + +The past few months have been a long process. There are many events in my life I would love to do again (play college football, see LOTR in theaters, eat at Chipotle), but applying to PhD programs is not one of them. It involves hours and hours of essay writing, mindless application details, checking on recommendations, and mostly just being uncertain and stressed about the future. On top, the applications fees can put a dent in one's pocketbook. It was fun in its own sadistic way, but I am glad to be done with it. I know Brynn is too. + +After much delibration, I have decided to attend the University of Minnesota this fall. It's an exciting program that has been expanding in recent years. While Minnesota is best known for its historic macro program, it has an excellent industrial organization team (connected with the business school and the Minneapolis Fed), which is my current area of interest. While there are other programs that I would love to attend, Minnesota is certainly the best for my career and personal goals. It will be the hardest academic challenge of my life. + +I'm sure I will be the only one in my cohort that reads Rothbard and Buchanan for fun in my spare time. That's okay. I don't really like being around totally like-minded people. I mean, I live in Spain where I am not the norm in any way. Still, Minnesota will push me to become the best economist I can be. + +The blog will still be up and running, so I will still be learning from my favorite economists online and you few followers will still know what is going on in my career. + +Wish my fiancé and me luck!]]> + + 888 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 112 + + + + + + + + + + 0 + 0 + + + + Short Reflection before my PhD + http://www.econpointofview.com/2014/04/reflection-pre-phd/ + Wed, 30 Apr 2014 13:19:30 +0000 + + http://www.econpointofview.com/?p=894 + + + +(Note: this is also posted at the Barcelona GSE blog) + +Determining whether to apply for a Ph.D. program or not, going through each application, and then finally making a decision is exhausting. It forces, rightfully so, the young economist to look on his experiences and his goals. I asked myself over and over about where I had been, where I am, and where I want to go. Here are some of my reflections. +

How the heck did I end up here?

+Some people find their vocation early in life and take the exact right steps. Other people find their vocation while reading Exchange and Production after a long workday. I took this indirect route. Until I discovered economics, academics were the means and not the ends for me. During my undergraduate, I did well in difficult physics and political science programs and on the football field. This ultimately led to an enjoyable well-paying job. That was my goal for college and I surpassed it. + +However, when I started studying economics, my goals drastically changed. Economics turned my life anew. Suddenly, the good job was inadequate. I could not stop researching economics. My free time turned into economics time. Through blogs, ¨pop¨economics, and academic work, I had found my passion. It just kept building. I woke up to read Hayek on information before work and fell asleep to Kirzner on competition and price theory. Throughout my day, I listened to lectures, followed blogs, and economics audiobooks. Economics became my life and it spread from how I made decisions to how I spoke. + +The above links hint at the economists and ideas that interest me. I have been strongly influenced by Austrian economists (as my banner hints), but that has not been my only source. My introduction to economics was actually Thomas Sowell´s Basic Economics. This quickly led me to economists like Milton Friedman, George Stigler, and Armen Alchian, who all continue to influence my thinking. Clear writing and clear thinking has been more important to me than a specific ideology or methodology. + +I will never be able to part from my earlier influences, with their focus on accessible language and outreach to the public. I would be foolish to believe that all the free material at Mises.org was not a major reason for my Austrian sympathies. This blog is a direct result of discovering economics through blogs. +

Where is my comparative advantage?

+Just because I enjoy something does not mean I can make a career out of it. Although my background in not traditional, I decided that I had skills that will be beneficial in my education and research. My undergraduate preparation was thorough. In physics, I developed some quantitative tools necessary to get through a Ph.D. In political science, I developed more qualitative skills, which supplement the quantitative. In my work experience, I was also able to work on some programming. This has been valuable while learning other languages, like Stata. + +This year I have tried to keep expanding my tool set with a master's at the Barcelona GSE. Here I am using those skills for economic questions, although the types of questions are not those I find interesting, but that´s classwork. + +My math and physics training makes micro easier and my programming experience makes econometrics easier. I can focus on applying these tools, not learning them. In addition to the core of micro, macro, and econometrics, at the BGSE I can explore my main research interests through courses on information economics, political economy and political institutions. + +This year has turned out perfect for my academic goals. A year ago, I was not ready for the formalism of an economics Ph.D. As much as I believed in my economic understanding, I lacked some specific training. This program fit my needs and filled in some of those gaps. Obviously, I would like to be better prepared, but I believe I can survive and then thrive, so why not jump in now? +

What keeps me going?

+Through my personal research and coursework, I became interested in how information and political institutions affect firms' decisions. Hayek, Mises, and Stigler attracted me to information economics. Alchian, Demsetz, and Coase attracted me to institutions and industrial organization. Right now, my research goal is to merge comparative institutional analysis with standard economic models. It's an old, but important questions- How do institutions affect the costs and benefits of certain actions? To me, that is an important question that only economics (broadly understood) can answer. This is what I read and think about all day. + +To answer this question, I need to know what economics is. Economics means many things to different people and our approach to the science is fundamental to our conclusions. My hope to find room for synthesis among multiple dimensions. Since reading Peter Boettke´s Living Economics, methodology has interested me (see here, here, and here). In fact, this blog´s title is a reference to Kirzner´s doctoral dissertation on the changing meaning of economic science. Austrian, Public Choice, or New Institutionalist economics all have insights to draw upon that can work with more Samuelsonian economics. Purists will stand their ground, but life is too short to not find room for mutual growth. + +This room is important for a young scholar looking for his place in the profession. The marginal returns to studying a field in isolation are declining. The increasing boredom of certain journals is evidence enough. Samuelsonians who have never read Hayek or Austrians who have not read on asymmetric information are boring. There is too much information in this world to completely shut oneself off from others. + +If I was a betting man, I´d guess the next great advances will come when economists work across fields within economics and beyond into philosophy, psychology, sociology, and history. I hope to never dismiss a viewpoint, simply because it is not "proper" economics. +

Where do I want to go?

+While I know my interests can change, I want to spend my days and nights researching and teaching about similar economic questions. The most obvious way to do this (and pay the bills) is through a Ph.D. Luckily, several universities accepted me and I am lucky enough to attend the University of Minnesota this fall. While it is a more Samuelsonian program than I would have planned on attending a year ago, it is a challenging program that will push me hard in this area. It will be up to me to tailor my education to additional forms of analysis. + +Looking beyond my student years, my primary goal is to teach at the college level and conduct cutting-edge research. Each new discovery I have made through economics develops more enthusiasm within me and I want to bring that feeling to others. I wish to further my knowledge inside and outside the classroom and eventually add to the academic world. When looking for a preparation that will allow me to become the type of economist I dream of becoming, a high-quality school like Minnesota was perfect. + +Through my academic and blog writing, I hope to keep discovering insights about the world and spreading it to others. I hope my blog readers will keep supporting me on it.]]> + + 894 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 5 Life Lessons Economics Taught Me + http://www.econpointofview.com/2014/05/5-life-lessons-economics-taught/ + Thu, 01 May 2014 14:42:46 +0000 + + http://www.econpointofview.com/?p=907 + + + +Most of the stuff I post is pretty esoteric and nerdy. Only a small group of economists probably like it. I mean me and a random guy in Slovenia. That's about it. + +It's not a huge problem, since nerdy economic theory is what I enjoy and want to write about. This blog is mostly me talking to myself, so who cares? + +However, that's not enough. Economics is the coolest discipline in the world. I'm sorry my physicists friends, yes quantum theory is crazy and fun, but economics tops it. + +The best subject should reach everyone. It has insights that anyone can apply to their daily life. My love of economic theory sprang from the "everyday" wisdom it provides, not the other way. Economics does not allow us to predict the future, but it does allow us to see the world more clearly. It is a good pair of glasses, not a crystal ball. (Now the picture might make more sense... No? Still seems random? I'm outing myself as a nerd again.) + +So for all readers, economists and real people, here are five life lessons that economics taught me. I hope they can help you. +

1. Everything has a cost.

+This could also be called "there ain't no such thing as a free lunch." Opportunity cost or simply "cost" is fundamental to economics. The cost of something is the next best alternative. The $5 footlong does not cost $5. It costs "the next best thing," whatever that is to the person. + +More importantly and less recognized, economics taught me that time has a cost. Even if I am attending a "free" lecture, watching a "free" movie online, or enjoying someone else's "free" food, I am paying a cost, whatever else I could have done. + +Economics taught me to consider all available alternatives. Every decision is about the best choice given the proper understanding of cost, not just price. Viewing time, price, and countless other subjects under one idea, cost, helps improve decision-making. Dollars and cents can be an easy approximation, but life isn't about easy. Do the proper calculation. + +http://www.youtube.com/watch?v=l-gQLqv9f4o + + + +Short story- a friend once asked me if I thought what we were talking about was the best use of our time. I quickly said yes. I had already thought it through and decided that talking with her was my best option among all available alternatives. She didn't think it was a compliment, but I thought it was. + +Insight #1 has also helped me be more positive. I know that I am making the best decision given my information. There is always room for growth and improvement down the line, but at any moment I am doing the best thing I can. I didn't do great on an exam, fine, I decided that the extra studying was not worth my time. I calculated that at the time. There is room for future improvement (see #'s 4 and 5), but my past decisions were correct ex ante. +

2. Information and knowledge are expensive.

+Before studying economics, specifically, before reading Hayek and Sowell, I was fairly confident about my understanding of the world. Back in B.E. (Before Economics, it's an actually dividing line for my life), I could tell you when people were making dumb decisions, what the problems were with policies, or why a certain event happened. Now, I am much less confident. + +Information is highly dispersed. Even the smartest people in the world do not know a minuscule amount of the information that everyone else knows. This makes sense. It is costly for me to gather information and I often do not have the incentive. Shareholders who are paying CEOs millions or school districts who are changing curriculum have more info on their choices than I ever could. If I think they are doing something wrong, I should take a step back. I am still highly skeptical of others, but I am also skeptical of my understanding. + +A corollary is that even if I (or anyone else) cannot explain something, it does not follow that there is not reason. Again, disperse knowledge is more than anyone can understand. I, Pencil is an example of this. Money is another. +

3. People are rational.

+I don't mean that people are computer-like calculators of pleasure and pain. I do not mean that people have perfect foresight and perfect information. My definition of rationality is less demanding, but still helps me make sense of the world. + +Why would someone go skydiving? I never would, mostly because I'm a little baby about heights. However, I can understand that people calculate and decide that skydiving is their highest ranked alternative and go. People can think things through. + +Now, before readers accuse me being some overly crazy subjectivist (just a mildly crazy subjectivist), I don't mean to explain everything by saying "she wanted to do X, so she did X." Rationality means that people respond to incentives. If price of a TV goes down, more people will buy it, simple supply and demand stuff. In my daily life, this teaches me that if raise my personal price (by being more annoying or less friendly), people will want to hang out with me less. People aren't dumb. They respond. + +Of course, everyone knows this. People accuse economics of simply proving that water runs downhill. That is part of it, but economics is not just common sense. Economics forces me to ask, why would someone do that? And "they are crazy" is not a good enough answer. +

4. Maximize lifetime happiness.

+It is easy to get stuck in the present. What is the most fun today? What will make me the most money today? How can I pay my bills today? + +While today is the most important day in any decision, it is not the only one. I need to take into account the future. Again, this is obvious, except when it's not. + +Some people argue to avoid debt. Of course, if the decision is debt vs. no debt, ditch the debt. However, that's never the case. I need to look at decisions through time. Many decisions are actually investment in relationships, careers, hobbies, or goals. If they rewards will pay off over time, I need to not ignore that. The real choice is often between (1) debt plus whatever the debt pays for and (2) no debt. + +Another anecdote- I bought an iPad in August. I love it. I'm probably on it too much. However, I calculated that it would "pay for itself" in a few months and it has. Since I am not working, I paid for it indirectly through a loan, i.e. more debt. If I would have been fearful of debt (which is a current balance-sheet number, not an expected lifetime number), I would have made the wrong choice. + +My iPad has increased my productivity and the number of books I can read (thank you PDFs). From a pure dollar calculation, it has saved me money. Now, this increased reading will hopefully also pay off in a better job in the future. Again, many decisions are investments. Add it all the "non-productive" benefits, it was a clear choice. I try to make the same type of decision (with varying levels of focus) with all decisions, not just college, housing, or portfolio management. + +I am not saying buying things makes people happy or that endlessly consuming is good. I'm saying people need to keep the "big picture" in mind and not be short-sighted. +

5. Ignore sunk costs.

+My fiancé hates when I use this in discussions. However, I keep mentioning it, because it is vital and easy to forget. People act in the present to change their future state to something better. Nothing in that statement, which is true, refers to the past. + +Nothing changes the past. When I was debating whether to pursue a PhD in economics, it would be easy to say I've put in all this training at my masters to prepare me: don't change paths now. That would be faulty reasoning. Instead, I asked, given the current situation with all the good and bad things that have brought me here and no matter the past, what should I do? This helps me avoid throwing away more time and money into a lost cause. Move on. You'll be better for it. The goal is to maximize future benefits. + +I'm sure I am missing some and some of these combine for extra help, but this is my list. Some more examples are in a 2007 graduation speech by Thomas Sargent. His are short and sweet. Some bloggers liked them. Some didn't. Everyone should check them out and make up their own mind. + +What have we both missed? How has economics helped you? + +(Update: This summer, I will be releasing a short book about economics' life lessons. To stay updated, please follow my blog on the top right or follow me on Twitter @BrianCAlbrecht)]]> + + 907 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 119 + + + + + + + + + + 0 + 0 + + + 120 + + + + + + + + + + 119 + 1 + + + 121 + + + http://gravatar.com/nickerso + + + + + + + 0 + 0 + + + 122 + + + + + + + + + + 121 + 1 + + + 579 + + + + + + + + + + 0 + 0 + + + 611 + + + + + + + + + + 0 + 0 + + + + Well Put My Friend + http://www.econpointofview.com/2014/05/well-put-my-friend-17/ + Fri, 02 May 2014 13:00:06 +0000 + + http://www.econpointofview.com/?p=926 + + The Meaning of Market Process- + +
For Austrians, however, mutual knowledge is indeed full of gaps at any given time, yet the market process is understood to provide a systemic set of forces, set in motion by entrepreneurial alertness, which tend to reduce the extent of mutual ignorance. Knowledge is not perfect; but neither is ignorance necessarily invincible. Equilibrium is indeed never attained, yet the market does exhibit powerful tendencies towards it. Market co-ordination is not to be smuggled into economics by assumption; but neither is it to be peremptorily ruled out simply by referring to the uncertainty of the future.
+ +How do we best understand knowledge? Austrians have staked out a middle ground between the two extremes for a long time. It's proven a tough place to be. + +Perfect knowledge is easy to deal with. Radical uncertainty amounts to throwing our hands up. An important area in economic research going forward is a refinement of this middle ground.]]> + + 926 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Article of the Week + http://www.econpointofview.com/2014/05/article-week/ + Mon, 05 May 2014 14:20:25 +0000 + + http://www.econpointofview.com/?p=930 + + Well Put My Friend." (I know its pretentious to assume any of the economic giants I quote are my friends, but it's an expression from my youth that I like.) + +Now I'm introducing a different idea, an article of the week. Every Monday, I will post an interesting/important/silly/fun economic article that I think people will enjoy. The articles will usually be shorter and accessible to laypeople. I'll give my little pitch, but I urge others to at least glance through the article. Sometimes you need to read the original. + +This week's article- +

Production, Information Costs, and Economic Organization by Armen Alchian and Harold Demsetz (1972)

+In this classic AER article, Alchian and Demsetz elaborate and point out some problems with Coase's theory of the firm. For Coase, the firm is an attempted to limit transaction costs. Sometimes it is tough to trade on markets and a collectivized command-based system is better. + +Alchian and Demsetz agree to a certain extent, but believe the theory is incomplete. For the authors, the reason for a firm is more obvious. Two people, working together, can sometimes do things that two people could never do separately. This seems obvious, but all great economic ideas do, after someone else elaborates them. + +However, in team work, there is an incentive to "shirk." If my rewards do not just depend on what I do but what my partner is doing, I'm going to try to slack and free-ride off of him. The firm is one, partial, solution to this problem. + +Check out the article for more details!]]> + + 930 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + The Gary Becker Method + http://www.econpointofview.com/2014/05/gary-becker-method/ + Tue, 06 May 2014 11:58:20 +0000 + + http://www.econpointofview.com/?p=934 + + + +The econ blogosphere is blowing up (rightfully so) with articles, tributes, and obituaries to the late Nobel Laureate Gary Becker. Prof. Becker passed away on Saturday at the age of 83. + +While I don't have any anecdotes about Becker like Russ Roberts or Steven Levitt, I do want to highlight some thoughts on Gary Becker's method. After all, the blog's title comes from a Kirzner book on method. Over the past few days, a few posts, mostly from Austrians who love talking about this stuff, have discussed Becker's work with an emphasis on this. +

What was the Becker method?

+Most people have stressed Becker's application of economic reasoning to traditionally non-economic areas of inquiry. Becker saw economics as a method of inquiry about human decision-making. Economics was not just the study of markets. This was the focus of Becker's Nobel lecture "The Economic Way of Looking at Life"- +
Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self interest. Behavior is driven by a much richer set of values and preferences. + +The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward-looking, and it is also consistent over time. In particular, they try as best they can to anticipate the uncertain consequences of their actions. Forward-looking behavior, however, may still be rooted in the past, for the past can exert a long shadow on attitudes and values. + +Actions are constrained by income, time, imperfect memory and calculating capacities, and other limited resources, and also by the available opportunities in the economy and elsewhere. These opportunities are largely determined by the private and collective actions of other individuals and organizations. + +Different constraints are decisive for different situations, but the most fundamental constraint is limited time.
+As an economist in 2014, it is hard to imagine a world where this is not the standard understanding of economics. We, economists, mostly believe that economics applies to all walks of life. It is a lens for looking at the entire world. That wasn't the standard thinking before Becker. Yes, Mises's book is call Human Action, but that was not normal. + +Here, I want to highlight that a few other economists have shared their thoughts on Becker's method. + +First, Becker's student, Walter Block, wrote an article following Becker's Nobel Prize. Block didn't see much differentiation between Becker and the rest of the profession. Block writes- +
 This is because the Chicago (read Becker- BA) methodological approach is so close to (indeed, is indistinguishable from) that of the rest of the profession. This is in sharp contrast to Hayek, whose receipt of the prize has correctly been given credit for a large part of the Austrian revival. I know Gary Becker; Gary Becker is a friend of mine; and believe me, he's no Friedrich Hayek. Nor is he even a James Buchanan, who took a position on the subjectivism of costs compatible with that of the praxeological school.
+Yet, Peter Boettke is much more favorable of the Becker method and believes that it takes on the Misesian project in one direction. Boettke writes- +
How does Becker fit?  Well, in my way to read his contribution, I interpret him as a practitioner of praxeology IF one adopts a philosophy of science that Hayek dubbed "scientism".  In fact, I would argue that there are two ways to translate Mises's project into this "modern" philosophy of science to operationalize it: (1) the Becker way, and (2) the Vernon Smith way... + +Understood in this light, we must acknowledge not only the towering achievment [sic] of Gary Becker's contributions to modernist social science, but the fundamental praxeological character of his project.  Imagine Mises writing Human Action if he was educated in the 1950s and competing as a young economist in the profession in the 1950s and 1960s trying to make their way as a leading scientist.  And in this thought experiment, remember the genius in question has adopted the prevailing philosophy of science and not choosing to buck against it (as Rothbard and Kirzner did).  My intuition says that the work would look a lot like the sort of univeral [sic] rational choice theorizing that was identified with Gary Becker, with James Buchanan and Gordon Tullock, with James Coleman, etc.  And there should be little doubt that in that crowd the most persistent and consistent application of the rational choice perspective was the great Gary Becker.
+Mario Rizzo also sees a similarity between the Becker method and Austrian economics- +
He loved economics and loved to apply it to a wide range of problems. He was no enemy of mathematical economics but thought that theory should be as simple as possible and developed with applications in mind. He was a true follower of Alfred Marshall on this: theory as the engine for the discovery of concrete truth. He was also no “positivist” in methodology. (Some people are quite careless about how they use that term.) He did not think that every statement in economic theory has to be falsifiable or testable. In response to what I believe to be the methodological disaster of behavioral economics, he argued that rationality per se is never testable. What is testable is the complex of assumptions and basic structure of a theory when it is applied to concrete problems. (I add, for those schooled in the philosophy of science, that he invoked the “Duhem-Quine Thesis.” ) + +He accepted Lionel Robbins’s view that economics is a science of choice generally, and not only a science of market exchange (what used to be called catallactics). In accepting that view he accepted the same perspective on this matter as Ludwig von Mises and the British economist Philip Wicksteed – from both of whom Robbins derived his own view. So there is immediately an undeniable Austrian connection.
+While it is important to realize that the Becker method was specific and "mainstream", it was also full of insights. Any economist as good as Becker (there haven't been many) has some insight to economic method and we should be willing to listen. + +He was a great economist and I wish I could have met him. RIP Dr. Becker + +  +
Related articles
+]]> + + 934 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Supply AND Demand, not Supply or Demand + http://www.econpointofview.com/2014/05/supply-demand-supply-demand/ + Sun, 11 May 2014 15:00:46 +0000 + + http://www.econpointofview.com/?p=944 + + + +If you think hedge fund managers or lawyers earn "too much money," one possible solution is to argue for MORE hedge fund managers or lawyers. Sound counter-intuitive? It doesn't if you follow the logic of supply and demand. + +One of the basic principles of economics is that both supply and demand determine prices and quantity exchanged. It doesn't matter how many mud pies I produce, if no one wants them, the price is zero. Similarly, if only one dude in Scotland makes the whisky I love, I'll have to pay more than I would for Seagrams. + +I thought of this basic insight when I saw multiple tweets on my feed about the difference between the top hedge fund managers' earnings and kindergarten teachers. The most frequent source was a Vox.com article from Matt Yglesias. +
The news once again is that it's good to be a successful hedge fund manager: the top 25 earned a collective $21.1 billion this year... + +How does that look in context? Well, it's about 0.13 percent of total national income for 2013 being earned by something like 0.00000008 percent of the American population. Another way of looking at it is that this is about 2.5 times the income of every kindergarten teacher in the country combined. (links in original)
+Knowing much of Matt's writing makes it hard for me not to read into what he is trying to say. In another post, he is more clear of his opinion. Here, however, I will try to deal with the above quote at face value. Presented with this information, what can we learn? + +Less than you think. Prices reflect complex phenomena and the interactions of millions of people. Our instinct might be nausea over "unfairness." However, this stat tells us little about the underlying mechanism that caused it. It tells us nothing of "fairness," "right," or "justice." + +Earnings, wages, returns, salaries, or whatever you want to call them are just prices, like many other things. Yes, we might consider them extremely important prices in our own lives, but they are subject to the basic laws of price theory that governs the trading of apples. Supply and demand work together to coordinate people's plans. This is a very good thing. I've had a earlier post arguing such. + +If prices passed some moral judgement (which they don't, they just exist), I  should hear people who are worried about the excessive wages of hedge fund managers arguing for MORE hedge fund managers. This would drive down the wage of those already in that job. I don't hear this. I only hear about "unfair" salaries. +

Diamond/Water Paradox Redux

+People's wages do not come from an underlying true value.  Instead, this price comes from millions of people interacting. Prices are complex phenomena that emerge from people's choices. It is the marginal interaction that ultimately determines their value. The comparison between the wages of hedge fund managers and teachers is like comparing the prices of diamonds and water. + + +Diamonds are more expensive because of the low supply. What does low mean? I don't know. Since there are only a few diamonds available, the next unit is valuable. I don't know about you, but I don't have any diamonds. Diamonds are cool and I would be willing to pay a few bucks for one. + +Water is different. Obviously, water is more important in many ways. However, water is cheap, because it is more abundant, at least to people in developed countries. I don't pay much for water. I have a bunch. I don't value the next glass of water. + +This valuation of the next unit determines the prices. Remember, all decisions are on the margin based on people's valuation of the good. The price does not come from a true or ultimate value of "water" vs "diamonds." +

I'm glad for teachers.

+The same reasoning applies to hedge funds vs. teachers. Their wages arise from marginal valuations of other people in the market.  Luckily, there are many people willing and able to be teachers. That is a great thing. Few people are willing and able to be hedge fund managers. That's okay. + +Could you imagine if we had to have as few teachers as we have hedge fund managers? That would be devastating. I'm so grateful that we have more teachers. I wish they could get paid more, but I wish everyone could. People live in a world of scarcity and we can't have everything we want. The interactions of people on a market, which we can understand through the model of supply and demand, help coordinate plans to make people better off under this scarcity. + +If I'm still not making sense, Anthony Carilli has a great intro lecture of supply and demand. He even has insights for people who have seen the graph a million times. + +http://www.youtube.com/watch?v=5LAC7TkpFqc +Prices just reflect underlying conditions. There might be problems with the underlying system, but prices cannot tell us that. +

One Question

+While price theory is well established, that does not mean that I know every aspect of it. While writing, I thought of a puzzle. It's not a puzzle of price theory, proper, but a puzzle about its practitioners. + +When a disaster strikes, believers in the free-market applaud the increase in prices of goods. These prices create an incentive for people to supply more of whatever good. + +To my knowledge, these same people do not applaud high wages in finance as incentive for more hedge fund managers. What am I missing?]]> + + 944 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + What the heck is economics? + http://www.econpointofview.com/2014/05/heck-economics/ + Mon, 12 May 2014 12:46:25 +0000 + + http://www.econpointofview.com/?p=963 + + +What the heck is economics? Wait, is this a philosophy post? Why are we opening up with such a question? + +It turns out that the answer to this simple question determines what you will believe are insights, goals, and benefits of studying economics. However, Jacob Viner´s quip that "economics is what economists do" is not satisfying enough. We need to figure out what economics is, before we can use it to improve our lives. That is ultimately the goal. It is not just for the entertainment of a few people with fancy degrees. +

The Study of Wealth

+For many years, economics was consider the study of "wealth and wealth creation". Adam Smith´s monumental work has the title The Wealth of Nations. Now wealth is a noble thing to study. When given the choice between more wealth and less wealth, people choose more wealth. Studying how people and therefore nations become wealthy will greatly help improve people´s lives. If I can learn how to make people wealthy, I will gladly learn. + +This framework helped improve societies and led to many insights. Adam Smith and his followers showed that wealth is not measured in amount of gold or money that sits in a vault, but goods and services that actually improve lives. Wealth and money are not the same thing. Boom, one insight from economics. A society shouldn´t increase the amount of gold, but increase the amount of goods. + +The classical framework, through the work of David Ricardo, also showed the benefits of trade, a principal called comparative advantage. Even if Lebron James is a great chimney sweep (do they still exist?) it does not make sense for him to climb up the fireplace. People are better off if Lebron sticks to basketball and advertisements and he lets someone else sweep his chimney. + +As useful as this is, it is terribly narrow. There is more to life than wealth. If economics is going to help us, it has to be about more than wealth. Economics is not finance, accounting, or personal investing. Econ has more to offer. Thank goodness the discipline has developed. +

The Study of Decision Under Constraint

+Lionel Robbins famously (well, famous for us nerdy economists, not MLK quote famous) said that "economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." This definition has dominated the past almost 100 years within the economics profession. Its main contribution is the emphasis on scarcity. One reason that not everyone has a Bentley is because we live in a world of constraints. Economics points out the constraints in our utopias. + +Ever since the debacle at Eden, people have had limitless goals they which to achieve, but only some goods to use. Yes, production allows for more means in the future to achieve future goals. However, in the production process that are still limited supplies. Even in the wealth parts of the world today (I´m talking to all my readers in the Hamptons), people live under scarcity. Scarcity, scarcity, scarcity. It defines the world on this side of the grave. + +There is one major shortfall with this approach. Robbins´s framework turns every problem into a simple calculation of maximization under constraints. At least, that is how most economists have used it. If I know what a person has available to use and I know what that person´s goals are, the decision turns into a simple calculation. + +There is no room for decision-making in this approach. There is no room for discovery. People are simply computers calculating pleasure and pain to maximize their utility. The great improvements made in the west over the past 300 years have not come from the reshuffling of means to meet ends. Again, Robbins helps, but he is short. +

The Study of Rational Action

+An outgrowth of the above approach has swept most economists since the Second World War. If we define rationality as correctly computing the above equation about pleasure and pain, economics allows for specific prediction on what people will do by assuming rationality. This approach assumes that people are smart. They do things in their own interest. Many economists have applied this idea and turned economics into the study of rational action. + +This has a profound impact on our understanding of many aspects of life. Why do people go to college? It maximizes their utility. Why do people steal? It maximizes their utility. Why do people listen to Nickelback? It maximizes their utility. See, this can lead to some absurd conclusions. + +However, it does help our understanding of the world. This framework allows for specific predictions of the consequences of decision, both at the personal level and the policy level. If people go to college because they expect to earn more, fewer people will go once graduate income drops. Some conclusions from this framework are obvious. Some are more profound. If criminals are crazy (as many people believe), why do we have laws? Clearly, even criminals respond to incentives. + +I have found this approach extremely helpful as a guide post through life. If I know my own goals and I know the means available, this rationality approach helps show the best way to meet those goals. It encourages me to be more rational and more effectively use my means to maximize my happiness. Don´t confuse this with maximizing wealth. Unfortunately, many economists replace maximize "happiness" with maximize "wealth" as a shortcut. If we can avoid that slip-up in our daily life, we are in good shape. + +Again, there is something missing. In accepting this approach, people implicitly accept that idea that people calculate like computers. This approach rules out wrong decisions. Everyone makes the choice that maximizes their utility. However, to many people, failure and bad choices seem obvious in the world around us. I rocked a mullet for a long time, good choice. + +I also have made many dumb choices in my life, listening to rap music way too much. Rationality rules out innovation and creativity. It is difficult to appreciate creativity when everyone is simply calculating. +

The Study of Human Action

+I take a broader approach and define economics as the "study of human action." Now, this is not my original approach by any means. Ludwig von Mises wrote a book titled Human Action more than 60 years ago. It is the most satisfactory definition I have found, partly because it is the most general. Economics can help with many things, so why limited it to wealth or rationality? + +While this approach is extremely broad (how can anyone study all of human action?), it does assume a few things. First, it assumes a pattern to study. If human action was chaos or people were completely irrational, no study would be necessary. Anything could happen at any time. This is a nihilist point of view, but some economists take it. Secondly, it assumes that action is the thing worth studying. Economics does not study beliefs, thoughts, or psychological processes, but concrete actions. The insights of economics are realized through people´s actions. My actions and others´ inform my understanding of the economic process. It includes looking inward at myself and why I act, but also out trying to understand how other people act. + +The usefulness of these two assumptions will eventually appear. Each reader must first understand the conclusions and insights. Then, he can judge the assumptions. I would apply this same criteria to any set of assumptions. For me, these assumptions are worth it. The "human action" approach also allows me to use the above approaches. It incorporates the idea of scarcity, since all action occurs under scarcity. It also incorporates rationality, without having to accept humans as computer-like calculators of pleasure and pain. It allows economists (we are all economists) to study all of human behavior. + +Of course, no approach to economics is perfect and I certainly do not understand it all. However, if it involves the actions of a person, economics can shed light on it. All we need to do is understand some basic insights and apply them. + +This blog is a result of thinking about my life through the lens of economics and learning from other people. There is no sense in re-inventing the sandwich (that´s the expression, right?) when someone else already did. None of these insights are purely mine and most are not even original. However, spreading these insights is more important than claiming ownership. + +If you´re eager to learn a bit about economics and improve your life in small steps, keep following.]]> + + 963 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Reforming Empirics in Econ 101 + http://www.econpointofview.com/2014/05/reforming-empirics-econ-101/ + Fri, 23 May 2014 09:59:53 +0000 + + http://www.econpointofview.com/?p=977 + + © WealthyHabit.org[/caption] + +I have a confession to make; I have no idea how to fix the economics profession. For people who don't follow many economics blogs, that statement is no big deal. For people who follow many economics blogs, that statement is rare to find. + +Recently, modest proposals to transform the whole economics profession have flooded to blogosphere. If you just read some newspaper accounts, you might think that economics needs a revolution along the lines of the Bolsheviks. + +Those who are slightly more reserved have plans to just transform the whole economics educational system. Everyone seems to be a master designer, like the blogger who thinks Washington D.C. would work if the fools would "JUST LISTEN TO ME." If only most economics course taught post-Keynesian/Austrian/Marxists/Behavioral economics, everything would be swell. + +Now, I'm skeptical of "mainstream," "neoclassical," "Samuelsonian," or whatever you want to call popular economics and will never defend every aspect of it. I would like to see reforms, such as more history of thought. The system clearly falls short of perfection, as do all human activities. + +However, this does not make me confident in my own ability to understand such a complex system as the whole profession. I think I know what is wrong with others' proposals. The system needs to change, but I don't know how to do it. Maybe I take this stance because the critic's job is easy. I'd like to hope I'm echoing (reportedly) H.L. Mencken +
The fact that I have no remedy for all the sorrows of the world is no reason for my accepting yours. It simply supports the strong probability that yours is a fake.
+ + +Since every post has been about redesigning everything, Noah Smith's avoidance of this in his recent post (at his new part-time forum Bloomberg View) brought me joy. Noah sets himself an easier task: how to just change Econ 101. More specifically, I read Noah as simply explaining how he has taught the course differently than most and why he did this. He does not make any claim that he would transform the whole profession. For Noah, this was quite the humble post. + +Noah's proposes a simple change. Econ 101 needs more empirical results. Instead of drawing supply and demand graphs all day, students need to see the real world results of economic theories. I'll add that economics cannot exist simply on the blackboard. + +Noah comes to this conclusion from his physics training. Physics 101 impressed Noah (and me) by its ability to make concrete predictions and then demonstrate them right in front of your eyes. Students can really see the power of physics. +
(O)ur intro physics teacher took us to the lab to test the theory of projectile motion. It involved lobbing metal balls at a piece of tape and recording where the balls hit. When we looked at the tape, it was like magic -- the math had predicted just where the ball would hit. Physics theory really worked. “So that’s how they did it!,” I exclaimed to myself, thinking of the Turkish cannon pounding away at the Byzantine walls.
+However, Noah fails to provide a similar example for economics. What mirrors the ball and tape example for economics? I can think of examples of how economic predictions hold in the real world, although many cannot be easily shown right in class. Also, economic predictions are never like physics predictions. Economics can predict the direction of movements if everything else is held constant. It can never predict where exactly the ball will hit. That is the nature of the science, not a problem of Econ 101. + +Economics explains a wide variety of things, but since many are about complex phenomena, they can't be just shown directly in class. It is hard (not impossible) to show the most important story of economics, how markets coordinate actions, in a classroom. + +Noah tried his own attempt to correct the overuse of blackboard economics. He is an empiricist and showed his students a few empirical papers, although he is skeptical of their effectiveness. I can understand why this approach didn't work well. Empirical papers are not as sexy as classroom demonstrations in physics. Think AER paper vs. gyroscopes demonstrations. + +http://www.youtube.com/watch?v=vWsuXNi_Vnw + +Even if the students can understand the intuition behind the econometrics used in the papers, the papers don't show the laws of economics as clearly as the laws of physics. That's always going to be true. The data of economics comes much noisier than physics and rely on more complex assumptions. Few clear results come from empirical papers. + +I applaud Noah's goal of imitating the coolest course in any college, Physics 101, but he took the wrong direction. Notice that Noah did not get attracted to physics by reading modern papers on prediction of quantum physics. He saw the results with his own eyes. Econ 101 must show through demonstrations and examples, not empirical papers. I agree that Econ 101 should include less formula memorization and more demonstrations and good examples. Dirk Mateer has many demonstrations on his website. + +One example I have heard of- the teacher gives different size shirts to people randomly in the classroom. Through exchange the shirts end up being matched to the person. Boom- benefits of trade/efficiency/Pareto optimality in one example. + +Other economics lessons don't require a whole economy. Diminishing returns can be demonstrated with any good. Comparative advantage could be show by asking two people of different heights to jointly accomplish two tasks (one involving height). The people will divide the duty. Simple examples arise everywhere for the creative professor. + +Even a great textbook (here I'm thinking Alchian and Allen, not Mankiw) has lively examples. A good story about economics might work just as well. A story of Ann and Bob trading apples and bananas poorly imitates graduate blackboard economics. The examples need to be lively. Peter Boettke uses examples of dating to illustrate basic supply and demand. If you want to catch 18 year old's attention and teach at the same time, dating works as well as cannons. This would a close match to Noah's tape example. + +We have the tools to teach Econ 101. Many people just don't use them. + +Yet, we shouldn't draw too many connections between the two subjects. Physics and economics are fundamentally different. First, the use of empirical research in physics does not involve econometrics in the way that economists use it. Physics are looking for different evidence than the standard economist. As I said above, predictions in the two disciplines are different. + +More importantly, if the goal is to intrigue and teach students, the job of the professor in the two fields are different. They have different students. Go and talk to an econ student and then talk to a physics student. Yes, students and curriculum influence each other. From economics jargon, they are endogenous. But it's not fair to assume econ students learn or are interested in the same things that interest physics students like Noah and me. Physics is not economics. Physicists are not economists. And neither needs to be a bad copy of the other. + +I plan to follow Noah's advice when I am teaching Econ 101 (well my TA sessions first) and more away from the blackboard, but I will focus on demonstrations, not empirics. It will not fix the profession or the educational system. Hopefully, it will fix my little class. + +Or maybe I am just a punk student who has no idea how to teach economics. True, but I only can know the things that I found interesting when I discovered economics, outside of Econ 101.]]> + + 977 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Trade is not War + http://www.econpointofview.com/2014/06/trade-war/ + Thu, 19 Jun 2014 20:42:43 +0000 + + http://www.econpointofview.com/?p=991 + + Why We’re All Crony Capitalists, Like It or Not." It is a good read and worth an analysis by all of my readers. + +While there is much to talk about in the post, I want to focus on one part. He explains why the case for shutting down the Ex-Im Bank isn't a slam dunk: +
And there’s the rub for those who want to shut down the Ex-Im Bank. It’s all well and good to assail crony capitalism and to say that taxpayers shouldn’t be subsidizing private industry. But it also would amount to unilateral disarmament on the international stage, essentially putting American exporters at a clear disadvantage compared with European and Asian competitors. (emphasis added)
+ +Unilateral disarmament, arguably a problem for a military, is a meaningless metaphor with respect to trade. Trade is not war. We don't have arms and cannot disarm. It is unfortunate that economics uses words like "trade-wars" or "competition" that make trade seem like a zero or negative-sum game. We economists are good with picking terms... + +Trade is a positive-sum game. Everyone benefits from trade. People would not trade if they weren't better off. The same thing holds for trading between my grocer and I, as for companies from different countries. If it is beneficial for someone to trade with his neighbor, it is beneficial to trade with a foreigner. The statistics of exports and imports might cover up the idea that really two people are trading. That's why it is important to think about the underlying people and not the statistics. + +War is fundamentally different, day and night. In war, both countries are losers. In trade, both countries are winners, always both sides. Thinking about trade as war will only obscure the picture. When we remember to think of trade as beneficial, the "fight" disappears. We are left wondering what institutions best serve people's needs. + +Neil has done a great job thinking beyond stage one. The world does not function like the friction-less models that some people study. The economy will not instantly adjust. Jobs will be lost, as with any change in the economy. That is the obvious downside of shutting down the Ex-Im Bank. + +However, Neil stops at stage two. He only sees the companies that will be hurt by abolishing the Ex-Im Bank. He mourns for the Boeings of the world. He does not look at the other side of the market, consumers. This is the protectionism argument all over again, which I swore no one believed. + +http://www.youtube.com/watch?v=6qqG6OurHaM + +How would consumers be affected by a more responsive market that does not rely on subsidies? It is hard to imagine how consumers would be hurt. If Boeing can still offer the service at a price people will pay, consumers are in the same spot. If they are not productive enough to handle a global market, consumers will be better off with foreign products. + +Yes, these consumers might need to spend more dollars. But what happens to those dollars? They have to come back to the States at some point. If they don't, American's got planes for paper. That sounds like a good deal to me. If the dollars do come back, we will export more of a different product, which Neil seems to think is a good goal. This creative-destruction allows markets to more effectively use inputs for outputs. How we label the exchange shouldn't change anything. + +The dispersed actions of people work to allocate resources on a market. It's not obvious to the eye because it is complex, but it happens. Distortions from institutions like the Ex-Im Bank only hamper the wealth creation, positive-sum aspect of markets. + +My post doesn't even address the public choice concerns that are rampant with something like the Ex-Im Bank. I'll leave that to someone else. I'm back to studying.]]> + + 991 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Economic Writing + http://www.econpointofview.com/2014/06/economic-writing/ + Fri, 20 Jun 2014 12:34:12 +0000 + + http://www.econpointofview.com/?p=998 + + Writing + +Most economic writing hurts. The English, my goodness, is painful. It doesn't take Deirdre McCloskey to realize this. The following quote shows my point. + +Relatively, this isn't that bad. But its competition isn't fierce. +
For example, few writers on economic methodology recognize that the activities of formulating economic models and investigating their implications are a sort of conceptual exploration. Instead, most mistakenly regard these activities as offering empirical hypotheses and assess them in terms of some philosophical model of confirmation or falsification.
+This doozy comes from a JEL article by Daniel Hausman. I recommend the article. He got the ideas right, once I understood him. + +To be fair Hausman writes on philosophy. It's a rule: philosophy cannot be comprehensible to us simpletons. Nevertheless, economics and philosophy are better advanced through writing well. + +It doesn't take much. +

Classic trick #1- remove half the words.

+
For example, few writers on economic methodology recognize that the activities of formulating economic models and investigating their implications are a sort of conceptual exploration. Instead, most mistakenly regard these activities as offering empirical hypotheses and assess them in terms of some philosophical model of confirmation or falsification.
+This turns into: +
Few writers recognize that economic models are a conceptual exploration. Instead, most mistakenly regard this activity as offering empirical hypotheses and assess them in terms of falsification.
+Have we lost the meaning? I don't believe so. If I did lose something, what? + +Classic trick #1 turns gobbledygook into English. A good writer, not me, could take it much further. My quick rewrite would be: +
Few writers understand that economic models are conceptual tools. Instead, most falsely think of models as right or wrong, subject to The Data.
+That still isn't great. None of my writing is. I don't mean to disparage Prof. Hausman, but what reader has time to parse through 12 pages of  gobbledygook? Time is scarce. + +Simple editing will help our arguments. We will better advance knowledge.]]> + + 998 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 144 + + + http://gravatar.com/thecopycourse + + + + + + + 0 + 0 + + + + Which School of Thought are YOU? + http://www.econpointofview.com/2014/06/school-thought/ + Sat, 21 Jun 2014 16:59:49 +0000 + + http://www.econpointofview.com/?p=1020 + + schoolsofthought + +(Update: I did not create this chart, but found it from John Aziz.) + +Sometimes I take approaches to econ for granted. Not everyone sees economics as exchange. To me that's weird. It's good to be reminded that not everyone believes this. Besides the differences, there is plenty of overlap and possible work between the schools. + +Also, while I consider myself a reader of diverse economics, this picture also reminds me that I have neglected some (possibly) good economics from behavioralists and developmentalists. I'll take a look after finals... + +In case you are wondering, I guess am a Neoclassical-Austrian-Institutionalists. It's not too surprising, since my banner is Austrian and Chicago-school economists. Readers can guess which title comes from which row. +

What kind of economist are you?

+HT: @azizonomics]]> + + 1020 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 138 + + + http://unlearningeconomics.wordpress.com + + + + + + + 0 + 0 + + + + + + + + + + + + + + + + + + + 139 + + + + + + + + + + 138 + 1 + + + 140 + + + http://unlearningeconomics.wordpress.com + + + + + + + 139 + 0 + + + + + + + + + + + + + + + + + + + 141 + + + + + + + + + + 140 + 1 + + + 598 + + + http://lifeofgump.com + + + + + + + 0 + 0 + + + + Well Put My Friend + http://www.econpointofview.com/2014/06/well-put-my-friend-18/ + Mon, 23 Jun 2014 21:19:26 +0000 + + http://www.econpointofview.com/?p=1038 + + New Directions in Austrian Economics. It's an essay by Mario Rizzo called "Praxeology and Econometrics." +
We do not have a choice as to whether we shall make methodological decisions. Our choice, rather, is whether we shall make them explicitly, examining the various implications and subtleties of meaning, or whether we shall make them implicitly, blind to everything but technique.
+We can ignore the questions about what it means to do economics. That doesn't mean the questions and problems go away. This is our science and we should know what we are doing as scientists. We can be more clear (at least to ourselves) about what good economics involves.]]> + + 1038 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + A Mediocre Counter-Factual + http://www.econpointofview.com/2014/07/mediocre-counter-factual/ + Fri, 11 Jul 2014 19:18:18 +0000 + + http://www.econpointofview.com/?p=1044 + + didn't happen. Unfortunately, since most policies are not done in a lab, we rarely see a true counter-factual. The minimum wage raises or it doesn't. We only see one of the two. + +Since we rarely have a counter-factual, what is someone with an interest in policy to do? Well, we do have some tools, but it can be rough. + +Most of the fancy econometric tests are just trying to build this missing counter-factual. They attempted to reconstruct what would have happened under a different policy. If we have our best guess of what would have happened under a different policy (from the counter-factual), then we can start making some judgments about the relative outcomes. + +As I said, this is really hard, I mean really hard, like perfect run in Mario hard. + +We all struggle to find the right counter-factual. Sometimes we come quite short. In my Twitter feed, I came across a tweet and article which thinks it has the missing counter-factual. + +I'm not convinced this is the right counter-factual. Notice that I'm not disputing the "Myth." It might be a myth. I'm also not disputing the "Fact." I'm sure it's right. + +I am doubting that the connection between the two sides of the picture are as clear as the Economic Policy Institute makes us believe. + +The problem is that states with higher tipped minimum wage are likely completely different from lower tipped minimum wage states. Is it really fair to compare the richest states with the poorest and draw a conclusion? If I find that Haiti has a lower minimum wage than Sweden, should I conclude that raising Haiti's minimum wage to Sweden's would raise the pay of Haitians? + +There are less drastic differences across states in the United States. But they still exist and we need to find a way to correct for those. That is where the econometrics can come in. + +Simple facts like those that fit in 140 characters won't cut it. Sadly, most analysis shown in popular press won't cut it neither. + +This is an easy trap to fall into when reading and writing. I'm not saying I know the right counter-factual often, but just giving a heads up to watch out for these slights of hand. + +]]> + + 1044 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Anarchy Unbound, Economics Unbound + http://www.econpointofview.com/2014/08/anarchy-unbound/ + Fri, 08 Aug 2014 18:26:28 +0000 + + http://www.econpointofview.com/?p=1053 + + 07056-after + +  + +  + +  + +  + +  + +  + +  + +  + +  + +It takes something special for an author to claim the book isn't arguing much and then spend 200+ pages not arguing much. My guess is the author is understating the size of his case. + +Such is the case with Pete Leeson's Anarchy Unbound. His simple thesis is that "anarchy works better than you think. (1)"  That is about as low of a bar as an academic can set. Leeson himself acknowledges that this is an extremely simple task, especially for an academic work that includes 10 essays. While I'm at Mercatus at the moment for an Austrian economics conference, I find it fitting to write-up my thoughts on the book. + +Even though Leeson claims he is not making a radical argument, many people will see this as a radical book. As soon as a book has the word "anarchy" in the title eyes are going to roll. + +I experienced this reaction first-hand. The confused looks I got when I read this book around campus or up at the lake cabin was evidence of people's gut reaction to word, just the word. As with all words, it can be used to dismiss another's argument out of hand (such as that is socialist or that would be anarchy) or it can be used as a descriptive tool. That is how I want to use words. + +To be used properly as a tool for helping conversation, Leeson and readers must first come to agreement on what the word means, or at least what it will mean in this book. + +Leeson takes a fairly academic definition of anarchy, not the popular definition. Anarchy is not a state of chaos, as most people use the word. Instead, anarchy simply means no government.  That's all. Anytime a government is not around to enforce contracts, protect citizens, whatever it is that governments do, Leeson calls that anarchy. + +But this definition really begs the question. Now readers are left wondering, what is government? That's harder to pin down. Leeson wrestles with it a little, but leaves it open. I bet some authors have spent a whole book on this question. Anarchy Unbound is about moving beyond that argument. + +Leeson's defines government somewhere between Potter Stewart's definition of porn, "I'll know it when I see it", and Weber's classic definition of government as a territorial monopoly on violence. For this review, that is a good enough definition. You know it when you see it. If you want a more complete explanation, check out the first chapter. He is slightly more nuanced. + +Without government, what are we left with? What structure remains when there is not a monopoly on force. Leeson argues that other rules arise to fill the void left when government is absent. + +This allows Leeson to distinguish government and governance. Government is only one form of governance. Throughout the book Leeson works to show readers forms of governance that emerge without government. He applies rational-choice theory to understand this topic. + +Rational people, through following incentives, develop forms of governance to improve their lives. As always in economics, actors do so because it is in their interest to. They expect life to be better with a form of governance than without one. + +To take one example, even when plundering ships on the open sea, privateers had an incentive to not destroy their potential loot. If I'm going to steal your ice-cream cone, I really don't want to hit the cone into the ground in the process. That would be a loss for everyone. It is in my interest for you to hand over the ice-cream cone without violence. + +Privateers faced with this incentive developed a system of governance to reduce these deadweight losses. Ransom and parole developed as a form of "Coasean contract." Leeson explains: +
After overwhelming a merchantman, such a privateer offered its victims the following bargain: for a price it would allow the merchant vessel, its cargo, and its crewmembers their freedom. If the price was right, this arrangement was mutually beneficial. Provided the price agreed on in the plunder contract was higher than what the privateer expected to earn if it plundered its victim traditionally and thus had to incur the costs discussed earlier, it was happy to enter such a contract. (76)
+Leeson shows that even in the worse of scenarios (people who live off of stealing), some rules developed to reduce costs. Governance does do something. It is not all violence like we imagine the Hobbesian jungle. + +Again, it's straightforward economic reasoning. Rational people don't like chaos. It is expensive to deal with chaos. These rational actors develop forms of governance even when academic economists with their narrow framework don't believe they will. They make anarchy work better than you think. QED. Well not quite. Leeson has more of an argument to make. + +Drawing on Leeson's extensive academic writings (seriously, check out his CV for a list of publications longer than I will have over my entire career), he lays out the ways that anarchy works. If he really wanted to raise the bar only as high as he claims (better than you think),  one essay would be enough. But Leeson gives the reader plenty to mull over. He makes an even stronger case than that. The whole book feels like a tug between modesty and intellectual radicalism. I'd venture to say for most people out there this book would convince them that anarchy works MUCH better than they think. That only happens when someone reads a radical. + +Unfortunately, I'm not sure it will convince many readers that anarchy works better than they think. This isn't because Leeson doesn't lay out a good case; he lays out a completely compelling case. My appreciation of forms of alternative forms of governance rose immensely from reading this book. + +Instead, I'm afraid he won't convince many because few readers will approach this book who don't already believe anarchy works well. That is, most people who pick up this book won't need any convincing. They already appreciate or love anarchy. But this book is not a typical rah-rah anarchy book. It reads like academic work, for good or bad. Actually, it reads like really well-reasoned and written academic work, not like most academic work. + +At the same time, I just don't picture many people who are unsympathetic to anarchy picking up this book. People who believe, like Hobbes, that without government everything goes to hell in a hand-basket will not even know this book exists. That's not a knock on Leeson. It's a knock on the intellectual climate around the word "anarchy." + +Without strong skeptics and already-convinced anarchists as the right audience, this leaves a small segment of the world who are sympathetic. Luckily, I fit in that and few positioned to write these words. My goal with this review is to convince people in all three categories to check out the book. + +I'm comfortable doing this because Anarchy Unbound is completely accessible to the proverbial layman. Anyone who reads this blog can follow and appreciate the argument. When I first picked up the book, I loved his approach so much that I had to tweet it. + +Leeson is writing the book that is for almost everyone, economists or not, anarchist or not. + + + +I've framed the last few paragraphs using words the word anarchist.  That's not fair to the book. Only the last bit of the book makes any sort of anarchist points or arguments FOR anarchy. + +Instead, the bulk of the book is extremely detailed explanations of the workings of anarchy. It is completely positive, as compared to normative. Leeson is adamant about this in the opening of the book. He even gets a little snarky on this, which I love: +
It’s inevitable that some persons will be unable (or unwilling) to accept the claim that the analyses in Chapters 2 through 9 are positive. They will jump from the fact I'm challenging the conventional wisdom about self-governance to the mistake belief that the essays I use to do so are normative. If you're one of these persons, go back and read the allegedly normative essay(s) again. You will see that the discussion is in fact positive. If you don't see this consult a dictionary for the definitions of "positive" and "normative". If you still remain unconvinced, consider the possibility that it's not me who has the difficulty escaping normative thinking. (11)
+In that way, Leeson fills in a chuck of the literature that is extremely thin, pure explanation of the workings of anarchy without value judgments. Contrary to some writers, this distinction between pure economic science and normative judgments is possible. I hope to emulate it in my work. + +So how does Leeson carry out his admittedly low task? He slowly and methodically lays out (1) theory of how anarchy can work and (2) evidence of how anarchy has worked. + +My only beef with some of his examples nagged me throughout the book. He explains historic and modern situations of where people under anarchy have developed forms of governance. Everything from pirates (which Leeson knows plenty about) to international trade to prison gangs to Somalia comes up. Constantly, Leeson finds forms of governance that emerge spontaneously for these groups. + +For the pirates, it was democratic elections and checks-and-balances. For international trade, it is social norms and customs. For prison gangs, it is written constitutions. For Somalia, it is private provision of public goods. Everywhere Leeson looks there is some order that is emerging spontaneously. It is not chaos. To Leeson, this is evidence that anarchy works "better than you think." + +But what would a society look like with NO forms of governance? What would we find it NO rules emerged? I'm left wondering what sort of evidence would show anarchy works "as bad as you think." + +I'm not sure what Leeson's null hypothesis is (to frame it in traditional economics jargon). What is the hypothesis he is refuting? Some of the evidence he provides leaves me thinking, "this is pretty bad." How bad do things have to get to counter his thesis? While I am sure Leeson has thought about this and it is probably in his extensive writings, it is not clear in the book. That and the right audience are the main issues I have. + +However, I can't leave this review on a negative note. This is the most interesting book I've read in months. It is a masterly piece of scholarship and worth reading for people interested in governments (or lack thereof). + +I raced through it, scribbling notes the whole time. It kept me engaged in a way that most academic books can't. Leeson blends sociology, law, history, and economics together in a great work of "social science" the way the great minds that originated the field would love. No more viewing economics in a narrow box for us! + +He shows that anarchy works beyond the limits that conventional wisdom puts on it. He shows that economics works beyond the limits that academic divisions puts on it. Win and win. QED. + + ]]> + + 1053 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Reflections on the Advanced Austrian Seminar at Mercatus + http://www.econpointofview.com/2014/08/advanced-austrian-seminar-mercatus/ + Sun, 10 Aug 2014 21:48:15 +0000 + + http://www.econpointofview.com/?p=1071 + + Anarchy Unbound, I am in Washington, D.C. at the Mercatus Center. Actually, I'm now in a hotel lobby. That's not the point. + +I came out here for the Advanced Austrian Economics Seminar, a 3 day conference/seminar for students interested in the ideas of Austrian economics, broadly defined. It was a gathering of around 20 students from around the world and faculty members from George Mason. Israel Kirzner, Pete Boettke, Pete Leeson, Larry White, and Chris Coyne gave lectures. Virgil Storr was also around and active in discussions. All of them know more economics in there pinky than I know in my body, to steal Pete Boettke's cheesy line. + +Any students interested Austrian economics should apply for next year's program. The people are fun and Mercatus treats guests well. I'm talking putting us up in one of those places where the shower head is some weird set-up you've never seen before. Fancy stuff like that. + +Plus, I got a lot of books as reading material, aka Christmas for me. + + + +If I can go again, I definitely will. + +The goal of the weekend was to show how modern research can use the ideas of Austrian economics. The presenters emphasized that Austrian economics is not a body of settled doctrine, but a framework for furthering economic science. Although we discussed the famous Austrian names (Mises and Hayek especially) quite often, the lens looked forward. We want to use these insights to move forward, not just look back. + +The weekend started off with Israel Kirzner presenting on the market process.That talk sticks in my brain. First, for me Kirzner is a towering figure. The first few chapters of Competition and Entrepreneurship are a major reason I'm doing a PhD. I told Pete Boettke that I was like a teenage girl at a boy-band concert (with slightly less screaming). I was much more intimidated by him than even people like Robert Lucas, Ed Prescott, or Raj Chetty. Heck, I named my blog after Kirzner's dissertation. And this is a guy that 99% of economists have (wrongly) never read. + +Second, Kirzner brought an energy to the podium that I was not expecting. He's no longer Mises's young student, but still has pure passion and excitement for the science. Plus, I learned a lot. While I have watched lectures of YouTube from him on similar topics, this had a new bend. To get a flavor of his ideas and the talk, check out the video below. + +http://www.youtube.com/watch?v=oMm-anSv-tU + +How do we understand an open-ended world that cannot be collapsed down into a probability distribution? If you understand, let me know how. It's tough. It's also right at the heart of the differences between Austrians' understanding of the market as a discovery process and non-Austrians' framework. That's what Kirzner has struggled with for 50+ years and still presenting on. + +The rest of the weekend involved 5 more lectures and 2 breakout sessions. On top of that were meals and free time to talk about this subject that I love. I can't express how fun that was for me. + +The passion differed from other seminars I've been to. Everyone there loves economics with a fervor. Mercatus, particularly the Hayek program there, is daring to be different, following the recommendation of James Buchanan. + +This weekend was especially unique for me personally because it was the first time I had ever talked with an academic Austrian economist. Literally, I have never talked with people who want to do research in this field. + +I didn't realize that until the first night. It hit me. I am around people who actually share my interests. Now, I was able to talk with other academics interested in the ideas. It overwhelmed me for a moment. + +Beyond what I've mentioned, the highlights for me were: +
    +
  • connecting with a whole new set of economists. I know have a larger network of interesting young scholars.
    • +
  • the food (both for the seminar and outside of it). I had my first Pakistani meal and my first meal off a "hidden" second menu.
    • +
  • discussing Austrian economics and political economy over beers and whisky.
    • +
+However the seminar wasn't without some disappointments. Mainly, it disappointed me to see the collective lack of understanding of non-Austrian models from us students. There were a few situations where I felt like we didn't arrive at a proper understanding of what non-Austrians are saying on an issue. + +For example, Larry White asked a fairly simple question about Keynes's model. I forget the exact question. No one, myself included, knew the answer. Upon reflection, I remembered the point, but I had no internalized the model well enough to even answer a simple question quickly. That's disappointing to see. Most people were happy to sneer at Keynes, but didn't know the model. + +In other discussions, less glaring examples came up. I don't think we had a correct understanding of how and why other economists use words like information or rationality. People were slaying strawmen. If Austrian economics is going to interact with the rest of the profession, the Austrian economists need to at least be able to understand others. That's a necessary condition for minimal conversations. + +Maybe this is me looking for a negative thing to write so this post isn't just "GO AUSTRIANS." Maybe not. Who knows. Overall, the weekend has been what I hoped for and more. I can't praise the seminar enough. If anyone involved at Mercatus ever reads this, thanks for the weekend. + +So if anyone is even remotely interested in the Austrian school of economics, apply to attend next summer here.]]> + + 1071 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 487 + + + http://nickfreiling.com + + + + + + + 0 + 0 + + + 488 + + + http://www.factsandotherstubbornthings.blogspot.com + + + + + + + 0 + 0 + + + 489 + + + + + + + + + + 487 + 1 + + + 490 + + + + + + + + + + 488 + 1 + + + + Almost Starting a PhD + http://www.econpointofview.com/2014/08/almost-starting-phd/ + Fri, 29 Aug 2014 20:47:30 +0000 + + http://www.econpointofview.com/?p=1080 + + married to the woman of my dreams. Believe it or not, weddings don't just fall in to place. They require planning and that took up most of my time this summer. It was all worth it. + +On top of slowing my blogging, the wedding took over time that I might have devoted to "math camp' for my PhD. For those of you who don't know, math camp attempts to bring all incoming econ PhDs to the same level of math. Since an economics PhD is heavily focused on math (check out some Minnesota lecture notes here or here), understanding the language of proof-based math is a must. It takes a full course plus more math to understand first year economics. + +I decided the opportunity cost of the last few classes was too high and decided not to attend. Later I might regret my make-up work, but then it was the rational thing to do. Maybe I irrationally discounted the future pain it would cause... I wish I could write a proper summary of math camp, but I don't feel qualified since I missed some of it. + +Now I'm sitting in my new office (well not *my* office since I share with three others) thinking ahead to the next 5+ years. It is nerve-wrecking, exciting, confusing, and so many more things all at the same time. Over this journey, specifically the first few years, I hope to document the process through this blog. Think of this post as the start of that collection. + +Here are a few things running through my mind pre-PhD: +

Teaching

+Minnesota might be unique because almost every first year is a teaching assistant. We start out in front of a crew of 18-year-olds on day one. From my understanding, many other places have first years as research assistants or they just do classes. We hop right into the teaching. + +All the TAs here spent this whole week trying to prepare for that process of teaching. Our orientation was extremely helpful and combined with my earlier teaching experiences, I feel ready for a class. Of course I'm nervous, but I can overcome that. + +First years see teaching as a blessing or a curse. After all I learned this week, I believe it will be a blessing. The most obvious reason is that I will gain teaching experience. Unless you are a top-tier researcher, most economists land in a job where their teaching matters, even to a very small degree. At some point I will have to teach if I want to be employable. I do want a job, so I need the experience. Minnesota puts that training at the (almost) core of the PhD. + +Secondly, I also want to teach in the future and I can't wait to lead my own classes. Teaching will be a blast. I'm pumped every day that I get to study economics. Economics surpasses all other subjects; it's the coolest. I hope to spend a career instilling this love in other people and the most obvious way to do this is through the classroom. + +But to teach a full class I need to take baby steps. TAing this year will help prepare me for that. My passion might not come out right away since econ 101 is highly structured at Minnesota. I won't teach "Brian Economics," what gets me pumped. Someday I will. + +Also, teaching econ 101- to students who have likely never seen the subject- helps my personal understanding. If I want an 18-year-old to understand comparative advantage, I need to break the topic down to its core. That helps me further my understanding. Sometimes we need to ditch the math and just explain things like a real person. That's a goal of this blog too. Econ 101 students will push me to do that better. + +When thinking about teaching/TAing, it was fun to see other people's thoughts on the process. Pete Boettke and Don Boudreaux both have some reflections on the benefits and purposes of teaching. We economics instructors have the coolest job in the world; we should show it. +

Classes

+Classes devour the biggest chunk of my next two years. The amount of time spent in actual lectures might not be much, but everyone warns of the difficulties of *cue scary music* problem sets. + +For those of you who don't know, problem sets are the (torture) mechanism that econ programs use to teach students. They involve proving theorems and solving problems. From what I've heard, they do not involve any economics, but I could be mistaken. I'm only half-joking. 50 pages of written solutions every week is not uncommon. + +These problem sets have a purpose, so I've been told. To survive in the Samuelsonian world of academic economics, economists must communicate with each other. First year tries (by fire) to teach the language of economics. My coursework is all geared toward that. I plan on taking a math course in Real Analysis (so I can understand those lecture notes above), a micro course, and a macro course. I also want to audit econometrics so that I can start the second year in a better place. Most future courses require econometrics, so I want it right away. Maybe I won't fit this all in, but that's the plan now. All four courses are truly fundamental to academic economics. It's the core at every university for a reason. + +Hopefully, after the first year, we PhD students can understand a bit when they attend lectures in varying fields, such as micro theory, trade theory, or applied micro. The second year and beyond is about specialization. That is when we try to move to the forefront of our field. Year one attempts to put the foundation in place. + +As most first years, these core classes are my greatest worry. It will take a lot of time and effort learning stuff that is not directly applicable to doing economics. One professor at Minnesota admitted that we will learn nothing applicable for the first year and a half. I hope he is also half-joking. We still need to go through as a right of passage. I hold Deirdre McCloskey close by as an inspiration. + +There are many horror stories, but many people can make it through. Everything I heard this week made me more confident in the process. People likely exaggerate these stories and Minnesota already seems like a cooperative place to do work. Everyone is supportive. We are all on the same team to get through this Ph.D. Classes will be tough, but manageable. +

Writing

+One of the things that is almost unheard of in the first two years is writing. That seems odd since we are budding academics who make their living writing, but that's not the emphasis. Most of the work, as I said above, is through problem sets. Solve this problem. Prove this theorem. It is not writing or research in the way that most economists use the term. We are still in training, not actually doing economics. + +My goal is to keep writing on my own, beyond the classwork, trying to do a little economics. This will include Econ Point of View, a small book I'm working on (more coming soon I promise), and academic research, such as a paper I'm doing about the Panic of 1907. + +For one thing, I find writing extremely relaxing when I've done a lot of reading or studying. It uses the brain in a different way. Instead of relaxing on Facebook, I hope to write. I'm weird like that. + +More importantly, my job prospects depends on my writing. That's how economists communicate. If I can't write articulately, no one will want to read me. If I can't research and write a coherent argument, I won't publish. I need these skills to survive, so why not work from day 1? I'm sure someone will scold me along the way, but I want to write. It helps my thinking. Everyone has their own way and this is mine. + +So those are a few of my thoughts staring a PhD in the face from 4 days out. Minnesota is a great place and I am happy a chose Minnesota. THe journey seems long from here, but I know it will go by in a flash. Taking some time to write like this will help me soak it all in. Hopefully, it will give insight to potential PhDs about the process. + +Wish me luck!]]> + + 1080 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 491 + + + + + + + + + + 0 + 0 + + + + An Economist Carves a Pumpkin + http://www.econpointofview.com/2014/10/an-economist-carves-a-pumpkin/ + Wed, 29 Oct 2014 02:10:27 +0000 + + http://www.econpointofview.com/?p=1091 + + image + + +Guess which one is mine?]]> + + 1091 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + Breakdown of Spontaneous Order: Smith and Hayek + http://www.econpointofview.com/2014/11/breakdown-spontaneous-order-smith-hayek/ + Tue, 25 Nov 2014 15:00:27 +0000 + + http://www.econpointofview.com/?p=1095 + + Ph.D. classes in economics, one of the most fundamental insights from economics is "spontaneous order theorizing." Basically, many of the aspects of our society have arisen spontaneously without anyone planning them. These phenomena, like money, language, or law, are the result of purposeful human action, but are not of human design. It is a powerful model for understanding the world. For an overview of the topic, check out this article. + +The two most famous economists who worked within this framework are Hayek and Adam Smith. While many writers have lumped them together, they disagreed on many issues. This is understandable since both wrote on wide-ranging topics. + +If you would, allow me to put down a few thoughts I'm having about their differences on the breakdown of spontaneous order. This differences don't affect the spontaneous order model from a positive point of view, but might from a normative. +

Problems within Spontaneous Orders

+A split between the two giants occurs on the issue of “social justice” with Smith providing a list of exceptions to the benefits of spontaneous order. One explanation of the split is given by Laurent Dobuzinskis, who sees Smith as emphasizing both of the sentiments of liberty and sympathy. Sympathy is not a major concern for Hayek. + +In contrast, Hayek focuses almost exclusively on liberty since he is a “classical liberal for whom private property rights were paramount” (Dobuzinskis, 2008, 94). The concern with sympathy explains why, in Smith’s worldview, nonmarket institutions can play a part in providing public goods such as basic education, regulation, and economic support for the poor (Sen 2011, 259). Indeed, Smith saw intervention in the interest of the poor as beneficial to the society. “When regulation, therefore is in favour of the workmen, it is always just and equitable” (A. Smith, [1776] 2001, 356). In fact, there is a list of interventions authorized by Smith. + +In 1787, Jeremy Bentham complained that Adam Smith was unable to see all the virtues of the market economy, since Smith criticized the “prodigals and projects” that were a natural part of a market. Smith also supported state regulation of financial transactions (Sen, 2011, 258) since a totally spontaneous, unregulated market can easily pave the way for “a great part of the capital of the country” being “kept out of the hands which were most likely to make a profitable and advantage use of it, and thrown into those which were most likely to waste and destroy it” (A. Smith, [1776] 2001, 356). + +Justice is commutative for Smith and requires negative obligations (justice requires that people not steal compared but people are not required to help the poor) to protect others. Ultimately, Smith believed that injustice could be reduced through governmental institutions (Sen, 2011, 267). This requires an intervention into the workings of spontaneous order, sometimes to a great extent. + +Hayek sees the need for government (he was not an anarchist), but believes the purpose of intervention is quite different. While Hayek believes in general rules, such as those governing property and protecting peace. Yet, government cannot provide for “social justice”. While Smith sees legislation to correct what he saw as errors of spontaneous order, Hayek defines the nature of law as “purpose-independent rules” meant to give a framework for the interaction between people. Laws should apply to “an unknown number of future instances” in order to offer a “protected domain”. This would “enable an order of actions to form itself wherein the individuals can make feasible plans” (Hayek, 1973, 85–6). + +Thus, he writes that a society should function under a rule of law, or ‘meta-legal doctrine’ (Hayek, 1960, 206), which prescribes legislation by the above definition. The purpose of judges and legislators is to select those rules which worked in the past and should be held up to make it more likely that individuals’ expectations will match the real rules (Hayek, 1973, 119). This system of order provides justice precisely because it develops from general rules of behavior and not in pursuit of any individual’s purpose. Society cannot possibly agree on ends; it can find agreement on means and the framework to create. These rules can proscribe types of action but should not reference the ends which any part of society aims. Hayek terms the order that spontaneously arises from such a process as a ‘cosmos’: an order which results from the adherence to abstract general rules with no agreement as to ends (Hayek, 1978: 76). + +If you'd allow me to go make a bold claim. This difference between Smith and Hayek provides a major basis for a split between certain modern-day conservatives and libertarians. Small government conservatives have followed Adam Smith more and libertarians have followed Hayek. + +
+ +References + +Dobuzinskis, Laurent. “‘The Adam Smith Problem’ Revisited: Comparing Hayek’s and Fouillee’s Answers.” Studies in Emergent Order 1 (2008): 92-118. + +Hayek, F. A. The Constitution of Liberty. London: Routledge, 1960. + +Hayek, F. A. Law, Legislation and Liberty: Vol. 1, Rules and Order. Chicago: University of Chicago Press, 1973. + +Hayek, F. A. Law, Legislation and Liberty: Vol. 2, The Mirage of Social Justice. Chicago: University of Chicago Press, 1978. + +Sen, Amartya. “Uses and Abuses of Adam Smith.” History of Political Economy 43 (2011): 257-71 + +Smith, Adam. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. London: Elecbook, 2001.]]> + + 1095 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Compared To What? Ideology Edition + http://www.econpointofview.com/2014/12/compared-ideology-edition/ + Tue, 09 Dec 2014 18:37:25 +0000 + + http://www.econpointofview.com/?p=1107 + + paper by Zubin Jelveh, Bruce Kogut, and Suresh Naidu received buzz all yesterday. Everything started with a 538 article by the paper's authors with the headline "Economists Aren’t As Nonpartisan As We Think." (Let's ignore the obvious question, what did we think?) + + +The article involved a few ready for social media images, like the buzzwords from the left and right economists. + + + +The take away from the article is that, contrary to some people's claims that economics is a science without ideology, ideology remains in economists' published work. +
We could then predict the ideology of any economist not in our sample by feeding his or her body of work into our algorithm. The results weren’t perfect, but the algorithm showed promising ability in distinguishing between liberal and conservative economists. To understand how well it performed, imagine that you randomly pick two economists and predict their ideologies. Random guessing would get it right 50 percent of the time and a perfect model would be able to produce the right affiliation 100 percent of the time. Our algorithm got it right 74.1 percent of the time.
+ + +Kevin Drum quickly followed up by pointing out that the slope, while statistically significant, is impressively small. I mean, the slope is basically zero, right? Drum's concludes that it is amazing that economists, who deal with political topics, aren't even more ideological. + +Cheers to us economists. We can mask our political ideology, at least for these authors. Well maybe. Noah Smith seems to agree that the slope is small, although he expresses reservations about the authors' ability to measure ideology. There are all interesting and important points about the 538 article, but they fundamentally miss one vital question. + + + +

Compared to What?

+One of the first things I learned when studying economics was to always ask "compared to what?" Is the railroad expensive? Compared to what? Is crime low? Compared to what? Do people like my blog? No. Compared to what? The question almost becomes annoying. But it's vitally important and cannot be forgotten. + +Imagine I believe that the authors have perfectly measured ideology. Also imagine that I will stop trusting economists if I find out they are ideological, so I better find an answer to this question. + +I still can't decide whether economics is ideological until I ask.... Compared to what? Are we ideological compared to journalists? Lawyers? Sociologists? Politicians? Philosophers? Biologists? A benevolent and all-knowing person? If there is not a comparison, how can one decide? + +This may seem trivial, but it goes to the heart of the public understanding of economists. Some people argue that economics is just a cover for political hacks. Economists argue against the minimum wage, because the Koch brothers pay them. Therefore, don't listened to economists. + +This is usually followed by a sneer and possibly mocking an "idiot" economist that the person disagrees with. + +Sure, you can do that. But if you really want to understand the world, you need something more. If you ignore economists because we are ideologues, I pray that you can find some wisdom this side of Eden that is less ideological. Maybe you can. The problem is that no one (that I saw) discussed this. Yesterday's conversations weren't about that. But until you do, while you're searching for understanding you must ask yourself: "compared to what?" If economists are less than every other comparison group, then for good or bad, we are the best option. + +When someone writes a paper comparing groups, then I'll start to listen carefully. + + ]]> + + 1107 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + One Semester In An Economics Ph.D. + http://www.econpointofview.com/2014/12/one-semester-in-an-economics-phd/ + Fri, 12 Dec 2014 19:02:12 +0000 + + http://www.econpointofview.com/?p=1117 + + + +Everyone knows that feeling during a long drive where you don't remember the last few miles. You're almost in a trance.  You feel like you missed something. That is what the last few months have felt like. + +I can't believe it is already the end of my first semester as an economics Ph.D. student. While it feels like I've been here for a long time, it went by in a flash. It was all a blur. However, this post is a short reflection on the bit that hasn't slipped through my mind. +

A Flurry Of Math

+Before the semester, I wrote down some of my thoughts on what I was expecting. While the specifics of this semester have varied, it has been what I expected overall. Lots of work. Lots of math. + +Once I'd thought I'd learned more math than I could stomach, I learned some more. And that's great. It's has allowed me to better understand modern economics, even though I'm a skeptic of the supremacy of math in economics. + +For better or worse, if I want to communicate as a professional economist (which I do), I need to speak the language. The language is math. (Actually it is only small subset of math that uses set theory and constrained maximization) and I have learned some of the language this semester. I'm at the point where I can identify the letters in the language, but not say anything intelligible. It's a start. + +On top of my micro courses, which cover math topics like convex analysis and the classic fixed-point theorems for general equilibrium, I also took a math course in real analysis. Basically, I learned how to rigorously prove some things I took for granted in calculus. Coming from a physics undergrad, the math use was completely new. Again, it's not something I want to spend my life doing, but it was good to learn more about these topics. Whether they were the best use of my time... + +Overall, the training I am receiving in mathematics helps. More importantly, it has opened my eyes to some of the possible tools that economics can use. I see no reason to restrict my tool set (or set of arrows in my quiver as Pete Boettke calls them) to exclude advanced math, computers or econometrics. If I see an arrow that allows me to tackle a problem, I hope I'm the type of economist who grabs that arrow. Sorry to all Austrians who believe logical deduction = economics. Of course, proofs are not necessary nor sufficient for doing economics. +

Economics?

+ + +I'm in an economics department. I'm an economist and although these tools are interesting, the tools are not the end. Ultimately, this is about understanding society and the economy. + +I'm not sure I've learned anything more about society. While this criticism of math as the end is not unique to me, it is important to sometimes comment on the emperors clothes. + +Beyond that complaint, I have started to understand two main aspects of economic theory: general equilibrium and macro. (Yes, these are roughly the same thing.) I knew about neither before this year. My macro training was extremely thin, just one course, and I'd never seen a formal general equilibrium model. So it hasn't all been math. I have learned a few models. This year involves going into the heart of core macro models to better understand them. That's new to me and helpful for communicating with macro economics. So I can say I learned some economic models. + +On price theory, what I believe is the core of economics, I have learned nothing. I do not better understand those things which got me excited about economics. Nothing. It makes for some boring parts of the year, but I had no expectations that this year would be exciting for me. + +To keep me excited about price theory, I've listened to graduate lectures by Walter Williams. It is a style of class that is the opposite of what my courses are. I find the lectures refreshing. I've always had a weird interest in economics and have chosen a different pedagogical approach. + +This may seem like a deep complaint about first-year. It is not. The professors constantly tell us that first-year is not about applying anything. It is simply about learning tools that we can apply later. I'm holding out hope that I will be able to apply some of these tools, but I'm not going to bet my salary on it. +

Other Fun Times

+Beyond the coursework, this semester has involved much exploring into fields of economics. Usually professors tell first-years to just keep their head in the coursework and not get distracted with other stuff. + +That's not me. My interest in economics is wide and I need to feed that to keep going through the hard times. I can't solve general equilibrium models all day; a guy has to have some fun. + +Luckily, I am an Adam Smith Fellow at the Mercatus Center this year. This fall, the fellowship involved a long list of readings (mostly on Hayek and Mises), plus one weekend of discussions this fall. This allowed me to forget about the theorem-proof approach to economics for a bit. + +We just received our reading list for the next meetings, so I need to start reading more on Buchanan and Tullock. These are the economists that excited me about economics, so I'm glad to have a constructive path for studying them. Plus, the fellowship connects me to people who are interested in the type of work that excites me. + +Also, I've spent much of the last month studying agent-based modeling in economics. While slightly heterodox, it is another tool for studying economic problems that uses some tools from modern mathematics and computer science. However, the tools are not the same ones used in most of economics. Agent-based modeling looks at patterns that emerge from a model, compared to an equilibrium. + +Agent-based modeling seems to incorporates many Austrian criticisms of standard Samuelsonian economics. However, I am extremely new to the field and don't understand enough to decide whether it is a useful tool for social scientists or just a fun game to play. For now, I'm enjoying learning about it, because it is fun. Whether it will be an area of research for me, we will see. For now, when I'm bored with classes I have something to learn about. +

Minnesota

+The best part of my Ph.D. is that I am doing it at Minnesota. While I had heard horror stories about this place and people love to talk bad about the program, my experience has been phenomenal. That was a huge concern for me. As someone interested in Austrian economics, I was worried about being the black sheep and not being supported. That is not the case. + +From day 1, the faculty, fellow first-years, and other years have shown me nothing but respect. They welcome everyone- even crazies like me- with open arms, which is huge when students are already stressed enough with work. I have no reservations about talking with students from other years or professors about problems I'm having. + +Also, we first-years work together on problem sets with no sense of rivalry. We are a team trying to become the best economists possible. It leads to a fun atmosphere, but also a challenging experience. You're constantly trying to work and push those around you, bouncing ideas off of each other. + +If anyone reading this wants to an economics Ph.D., I urge you to apply to Minnesota. The atmosphere might not be for everyone, but after my first semester I'm sold. + +While I could write 10,000 words on my first semester, I will leave this post right here. If people are interested in specific aspects, I'll say more about it. + +For now, I'm excited for a break, but I'm excited to come back in January for semester 2. I'm extremely blessed to be an economist (in training).]]> + + 1117 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 497 + + + + + + + + + + 0 + 0 + + + 499 + + + + + + + + + + 0 + 0 + + + 605 + + + + + + + + + + 0 + 0 + + + + I LOVE BOOKS- My Favorite Books From 2014 + http://www.econpointofview.com/2014/12/my-books-from-2014/ + Wed, 17 Dec 2014 15:40:56 +0000 + + http://www.econpointofview.com/?p=1132 + + + +Seeing other people's lists of their favorite books of the year, like Ryan Decker's, inspired me to read a few more books and add A LOT to my "To Read" pile. Perhaps my list of the best books I read in 2014 will inspire others. +

Economics Books for Everybody

+I fell in love with economics through books written for non-economists, like Thomas Sowell's Basic Economics. Even during my academic work, I try to continue reading economics books that highlight the beauty of economic reasoning in the world around us. Here are two books to help you see the world as an economist: +
    +
  • The New World of Economics by Richard McKenzie and Gordon Tullock- Long before Freakonomics, and even before Steven Landsburg's fantastic An Armchair Economist, The New World of Economics showed the wonder of economics. If you're first economics class was deathly boring, this little book could have spiced it up. Published in 1975, this book still enthralled me with vivid insights about the world. Even economists who think they know supply and demand analysis could benefit from a (re)reading of this classic. With whole sections on sex, it's not some boring textbook.
    • +
  • An Economist Gets Lunch: New Rules for Everyday Foodies by Tyler Cowen- I love food. One of the highlights of the past few years has been my discovery of better food. Tyler Cowen largely influenced me through his older book, Discover Your Inner Economist. If you're interested in learning about food, which you should be, and are interested in how an economist looks at the problem, which you definitely should be, pick up An Economist Gets Lunch immediately. You'll start finding cheaper and better food without much effort. I certainly have.
    • +
+

Economics Books for Economists

+This list is geared toward economists. It is more technical, although all the books would be accessible for someone with an interest in economics. +
    +
  • What Should Economists Do? by James Buchanan- I have read and reread this book already during 2014. I have a physical copy and a PDF version to make things easy. The essays in What Should Economists Do? have been an indispensable reference as I discover what kind of economist I should become. It's not as simple as it might seem to outsiders, and even many insiders. (If anyone thinks economists should simply do economics how it is taught in graduate school , I urge them to read Pete Boettke's Living Economics to understand the problems with this.) As an economic scientist, I have a duty. I didn't become an economist to become rich and famous. I became an economist to study the world. The only way to understand if I am fulfilling this duty requires deep thought on what this all means. Buchanan's book is the best lesson in how to do this that I've found. If you find a better one, let me know.
    • +
  • Anarchy Unbound: Why Self-Governance Works Better Than You Think by Pete Leeson- This past summer I blogged my thoughts on Leeson's book here.  This book almost belongs in the top section, but there are enough references to scare off many non-social scientists. Anarchy Unbound is not a rah-rah book for anarchy. It is deeper as a work of science. Following Tullock, Leeson has an incredible ability to see the economics that underlies all of human life, especially weird parts of human history. To understand how to apply power economic tools, pick up Leeson's book. Leeson is a natural economist.
    • +
  • Public Finance and Public Choice: Two Contrasting Visions of the State by James Buchanan and Richard Musgrave- Buchanan makes the list twice; he's that good. For a while I was under the impression that public finance and public choice were one whole body of thought with two parts. Maybe I thought something like "public choice assume government is bad and public finance assumes government is good." After reading this book, I don't believe that. There are fundamental assumptions in each approach that make them worlds apart. The book consists of a series of lectures by the two authors that go back and forth. The book is a treat in terms of style, information, and brevity. Anyone who studies public finance should focus on Buchanan's part. Anyone who studies public choice should focus on Musgrave's part. They will challenge your assumptions about "your side" and the "other side." At times I found Musgraves parts infuriating, but he made clear that his position is something he has thought deeply about.
    • +
  • An Entrepreneurial Theory of the Firm by Frederic Sautet- This was the first book that enthralled me this year. I read it in one sitting and even blogged about it. Samuelsonian economists might find not follow the style. Austrians might not think Sautet has added anything new. Yet, both can learn from this book. If you still study businesses as a system of inputs and outputs through a production function, you're about 80 years behind. If you've read Coase, Alchian, Kirzner, or Williamson and think you understand the purpose of the firm, Sautet will push you deeper. It's a fun book from an IO, history of thought, New Institutionalist, and Austrian perspective. I'm not sure how I can use it in my research, but it caused me to reconsider my understanding of how businesses work and what their role is.
    • +
  • Complex Adaptive Systems: An Introduction to Computational Models of Social Life by John H. Miller- As I said in my last post, lately I've read up on complexity theory and agent-based modeling. While this book is a good introduction to the field for social scientists, I included it as an encouragement to study agent-based modeling. More broadly, I want to encourage economists to study a wider range of approaches instead of simply maximizing a utility function subject to constraints. Agent-based modeling is the approach I've discovered over the last few months and I find it fascinating.
    • +
+ + + + + + +  + + ]]> + + 1132 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 595 + + + http://www.econpointofview.com/2015/12/best-old-journal-articles-i-read-in-2015/ + + + + + + + 0 + 0 + + + + Study Math, My Austrian Friends + http://www.econpointofview.com/2015/01/study-math-my-austrian-friends/ + Thu, 08 Jan 2015 14:45:02 +0000 + + http://www.econpointofview.com/?p=1128 + + 5895602317_1c9c7117c4_b

+

+

(Update: I've posted a reply to some concerns here.)

+Austrian economists hate math. That’s a broad brushstroke, but I stand by it. + +And it's a shame. I understand the Austrian concerns about math and agree with most. But the concerns call for hesitation when applying math to economic problems. Yet, justified hesitation wrongly became abstention. I want to fight that tide. + +This is not a post to bash Austrian economists and their lack of math. If you came here for a smackdown of Austrian economics, you will get no such pleasure from me. I'm not sure advanced math has been a net gain for economists. + +Instead, this is an apology, in the religious sense, for math- pleading to young scholars interested in Austrian economics: Put away your concerns for a moment. Learn math. Math can be your friend. You will be a better (Austrian) economist for it. + +Let me echo something I've heard Bryan Caplan say: Austrian economists are among the most interesting in the profession. My criticisms come from a love for the tradition and a wish to keep improving it. People who understand Mises/Hayek/Rothbard/Kirzner will push our understanding of the world in the coming decades. I'm sure of it. You, my Austrian friend, will help in that. +

From one friend to another

+First, let me set up my street-cred within Austrian economics. I am no Trojan horse; I am truly a strong supporter of advancing Austrian economics. Whether other people will label me as an Austrian is up to them. + +First, I am an Adam Smith Fellow at the Mercatus Center, which is THE heart of academic Austrian economics in the world. My job literally involves discussing Hayek and Mises with some of the best in the business. I believe they would vouch for me as a friend of Austrian economics. + +Second, my research is clearly Austrian-inspired. One paper I'm working on examines the boom/bust Panic of 1907. The second looks at Hayek's theory of spontaneous order, specifically when that spontaneous order breaks down. I see my research as following in the footsteps of the greats. + +Third, look at this blog. It's called EconPointOfView.com, a reference to Israel Kirzner's first book. The site's banner has Rothbard, Mises, and Kirzner- my way to show respect to those who I think are superb economists. + +While none of what I've written makes me an expert on Austrian economics, I hope Austrians will be more willing to accept my point, coming from a friendly stance. I won't belittle those who choose to do a more literary form of economics. Do your thing. But along the way, pick up a math book. +

I agree with many of your criticisms.

+I, as a good student of Austrian economics, accept the following: +
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  • Economics is a value free science. It can never tell a person what he "should" do. My recommendation is not as an economic scientist but as a person.
    • +
  • Pure economic theory derives from the action axiom.
    • +
  • Math or statistics cannot be a source of pure theory.
    • +
  • Statistical aggregates conceal most of the interesting information about the economic phenomena.
    • +
  • Radical uncertainty makes point prediction impossible.
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  • Tacit knowledge, which can never be incorporated into formal theory as "information" or statistics, is the vital part of a functioning society.
    • +
+I accept these points made by your favorite Austrians. These points invalidate how most economists use math. I still am urging you to study math. + +Careful readers will have noticed something by now. I'm not urging Austrian economists to study mathematical economics. No. My central point is smaller. Study math, The Real Thing. + +Math is pretty damn cool. Spend the time to learn some of it. + +Obviously whether studying math is worth the effort or not, depends on each individual's opportunity cost. I know that. Instead, my goal here is to convince people that studying math has a higher expected benefit than they originally thought. Therefore, on the margin, some people will decide to study math. +

The Beauty of Proofs

+While proof-based mathematics is by no means the only form of mathematics, it is the type I focus on here. + +Mathematical proofs have aesthetic beauty, in the way music and art does. Once I started to understand proofs, I had a similar feeling to when I read Cicero in Latin; "I know I'm missing the subtleties, but Cicero is beautiful." + +Since Austrian economists are mostly human, I urge learning math as an end in itself- like developing a palette for good food (which you definitely should do.) Math's pleasurable, in a sick way, and enhances your life, just like Bach. +

What is the purpose of a proof?

+But you're more practical. You're an economist. You want Use. You want Reasons. Well, fine. + +Proof-based mathematics attempts to create a solid connection between assumptions and conclusions, laying out every step between. That is not to say each connection is always clear. + +I have written many proofs without truly understanding what I am doing. Still, by working to improve my proofs, I have developed a stronger understanding between the assumptions and conclusions. Little by little, I improved. + +That's the main reason for Austrian economists to study math; it helps train the mind in logical connections. You say you love the logic of Man, Economy, and State. Studying proofs has helped me understand Rothbard's process. + +Rothbard and Mises were smart enough to think about these topics in only words. I'm not. Math helped my thinking about the Austrian theory of utility, time-preference, and capital theory. + +For example, I was discussing continuous preferences with a classmate. I was going through my basic Rothbardian explanation of the problems with continuous utility functions. Goods are never infinitesimally small, so a consumption set is discontinuous. Consumers either buy 1 apples or 2 apples, not pi apples. Boom, win for the Austrians. + +Not quite. My classmate was able to explain to me that I also required an extra assumption: I need to assume the goods are finite. If there were infinite goods, continuous preferences is still workable. + +It’s an obscure point, but I was simply wrong in my defense of Austrian economics. Knowing math helped me clarify my thoughts and communicate with a non-Austrian economist. Knowing a little about power sets, infinity, countability, and more was the only way that I could understand his (100% correct) point. + +The math forced me to recognize another assumption I was implicitly making. I'm fine assuming finite goods, but now at least I know I am making it. Thank you math. I'm a better defender of Austrian economics because of math. + +That doesn't show whether continuous preferences is a useful abstraction. Such decisions need judgement, something math cannot save our poor souls from needing. However, without an understanding of basic analysis, I would not have understood the connection between my assumptions and my conclusions. Heck, I couldn't even communicate with my classmate about this topic without proofs. + +My example might seem small. But I'm not claiming that studying math will overturn your world. It will simply clarify points of detail. We learn on the margin. That's when math is most powerful; use it. + +Is studying math the only way to connect assumptions and conclusions? Of course not. Economics teaches us that there are multiple means for every end. My point is that rigorous math is an effective way to pursue the end. + +My dear Austrian friends: if you want to further your understanding of your own theories, drop the anti-math rhetoric. It’s unbecoming. Pick up a proof-based textbook and get studying. Challenge someone to learn the math with you. I'll be your partner if need be. + +You spend time each day doing Sudoku or the crossword puzzle. Heck, you probably read Kant for fun. You enjoy challenging your mind. Why not learn math too? Plus it helps you communicate with other economists (which is worthy of a whole post). + +So if you're someone who enjoys and wants to study Austrian economics, start reading your math too. Post comments or tweet at me (@BrianCAlbrecht) your thoughts along the journey. I'm going through the same journey with you. +

Starting The Journey

+It takes time to learn how to write proofs; it does not come overnight. The long process continues for me. + +I'm sure there is some expression about a single step and a thousand mile... + +Here are my recommendations for a first step: + +Basic Proof Books- + +Analysis Books- + +Over the coming weeks, I plan to write a similar apology for econometrics and computation. Both are tools that Austrians are rightly skeptical of, but wrongly reject outright. I'm partly a devil's advocate here, but still 100% sincere. (Or maybe it's just Stockholm Syndrome after my first semester in my PhD.) + +Stop being so negative about anything outside of Rothbard and Mises. They weren't the only people to think about the world. Expand your reading list so that you can become better Austrian economists.]]> + + 1128 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 509 + + + + + + + + + + 0 + 0 + + + 510 + + + http://politguard.wordpress.com + + + + + + + 0 + 0 + + + 512 + + + + + + + + + + 0 + 0 + + + 514 + + + http://whitman.syr.edu/faculty-and-research/faculty/showInfo.aspx?id=468 + + + + + + + 0 + 0 + + + 515 + + + http://www.farmerhayek.com/ + + + + + + + 0 + 0 + + + 516 + + + + + + + + + + 512 + 1 + + + 517 + + + + + + + + + + 516 + 0 + + + 518 + + + + + + + here with a few more points if you are interested.]]> + + + 514 + 1 + + + 519 + + + + + + + + + + 515 + 1 + + + 546 + + + http://Dallas1823.biz + + + + + + + 0 + 0 + + + 602 + + + http://www.econpointofview.com/2015/01/reply-on-austrians-and-math/ + + + + + + + 0 + 0 + + + + Top Posts of 2014 + http://www.econpointofview.com/2014/12/top-posts-2014/ + Wed, 31 Dec 2014 14:12:35 +0000 + + http://www.econpointofview.com/?p=1139 + + 2014 was an eventful year for me, which doesn't help my blogging. For those who don't know, I started the year in Barcelona where I was finishing up my master's degree. After moving to Minnesota, I got married (the real highlight of the year) and then started my Ph.D. + +Along the way, I was able to squeeze in a few posts. Here are the most popular posts of 2014 (with stats since around August 1st): +
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  1. Which School of Thought Are You? (3,244 views)- A short post with a table about different schools of thought. Not a particularly enlightening post, but it did well on Reddit. Reddit leads to traffic, but not interactions.
    2. +
  2. 5 Life Lessons Economics Taught Me (2,433 views)- My personal favorite, this post highlighted a few of the lessons I've taken away from economics. I've extended this post into a short e-book, but it looks like the Ph.D. has successfully killed that project.
    3. +
  3. One Semester in an Economics Ph.D. (463 views)- This recent post has done well (for my little blog). In it, I reflect on my first semester at Minnesota. It explains the process a little to my friends and family who have no idea what an economics Ph.D. is like.
    4. +
  4. Reflections on the Advanced Austrian Seminar (253 views)- This summer was the first time I had met anyone interested in Austrian economics. Before that, I just assumed everyone was fake. Nope. Not true. Here I wrote down my thoughts after spending some time learning about Austrian economics from people like Pete Boettke, Pete Leeson, Chris Coyne, and Larry White.
    5. +
+These aren't Marginal Revolution stats, but I've enjoyed every minute of it. Next year, I will keep pushing to make this site interesting for both of my followers! + +Happy New Year :)]]> + + 1139 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + History Rhymes: Growth in Money Supply -> Panic of 1907 + http://www.econpointofview.com/2015/01/history-rhymes-growth-money-supply-panic-1907/ + Fri, 02 Jan 2015 17:54:13 +0000 + + http://www.econpointofview.com/?p=1141 + + + +Believe it or not, I don't only hang out on Twitter and read books. Sometimes I blog. Rarely I do this thing called "research." + +One area that I do this so-called "research" about is banking panics, specifically the Panic of 1907. For historical purposes in the U.S., it's a fascinating story. The Panic of 1907 changed the future of banking, specifically leading to the Federal Reserve. + +For us in the post-2007 world, the Panic of 1907 might help shed light on the mechanisms that lead to a banking crisis. From my vantage point, 2007 mimicked 1907, but with flashier technology. Instead of runs on the trust companies, in 2007 shadow banks experienced a run. History rhymes. + +The actual banking Panic (people screaming, running to get money) is worth reading about. It sounds like 2007, where a few players dictated what happened. It's a good tale. The United Copper Company tried to corner the copper market, like the Duke brothers in Trading Places did for oranges. + +That failed. Panic ensued. Fun stuff. + +If you want to learn about the personalities and the anecdotes surrounding the Panic, pick up Robert Bruner’s The Panic of 1907: Lessons Learned from the Market's Perfect Storm. It’s not Michael Lewis, but the stories are interesting. + +So that’s the sexy stuff about the Panic of 1907. Yeah... That’s not what I study.  Sorry. + +I look at the build-up to the Panic. For reference, instead of looking at the Lehman and Bear Sterns of 1907, I look at the equivalent of the recent housing bubble. There are none of Michael Lewis's fascinating characters, but it’s the real driver. +

So what happened before the Panic of 1907?

+ + +It was a classic boom/bust story. You've seen it once; you've seen it a thousand times. + +The money supply climbed. Gold stock rose at 6.8% per year between June 1987 and June 1914. Gold production averaged about $110 million for the twenty years ending with 1890. The next twelve years saw an annual average production of $220 million (Conant and Nadler 1969, 703). + +The stock of money, what we'd call M1,  rose even faster at 7.5% per year during the same time frame. That might not seem like a much, but this period included six recessions and an absolute decline in money during 1907. This growth in the money supply exceeding gold came almost entirely from increases in national bank notes (Friedman and Schwartz 1963, 137). The national banks held gold and created even more paper notes. The word "leverage" might sound familiar. + +The total volume of money rose from $1.5 billion in 1896 to $2.1 billion in 1900 to $2.7 billion in 1907 (Conant and Nadler 1969, 699). Up, up, up. It continued until the Panic. Starting in 1902 until 1906, the growth in the money supply surpassed 7% per year (Conant and Nadler 1969, 153). For comparison, Friedman and Schwartz calculated stable prices require 5% growth. + +As with any macroeconomics story, pieces move together. These changes in the money supply matched changes in the import-export markets. Increases in money helped foreign trade. Exports of merchandise rose from $1.3 billion in 1900 to $1.74 billion in 1906 to $1.88 billion in 1907. At the same time, imports also rose from $1.2 billion in 1906 to $1.4 billion in 1907 (Conant and Nadler 1969, 698). + +This is the standard, econ 101, free-market, specie-flow mechanism part of the story. That's not everything. 1907 has its own quirks. + +Treasury Secretary Shaw used government deposits to induce banks to import gold starting in February 1906. The Treasury promised to increase governmental deposits at any bank that imported gold (Friedman and Schwartz, 155). As usual, the government tinkered. Maybe you could call it a “nudge.” That's the new, popular term. + +On top of the help from Uncle Sam to make things fun, credit markets changed in a drastic fashion. Credit expanded at a greater rate than the growth of gold. Between 1890 and 1907 the United States increased bank credit $13 billion upon a gold increase of $3 billion. Most of this increase happened after 1897 (Johnson 1908, 455). + +State banks were not required to keep reserves. In fact, banks could hold the reserves in banknotes. That doesn't seem like a reserve to silly old Brian, but what do I know? + +Liabilities of State banking institutions expanded by over $5,000 million between 1900 and 1907 while reserves only grew by about $171 million. “Their deposit and credit operations were capable of expanding to enormous proportions without any definite relation to gold.” (Conant and Nadler 1969, 707). It’s a pyramid that lends itself to panics. + +The increase in credit over the growth in the money supply was also affected by non-state banks. Commercial and trust bank reserves declined from 18% in 1897 to 10% in 1907 (Johnson 1908, 458). There was no minimum reserve requirement for trusts in New York City until 1906, when it became 15%. Even then, only needed to hold a third of this requirement in specie or legal tender. Meanwhile, national banks had 25% reserve requirements in specie or legal tender. + +Due to this low requirement, trusts were able to issue credit to a greater extent than other banks could due to looser regulation. The capital-asset ratio was 4.8% for trusts in New York City compared to 5.8% at state banks and 7.5% at national banks. Part of this difference was due to the fact that trusts had much fewer restrictions on their assets. They could own stock and real estate directly. + +It might not surprise you that almost the entire contraction in New York City happened at trust companies. (Moen and Tallman 1992, 616-618). This panic is sometimes called the Knickerbocker Trust Panic after the biggest bank failure at the time. + +Maybe surprisingly to some, unlike the Great Depression, the stock of money was not greatly affected by the amount of bank failures. 0.0026% of banks suspended payments at some point compared to 0.034% in 1930 (Wicker 2000, 7). The (albeit wrong) story of bank failures told about the Great Depression don't apply to 1907. + +In fact, by the time of the panic in October, there was a heavy influx of money and outflow of goods. As stated above, the net exports rose from $1.46 million in August 1907 to $114 million in December of the same year (Conant and Nadler 1969, 717). This corresponded to an increase of the money supply by $72 million of Government deposits, by $70 million from gold imports and $50 million in new banknotes (Sprague 1908, 367). Although there is not full agreement on this point, inelasticity of currency appears not to have been the cause of the problem since this influx happened during the heart of the panic, September through November. + +So what is the causal mechanism? Is everything Treasury Secretary Shaw's fault? Probably not. Why did banks become so leveraged? I don't have a clue. No one else seems to know either. That's why it's called research. +

To Be Continued...

+This is just a teaser of all the fun stuff that happened during the Panic of 1907. Most of this has been known for 50 years, although economists might forget it. That’s a shame. + +With all the focus on “big data,” it is sad to ignore all the data that happened before WWII. While the institutions were different, the same economic laws operated in 1907 as 2007. + +(Correction: This post originally had the volume of money for the years 1896, 1900, and 1907 in millions, instead of the correct amount in billions.) + +
+ +

Bibliography

+
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  • Allen, W. H. ”What Caused the Panic.” The Sewanee Review 16.1 (1908):85-103
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  • Conant, Charles A., and Marcus Nadler. A History of Modern Banks of Issue. New York: A.M. Kelley, 1969.
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  • Friedman, Milton, and Anna (Jacobson) Schwartz. A Monetary History of the United States 1867-1960. Princeton: Princeton University Press, 1963.
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  • Johnson, Joseph F. ”The Crisis and Panic of 1907.” Political Science Quarterly 23.3 (1908): 454-67.
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  • Moen, Jon, and Ellis W. Tallman. ”The Bank Panic of 1907: The Role of Trust Companies.” The Journal of Economic History 52.3 (1992): 611-30.
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  • Sprague, O.M.W. ”The American Crisis of 1907.” The Economic Journal 18.71 (1908): 353-72.
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  • Wicker, Elmus. Banking Panics of the Gilded Age. Cambridge, UK: Cambridge UP, 2000.
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]]> + + 1141 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Panic of 1907]]> + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + A Better Understanding of Equilibrium + http://www.econpointofview.com/2015/01/a-better-understanding-of-equilibrium/ + Wed, 07 Jan 2015 02:54:57 +0000 + + http://www.econpointofview.com/?p=1163 + + For economists + +I've thought a lot about equilibrium recently. At the same time that I'm reading some excellent game theory books (including a nice little book by David Kreps that is accessible to non-economists), I am also studying agent-based modeling. + +Game theory uses equilibrium heavily and distinguishes a billion different types of equilibria. Agent-based modeling rejects equilibrium as central to economic analysis. + +Oh yeah, and I just got done with a full course on general equilibrium theory. Throw that on top of my skepticism of equilibrium as an important concept and you have one confused grad student. + +This jumble has me thinking heavily about the meaning of equilibrium. Is it useful? When? How do we need to adjust our understanding? What is the role of disequilibrium? + +Then I re-watched a speech by Mario Rizzo title "A Better Concept of Coordination." In it, Rizzo is trying to clarify our understanding of coordination and equilibrium. He is trying to understand the relationship between aspects of the economy that lead to equilibration, or better coordination, and disequilibration, or when people's plans don't align. + +For Rizzo, equilibration and disequilibration are like yin and yang. They cannot be separated. + +http://www.youtube.com/watch?v=d4R9bQ_iuCY + +I just love the quote he starts out with from Oskar Morgenstern. + +I'm not sure I have any more insight to add to Rizzo's speech. It is clear to me that a focus on equilibrium has killed much of the interested parts of economics. What is a better option to replace it? I don't know. I just enjoyed the speech and thought you might too. + +]]> + + 1163 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 504 + + + + + + + + + + 0 + 0 + + + 505 + + + + + + + + + + 504 + 1 + + + + Reply on Austrians and Math + http://www.econpointofview.com/2015/01/reply-on-austrians-and-math/ + Wed, 21 Jan 2015 02:17:47 +0000 + + http://www.econpointofview.com/?p=1191 + + We should not write so that we can, but that we must, be understood. - Marcus Quintilian +One might think that after 4 years at a good liberal arts college I might be able to write. You'd think I'd be able to make a small point. A las, that is not so. I will keep working. Thank you to all who put up with my poor writing. + +My goal in my last post was simple. I wanted to encourage people, like myself, who are interested in Austrian economics to do one thing: +

Give math a shot.

+That is all I wanted to do. It wasn't a bold claim and I don't think anyone disagreed with that point. Most people probably dismissed it as trivial. + +Yet, I didn't believe there is a single post/article by someone friendly to Austrians urging people to study math. I still haven't heard of one. If you know of one, please let me know and I will post it. + +I didn't want to get into discussions of the usefulness of continuity or the benefits of advanced mathematical economics. But people latched on to the continuity or mathematical economics. Those are interesting conversations, but they've been had other places. + +I just wanted to say to someone like me during my undergrad, someone who had read more Mises.org than academic Austrian journals, "Hey, Austrian economics is really cool. Keep studying it. But also don't be turned off to math. It can be helpful to understand the world if used right." + +Instead, people focused on other parts of the article. That's my fault as a writer. +

First Criticism: I painted with too broad of a brush.

+Of course this is a valid concern. I knew it would be. Both "Austrian" and "Math" are broad. + +Anytime someone writes about a group of scholars that is as wide-ranging as the Austrian school, the writing won't apply to everyone. Once you throw in everyone who is not a strict academic, it becomes even messier. Not everyone could hate math. Obviously. + +My already too long post convinced me to leave out the nuances about who my lede dealt with. A good editor would have maybe changed that, but I'm stuck with me. That's how I wrote the post. I will work to distinguish the different types of Austrian economists and people interested in Austrian economics. +

Second Criticism: Good Austrians don't hate math.

+Of course no one will come out and say that hate math in the abstract. To do so would be equal to throwing your hand up and saying "I'm an idiot." Just like no one hates music or books in the abstract. + +But looking at revealed preferences, I'm less convinced. I had never seen anyone connected with the Austrian school promote math. My impression of the general trend has always been a negative feeling towards math. Maybe that is just my wrong impression. Who knows? + +Was I completely talking about a straw-man? That wasn't my thinking and still is not. Let's go to Mises.org, which was my main inspiration when I discovered economics. I searched "mathematics." ("Math" turns up mostly things unrelated to my point.) I come across articles like "How Mathematics can make Smart People Dumb." Or, statements like this from Mises: +
The truth is that these scholarly treatises [on mathematical economics] give the businessmen only one piece of advice: to buy when he expects prices to rise and sell when he expects them to drop. Everything else they offer is insignificant. It is a waste of time to publish voluminous books on the best size of an inventory. (emphasis added)
+Insignificant, a marginal product of approximately zero? There is zero to learn from mathematical economics? That's bad economics. Diminishing marginal returns to math, for sure, but zero returns? + +Or from Rothbard: +
For mathematical logic must deal with meaningless symbols; hence its use would strip economics of all its meaning.
+I likely improperly extrapolated these comments to think Austrians hate math. I understand the era and people who Mises and Rothbard were writing about. I would have probably shown as much hatred. You hopefully will forgive me for reading this as hated of all math. It's more nuanced likely. + +Neither Mises nor Rothbard specifically talk about math in the way I was looking at it, so I don't know how the greats would react to my point. But these are the statements I have read for years and had been ingrained into me. + +However from my personal conversations online and with my students, I'm not the only one left thinking Austrians hate math. I have received several emails, Facebook messages, and other contacts from the exact people I was trying to communicate with, those entering the field of economic science. They all enjoyed and supported my post. + +They felt the same thing that I did; Austrians scare some students off from math. + +That might be the wrong lesson to draw from Austrian economics, but I'm afraid that is the lesson some students draw. + +But again, none of this was my intention or focus. To err on the side of clarity, I only wanted to encourage people interested in Austrian economics to study math. It's a fun subject and one you shouldn't disregard so easily. + +
+ +A note to Bob Murphy- + +I'm sorry if my post gave ammo to Noah Smith. Anyone who has seen my discuss with Noah would know that I would never want to give him ammo. Collateral damage, I guess. My apologies Murphy. :)]]> + + 1191 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 528 + + + + + + + + + + 0 + 0 + + + + Nothing New Under The Sun + http://www.econpointofview.com/2015/01/nothing-new-sun/ + Fri, 30 Jan 2015 00:48:52 +0000 + + http://www.econpointofview.com/?p=1202 + + As I've written before, one of my research projects is on the Panic of 1907. In many ways, it resembles our recent economic crisis. For me, the most startling resemblance is the absolute fear that the monetary authority had about any contraction in the credit market1. + +Before 1907, since there was no Federal Reserve, the Treasury decided to act like a modern central bank. Facing a slowdown in economic activity, Treasury Secretary Shaw made some policy changes. Quoting from an academic article at the time1: +
Until within the last decade [1898-1908], also, the treasury had never ventured to intervene in the money market, except in moments of really great distress, such as the outburst of an unreasoning panic. + +Nor had any secretary ever attempted, or probably ever thought of attempting, to render the currency responsive to the changing needs of trade by deliberate manipulation of the public funds. + +For the first time the treasury's policy appears to be influenced by the rate of interest prevailing in the financial centers, and by the condition of the stock market. + +With him it became the avowed endeavor of the department to check every incipient stringency, and to prevent any contraction of credit, no matter what might have been its cause.
+By the end of 1902, Mr. Shaw had increased the amount of deposits at banks to $150 million. This is at a time where total money in the United States was around $2.5 billion.  Again, this is not during the height of the Panic, where the Treasury was acting as a lender of last resort. No. This was during a normal downturn in the economic. +
On August 27, 1903, Mr. Shaw announced that, according to his ruling, money could be transferred en bloc from the treasury vaults to the banks, and that he had on hand about thirty-eight millions available for that purpose. In other words, he announced to the banks before any panic had occurred, that he intended to assist them if they were in need, and that he was ready to assist them upon a scale never before conceived possible.'
+In 1906, trying to hold off the inevitable correction, Mr. Shaw announced that the Treasury would deposit government money with any bank that imported gold. This amounted to $49 million deposited in New York banks, $31 million in National City Bank alone. In September, another $44 million were poured in. Again, think of the total amount of money in the economy at the time. + +The Treasury literally just gave government money to the banks to hold. That makes quantitative easing look like a joke. +
Nearly a billion dollars had been added to our supply of gold and about three hundred millions to our bank circulation, which meant an average annual increase for ten years of about one hundred and thirty millions. A considerable part of this increase had passed into bank reserves and had naturally formed a basis for enlarged credit.
+Secretary Shaw just could not understand the role of credit in coordinating production. That might be excusable. Mises and Hayek hadn't formulated their theories of the boom/bust. 1902-1907 might be excusable. 2002-2007? You decide. + +But remember, since there were recessions and banking panics before the Fed, a "free-market" in credit cannot work... + +
+ +1. Andrew, A. Piatt. 1908. “The United States Treasury and the Money Market. The Partial Responsibility of Secretaries Gage and Shaw for the Crisis of 1907.” American Economic Association Quarterly 9, no. 1 (April): 210–231.]]> + + 1202 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Opening up to my Economics Department + http://www.econpointofview.com/2015/02/opening-up-to-my-economics-department/ + Fri, 13 Feb 2015 14:14:00 +0000 + + http://www.econpointofview.com/?p=1211 + + combine_images]]> + + 1211 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + Year 1 PhD Update: Spring Break Edition + http://www.econpointofview.com/2015/03/year-1-phd-update-spring-break-edition/ + Wed, 25 Mar 2015 16:58:18 +0000 + + http://www.econpointofview.com/?p=1217 + + last checked in about school, I have finished one more quarter. That makes three. This past quarter involved two courses, game theory with Aldo Rustichini and macro with V.V. Chari. (I also audited microeconometrics and a computer science course. Yet, since I'm not getting tested on them this spring they weren't my main focus.) + +These courses were by far my favorite in the micro and macro sequences so far. We will see if the final courses are even better. + +I've had an interest in game theory since the first time I learned about it. Compared to my earlier game theory courses, this one was extremely abstract. The goal was to be as general as possible with how we write problems and the notation we use. That makes it hard to grasp intuition, but powerful to approach new problems. We started to learn the language of modern game theory. I hope to use game theory in my research, so I looked forward to this class from day 1. + +Prof. Rustichini's teaching style worked for me. He started with a simple example, crawled through it, and then gave the fulled-fledged general model or definition. If I ever teach graduate level micro, I will definitely consider a similar style. + +He also was exacting about how we define things. A student would suggest and answer. He then would write the verbal answer in two different ways with two different interpretations.  His stress on clarity and definitions helped me understand previous classes. + +Macro was also a blast. (Again, "a blast" is relative.) First, Chari is entertaining and willing to take the class where students want. Students asked, "why the heck are we doing this?" Chari always had a coherent, big picture answer. We emphasized that first year is all about learning the language. By language, he meant specific the math used in macro. The specific models we covered weren't the focus. Instead Chari taught us how "everyone" else talks. Only then can we understand modern macro and contribute to it. + +This point might seem obvious to a clear-headed outsider. For a first year student, it is easy to miss this point. Chari was great at bringing us back to this. We are starting to get to a point where the models are more interesting and realistic. We covered things like incomplete markets, cash-credit economies, basic New Keynesian models, and a few more things. It might seem simple. Trust me. These are much more advanced than what we covered at the beginning of the year. + +As I look back at the first three quarters, I am amazed by how much we can cram into one year. Cram is the right word. Actually, maybe it's not violent enough... I am amazed by how much we can have smashed into our brains in one year. + +My whole understanding of math changed. I have learned much about how to make models (yet, my own models are still awful). I have even learned a bit about the economy. And none of this is special to me. The first year forces it. All first years have learned a lot. Most have learned a lot more than me. + +I'm terrified to see how much we learn in this last quarter. Terrified, in a good way. It's a lot of work. Anyone interested in a PhD in economics should not lie to themselves. The first year will be the hardest intellectual challenge of your life. But if its what you know you want to do, I'd say go for it.]]> + + 1217 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + What Football Taught Me About PhD Economics + http://www.econpointofview.com/2015/03/what-football-taught-me-about-phd-economics/ + Fri, 20 Mar 2015 18:19:36 +0000 + + http://www.econpointofview.com/?p=1218 + + MRBethel_0190 + +(Disclaimer: Most of what I say below, Pete Boettke already said better. A lot of the ideas come from things he has written or said. Of course, any mistakes or dumb ideas are all mine.) + +One of the great honors of my life was being able to play college football. It left me with a bad back ("and probably some brain damage," yells the crowd), but I wouldn't trade those years for anything. I continue to use the life lessons I learned on the field every day of my life. + +On my first day of college football, my defensive line coach, who is as good of a coach and man as I've ever met, said "forget everything you knew about playing D-Line. That was good in high school. Congrats. It got you here. I will teach you how to play college football." + +And he went on to teach me more than I could have imagined. I'd like to think he turned me into an okay college football player. Without his advice and training, I would have been crap. He knew what he was saying. + +The game is completely different at the college vs. the high school level. If you come into the college level thinking it is still high school, you will get crushed. It's not only a higher level, but a different game. What works in high school does not work in college, so players are better off forgetting what they learned. (Of course, if you are a true FREAK, which I was not, you can do whatever you want.) + +That doesn't mean that I truly forgot everything. That's impossible. But as much as possible, I needed to clear my head of what I thought a D-Lineman should do. I had to go back to stage one and learn how to take a single step. Over, and over, and over again. Step. Step. Step. + +We spent hours just working on our first step. An outsider watching might say, "why would you have players doing the same drill 1000 times? Doesn't everyone know how to step after being a baby? That's not how football is played. You should play real football." + +People who say that don't know the sport. + +My first year in a PhD has brought me back to Day 1 of football camp, August 2008. I've had to relearn it all. I never can (nor want to) forget my understanding of economics that I discovered through reading people like Thomas Sowell, Walter Williams, or Murray Rothbard. But I'm now playing a different game now. I signed up to play a new sport, not blog or pop economics, but professional academic economics. + +To play that sport, I needed to go back to stage one and learn my first step. Day one micro involved basic producer theory, but with advanced notation. Day one macro involved defining equilibrium "concepts." That might seem basic.  It is. But it's a new game. + +The way academics talk about producer theory or equilibrium is not the way undergrad courses or blogs talk about these concepts. Demand isn't a curve, but a vector. It doesn't slope downwards, but the matrix of partial derivatives with respect to price is negative semi-definite. Equilibrium isn't where two lines cross. It's a whole page of definitions. + +Getting down those basics takes a long time. That's what first year (and more) is about. We spend the year learning basic academic economics. It's long. It's tedious. It's probably a waste of time. But ultimately, I believe there is a light at the end of the tunnel and first year is definitely worth it. In the words of the scripture, this too shall pass. + +Before my Austrian friends think I've completely crossed over to the dark side (I've already annoyed them too much), let me add two things. + +First, I don't mean that players or students have to think what they are learning is the best way. What are the odds that all of your teachers are right on everything? Students and players should have questions about why they learn what they learn. But it takes a lot of arrogance (which I certainly have been guilty of) to come in and think you know how the game should be played on day one. + +My advice to myself and others: be patient. Learn the game. After you have developed an understanding of the new game, make your ultimate decision on how it should be played. If you're right, you'll win games in football and publish articles in economics. + +A second point I want to emphasize is that students ultimately must find their comparative advantage. When I started college football, I had to learn to play how everyone else played. That's just the nature of being 1 person learning in a group. + +While the basic skills you learn help everyone, each player eventually needs to figure out how he best plays. For me in football, that was different from most people. I was 2 inches too short, 40 pounds too light, and 0.3 seconds too slow. I had to learn my unique style. My style wasn't right for everyone. It was right for me. + +For me in economics, I don't know what my style is. Hopefully I will find it someday. + +Most people will play traditional economics. That's fine. If you're interested in something non-traditional like Austrian economics, you have to adjust your play to that. You'll get crushed if you try to play like a pure theorists or econometricians. That's not your comparative advantage. + +Take Pete Leeson. He is one of the most interesting young economists in the world. My guess: he would be a nobody if he tried to imitate what comes out of MIT. Instead, he works on what he loves and does it well. He is more successful and the profession is more interesting, because he doesn't imitate. + +Grad school is about finding the area that I can contribute to. If I don't want to be a traditional football player, there is a huge difference between finding a niche (pass rushing, for example) and sitting on the bench all year. If I insist that my "economics" is right and no one else agrees, I'll have to enjoy sitting on the bench. + +I came here to play. So I'll keep working on my steps. Hopefully, I'll get a few good hits in along the way, like the top picture :)]]> + + 1218 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Why Aren't There More Microeconomics Blogs? + http://www.econpointofview.com/2015/03/why-arent-there-more-microeconomics-blogs/ + Tue, 31 Mar 2015 14:22:02 +0000 + + http://www.econpointofview.com/?p=1231 + + Twitter. Maybe I better question would have been, why aren't micro blogs more popular? + +Now I don't have any data on whether there are less microeconomics blogs or whether they get less traffic, but that is my impression. Most people agreed with me too. Of course there are counterexamples (Freakonomics, Marginal Revolution, Chris Blattman), depending on how one defines "microeconomics blog". There are blogs on every topic imaginable and every blog touches on micro topics. But the blogs that I see talked about on Twitter and from other blogs are almost always macro focused. + +For the sake of argument, let's say it is true that micro has fewer/less popular blogs. Then the next question is, why? + +Here were some of the suggestions + +All these make sense to me. Yet, I'm not completely satisfied with any of the answers. + +First, micro can be political too. Yes, pure micro theory is not political; nor is applied work concerned with identification political. But neither is macro. Solving an OLG or Neoclassical Growth model is not inherently political either. Yet, when macro gets applied, especially to monetary policy, people make it political. That adds a huge readership and drives macro blogging. It's fun to see Krugman and Cochrane go back and forth. + +Micro can be the same way. It's political when it gets applied to policy. I'm not just thinking about minimum wage, but also topics like regulation and patent protection. Microeconomists analyze all  these and they are inherently political. Walter Williams and Thomas Sowell have made a living for a long time by writing popular pieces from a microeconomics point of view. There is no reason microeconomists couldn't debate taxation online. Yes, many macro bloggers have taken this up too. + +Secondly, I don't see how micro is more specialized than macro. Research in both fields is highly specialized. Yet, most blogs are not about leading research. Instead, they are brought down to a more basic level that non-specialists can understand. I see no reason a microeconomist working on development couldn't blog about identification problems in IO. Trade economists blog about monetary policy. + +I think the most compelling point was Claudia's. Macro has a natural readership of people involved in business and finance. Again, I see no reason these same people wouldn't read industry or policy analysis from a microeconomist. Explaining the state of some industry or the effects of some policy seem extremely beneficial to businesses. Businesses hire microeconomists to do this. (Maybe that is why people don't blog for free...) Of course, monetary policy affects all businesses, while micro policies are more, well, micro. + +But I refuse to give up hope. + +People suggested two options which I would love to see. +
    +
  1. A group on microeconomists that blog on different topics. One blogger writes about healthcare policy. One writes about regulation. This would avoid the specialization problem about microeconomics.
    2. +
  2. A whole blog could be about industrial organization.
    3. +
+Until then, I hope to encourage a group of microeconomists to pick up blogging. That is my new crusade (after prelims, of course). I hope all my readers will join me in this fight.]]> + + 1231 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 522 + + + http://www.farmerhayek.com + + + + + + + 0 + 0 + + + 523 + + + + + + + + + + 0 + 0 + + + 524 + + + + + + + + + + 522 + 1 + + + 525 + + + + + + + + + + 523 + 1 + + + 589 + + + http://www.oikonomikos.com + + + + + + + 0 + 0 + + + + Models, Who Needs Them? + http://www.econpointofview.com/2015/04/models-who-needs-them/ + Sun, 05 Apr 2015 00:37:42 +0000 + + http://www.econpointofview.com/?p=1237 + + There are many books that I've read that continue to influence my thinking. An important book for me is "Philosophy: Who Needs It?" by Ayn Rand. This book was important, not because I became a Randian. I didn't after that book nor "Atlas Shrugged". Instead, it was the first book I read that urge me to think about philosophy.

+Before Rand, I was like most people, scoffing at philosophy, dismissing argument as "just philosophical." I, in all my infinite wisdom, didn't need to think of the mumbo-jumbo philosophy. + +Rand's main argument in the title essay is that the question isn't whether to have a philosophy or not. Every person must have a philosophy of how to live their lives. It's unavoidable. + +The options are to follow the philosophy that we absorb through life or consciously choose our philosophy. If we do the first, our philosophy might come indirectly from parents, friends, teachers, or celebrities. It might be whatever we pick up through our day-to-day. + +Or, as Rand argues we should know what our philosophy is and why it is our philosophy. We can think deeply about the way we want to live our lives and work to pursue that. Instead of passively floating down the river, we can direct our philosophical boat in the direction we want. + +The answer to Rand's question "who needs it?" We all do. +

Economic Models

+The same is true for models of the world, although I have economic models in mind for this post. For this post, I'm using the word "model" to mean a systematic way of analyzing economic questions. We can debate elsewhere the difference between models, theories, frameworks, etc. + +If you don't want to talk or think about economics, you don't need a model. That's fine. Economics is not as fundamental as philosophy. + +But I haven't met anyone yet who doesn't talk about economic issues. Every time you blame those greedy oil companies for high gas prices, you're using a theory of economics that you probably picked up without knowing. As Rothbard reminds us, +
[i]t is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.
+After reading Rand, I realized I can passively pick up my economic analysis from newspaper or our humanities professors. Or I can pick the models I use and then do are best to understand how to apply them. Models push me to clarify my thinking. That's why economists love models and are insistent on being explicit about them. + +Using models might seem odd to non-economists who aren't used to talking about or thinking about models explicitly. I know it was weird for me when I first studied economics. + +Our love of models comes up in discussions with critical students, who usually invoke some heterodox economics. Complaints are levied against the common models, say standard consumer theory. "Individuals aren't rational" is one classic complaint. Sometimes Samuelsonian economists get annoyed at these complaints and ask "what's your model?" That is not because economists are evil jerks who want to crush any outside opinion. Every economist I've met is nice and willing to discuss models. We love that. + +Instead, we are looking for what model the complainer has in mind. Only then can we judge whether it is a helpful way of looking at the world. If the model you use is "corporations are evil and cause all the bad in the world", fine. You should at least know that so you can decide for yourself whether that is a good model. + +Models are just tools, nothing more, nothing less. The economist who insists on a model does so because he finds it easier to discuss a topic when it is clearer where people are coming from. Once a model is put forward, then we can talk about what are the costs and benefits of using it. + +People cannot debate economics, nor any social science, without at least using implicit models. It's not only ill-advised, but impossible. One person asserts QE will cause inflation. He is using a model, probably not a good one. If a person says capitalism impoverishes Africa. He is probably invoking a poor model. + +Since it's impossible to not use models, I want to know what model I am using. I hope the people I discuss economics with have the same goal. This is an idea I've been going on about all week on Twitter. + +To be clear, the models don't need to be equations. A supply and demand graph is a model, and a damn good one. Sometimes equations help clarify a model. Sometimes they don't. Either way, I want to choose my models carefully to aid my understanding of the world. +
Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.
+My advice to other: Don't be the "practical men" who Keynes is talking about. Figure out which models you use and only use the ones you want. + +
+ +There are many references that explore the nature and role of models, specifically how economists use them. Some that people recommended by Erik Angner and Beatrice Cherrier are here, here, and Mary Morgan's book The World in the Model: How Economists Work and Think. Morgan's book is by far the most thorough examination of models that I've seen.]]> + + 1237 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 526 + + + http://www.farmerhayek.com + + + + + + + 0 + 0 + + + 559 + + + + + + + + + + 526 + 1 + + + + Critiquing Micro-Foundations, a Response to Mark Thoma + http://www.econpointofview.com/2015/04/critiquing-micro-foundations-a-response-to-mark-thoma/ + Tue, 07 Apr 2015 12:54:27 +0000 + + http://www.econpointofview.com/?p=1251 + + David Levine's post on Keynesian economics. + +So it should not surprise me to wake up and read two posts on the topic: one from Paul Krugman and another from Mark Thoma. After thinking about it more by myself and on Twitter, I am still left confused about what the critique is of micro-foundations. Thoma's article is more substantive and interesting, so I'll focus on his. + +Macro, by definition, deals with aggregates, such as unemployment, GDP, and inflation. While individual actions determine GDP, economists study them as aggregates statistics. So first off, all macro is aggregation. + +According to Thoma, there are two main ways to do macro. The newer version uses micro-foundations. These models start with standard micro-style consumers and producers. The other approach, older in origin, assumes some steady macro relationship, such as a constant relationship between aggregate consumption and aggregate output. This is the style of Keynes and Fisher. + +Since the 1970's, macroeconomists have tended to use the micro-founded approach. But it's still an aggregate. Both are aggregates. Even Thoma recognizes this when he describes the modern approach which must ultimately "aggregate across household and firms to determine macroeconomic relationships." The most common way to do this is using a "representative agent." When Thoma draws a distinction between micro and aggregate models, I'm left confused. I might not be reading it right. + +Leaving that aside, Thoma levels a reasonable critique of the representative household models: +
Unfortunately, the representative agent approach is unsuited for studying behavior in financial markets. The problem is that there is no way for a single representative household to trade stocks and bonds with itself based upon different forecasts of future economic conditions (e.g. a person who thinks the price of a stock will fall in the future sells the stock to someone who believes the price will rise).
+I agree. The representative agent model is not suited for financial markets. But the old Keynesian model of aggregates is suited for financial markets? How does the aggregate Y and aggregate C or IS/LM or whatever aspect of the Keynesian model explain financial markets? I don't see it. To explain financial markets, there must be two people who value a financial asset, e.g. a stock, differently.  I just don't see how the representative agent or the old Keynesian model can explain. Any critique of the micro-founded DSGE model in this respect also is a critique of the old models. So the score is 0-0. + +There is one difference that I see. DSGE models have developed beyond the representative agent models and are working to model financial markets. Are the models perfect? No. Should the models have been more common before the Great Recession? Probably. + +The only critique I understand of Thoma's,which he makes in a linked-to article, is that DSGE doesn't give clear policy advice the old Keynesian model does. Sure, but the model wasn't designed to manipulate the economy like an engineer. That's not the purpose of the DSGE model, at least not the purpose that I learned in class. It may have been the purpose of the Keynesian model. But as Thoma says in the linked-to article "when a model is applied to situations it was not designed to address, it is not the model that failed. The model has been misused." + +I am left wondering what are the "simple, fast, and accurate answers to our questions" that the old Keynesian model provides. I would love to hear in the comments. + +Thoma ends with +
Thus, the approach to take depends critically on the question the researcher is asking. For some questions, the aggregate approach (sic) is best despite the criticism it has received in recent years from those using modern models, and we shouldn’t think of it as going backwards if we adopt this approach when it provides simple, fast, and accurate answers to our questions. The “correct” model to use is not an either/or decision, and macroeconomists should be open to both approaches as we try to improve our ability to understand the macro-economy, and provide policy advice when the economy experiences problems.
+Here I am absolutely in agreement. As micro teaches us, there are trade-offs everywhere. Just as consumers don't buy only one type of good, economists should probably not use only one type of model. But Thoma has left me unconvinced that the old aggregate approach is the way to focus efforts on the margin. + +I can't believe I wrote a post defending DSGE models. But if the critique is not compelling, it's not compelling. This is true regardless of what it is critiquing.]]> + + 1251 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + The Five Stages of Econ Prelim Prep + http://www.econpointofview.com/2015/04/the-five-stages-of-econ-prelim-prep/ + Mon, 20 Apr 2015 15:00:11 +0000 + + http://www.econpointofview.com/?p=1266 + + here, here, and here.) That's because overall this year is awesome. I'm finally getting paid to study economics, something I've done on my free time for years. Training to be an economist is a wonderful experience and I wanted to highlight that in earlier posts. + +However, with my end of the year exams, aka prelims, only a month away, the mood has turned. All day, every day is focused on those prelims. I have one in micro on May 20th and one in macro on May 27th. + +The hours have gotten longer and the subjects I'm studying are less interesting. I've finally noticed the 5 Stages of Econ Prelim Prep. +

Stage 1: Denial

+For me, this stage was roughly the first semester and the beginning of second. This was the happy time of the year, where I denied that the prelims will ever come. + +I went about with my business, studying as I went along. I worked hard (still averaging around 60-70 dedicated work hours a week), but I was able to study things I wanted. I read lots of Austrian economics, books on agent-based modeling, network theory, and worked on programming. Everything (well almost everything) I studied was just because I wanted to do it and I thought it might help my future research. + +I denied that prelims would ever come. The date was so distant that I could ignore them for a long period. +

Stage 2: Anger

+Then the anger stage hit. After starting to study and memorize as much as I could, I got bored quickly. That is a problem I have that will plague me through my whole PhD. It wasn't that I thought the material not worth knowing, but only that I hated the structure of the year and prelims. It is all about memorizing definitions and theorems for an exam that doesn't matter in the end. + +Yes, we should be trying to actually learn the material, but everyone resorts to a lot of pure memorization. It is not enjoyable and results was a not-so-happy Brian. The level of cursing, especially directed at books and study notes, went from almost zero to a level I'm not proud of. + +One aspect makes it especially bad. The topics that need the most time to study are exactly the topics that are confusing or boring. Exactly the stuff I don't want to study, that's what I end up studying. With a full year of material, everyone will have something they find extremely boring. It's just the nature of it. +

Stage 3: Bargaining

+Just when I think I was about to explode, I started to bargain with myself. The material load because too overwhelming and I started to believe there is some way out. + +I bargained that "I only need to study these subjects in General Equilibrium" or "I will only study for micro and spend the summer studying for macro." Whatever little deals that I could think of, I considered. +

Stage 4: Depression

+I am on the verge on the depression stage. (This is all relative understand. I'm still a happy, upbeat person, just less than without prelims.) There appears to be no hope. I realize that all the bargaining is in vain. Every subject needs to be studied. + +There are trade-offs, as in everything in life, but now there are mostly between work and "life." The hours spent with my wife are steadily decreasing. I will not see the 2 friends I have outside of the department for another month. It is a dark time in the first year. A shadow is cast over the economics department... +

Expected Stage 5: Acceptance

+I assume in the week or two before the prelims I will accept my fate. That fate will likely be a summer spent studying both prelims. Oh well. Wish me luck.]]> + + 1266 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + 529 + + + + + + + + + + 0 + 0 + + + + Prelims: T-Minus 12 Days + http://www.econpointofview.com/2015/05/prelims-t-minus-12-days/ + Fri, 08 May 2015 20:44:02 +0000 + + http://www.econpointofview.com/?p=1272 + + overwhelming at times, but the year is still good. I spend my days learning economics. That's awesome. Not ideal to do so much memorization, but economics is still better than anything else I'd do all day. + +But everything has a cost. So I have limited my amount of blogging over the last few months. Hopefully this summer will lead to more. For now, prelims are center. + +For people who haven't been through prelims (specifically Minnesota prelims), this structure might seem odd. Why all this build up for an exam that doesn't matter? Isn't a PhD about research? Good questions. I don't know. People act like there is a reason, but no one can articulate what it is. It's just something I have to do, like learn cursive or go through hazing in college. + +In under two weeks, I have my first prelim exam. It's in microeconomics and will look something like this. I remember looking at the exams before class started and being completely overwhelmed. I didn't know how to do anything. That feeling has only slightly changed. + +There are 4 sections, one for each of our quarters: +
    +
  1. Consumer and Producer Theory
    2. +
  2. General Equilibrium
    3. +
  3. Game Theory
    4. +
  4. Mechanism Design
    5. +
+In each section, there are a range of topics. Some topics I understand, especially from 1st quarter since I've had time to study them. Some I am still clueless about (everything in mechanism design). From now until May 20th, I'm working to fill in the gaps. + +After all the joy of studying micro, I will have another week to focus solely on macro. The exam for macro is longer (5 hours compared to 3 hours), but more structured. For macro, the courses build on each other more directly than for micro. Studying for one subject helps (at least a little) for the others. For micro, that is not the case. Each section is basically independent in micro. + +That makes studying for macro less overwhelming. It doesn't seem so varied by topics, but has more depth on one topic. That one topic is the Dynamic Stochastic General Equilibrium model (DSGE). Sometimes we set up the problem in one way, sometimes in another. Sometimes there are taxes, sometimes not. Whatever. + +While there has been much criticism of this type of macro, DSGE is still the main framework for modern macro. Therefore, DSGE = macro for first year UMN students. We can debate the issues with that later. For now, I must ignore those concerns. + +DSGE and the micro topics above are what I have been focused on for months and hopefully will only have to focus on for a few more weeks. Ideally, I will pass both. But economists don't care too much about ideal worlds. + +If I don't pass, summer means studying. We get a second shot at the exams in August. However, I'd rather spend my summer learning about things that interest me, like network theory or agent-based modeling, than studying for an exam. My reading list, and stacks of books I bought without reading properly, is embarrassingly long. I hope summer makes a dent in that. + +Oh well. That all has to wait. Wish me luck.]]> + + 1272 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + 594 + + + http://www.econpointofview.com/2015/12/best-old-journal-articles-i-read-in-2015/ + + + + + + + 0 + 0 + + + 607 + + + + + + + + + + 0 + 0 + + + + Prelim #1: Micro + http://www.econpointofview.com/2015/05/prelim-1-micro/ + Tue, 19 May 2015 22:26:01 +0000 + + http://www.econpointofview.com/?p=1275 + + stage 5 of prelim prep, acceptance. At this point, I know what I know. Now I am just reviewing a few things and trying to relax. I don't see any value in going into the exam stressed. I never have seen that as a good strategy. Tonight I'll go for a run and have a nice dinner. Maybe I'll read some Austrian economics for fun. And I'll listen to B.B. King and have a scotch. Macallan. 12 years. Neat. + +Now, whether I pass or not will depends on the specific exam questions. "Duh" say both readers. + +Let me elaborate. Looking over past exams, there are many I believe I could pass today and many I would fail. I say "believe" since we are never given a real understanding of what it takes to pass. I'm relying on hearsay and gut feeling. It's the best we have. The exam has 4 questions and everyone says 2.5/4 is passing. What is a 2.5 vs a 2.0? Not sure. But that's my imaginary goal I've been shooting for over the last 9 months. + +The nice part about Minnesota's prelims is that they don't matter a ton. I have around 5 attempts to pass. Given the only options are in May and August, that gives me another two years. So I don't have any fear of being kicked out if I don't pass. That doesn't mean they aren't stressful or important. It still will be nice to pass this time. (I shot myself in the foot when I idiotically scheduled a trip over the August prelims. That's made these exams more important for me than they should have been. Whoops.) + +Passing on the first try would allow me to spend the summer doing things I actually want to do, things that would be a productive input into my research. That sounds better than studying more for an exam. + +Studying for these prelims has been zero fun, sir.  I added the extra stress of putting together a paper to present over the summer. My advice to any future PhD students: don't agree to submit a paper the week before exams. You might see a pattern of my smart life decisions... If you want to read a draft of that paper and leave some comments, I'd appreciate it. + +Studying for prelims is still better than milking cows (a job I did for a summer), but not as fun as actual economics. Compared to everything else I've done in economics, it's awful.  Granted, that's not saying a lot since I love studying economics. + +But this studying is at a point where it is pure memorization of definitions and mathematical results. Applying the fact that demand curves slope downward or using opportunity cost reasoning? Understanding how an economy functions? Ha. Yeah right. That's not something you get in first year. Memorizing Topkis' Theorem or the proof of the First Welfare Theorem? Yep. Proof after proof? Oh yeah baby. + +Luckily, because I studied I'll be ready for those times where someone comes up to me with a gun and asks me to recite the Maximum Theorem and I don't have a reference or computer around. When I do have a reference, I'll check the reference like an actual scholar would. There is some method to the madness, or so I'm told. At the moment, it seems irrelevant. + +But that's one of the aspects of being a student. I have acknowledge that certain people, called professors, know more than me. In particular, I chose these professors at Minnesota to show me what I don't know. There are other schools I could have went to and not worried about the exams. Yet, I chose Minnesota knowing prelims awaited. Can I really be upset about something I willingly and knowingly chose? + +That doesn't mean they have convinced me on every issue. I'm pretty sure they're wrong about prelims being a valuable part of econ PhDs. But in general, I'm taking their advice. + +I'm sorry if this is an incoherent rambling. Forgive me. It's prelim time. + +I'd be interested in what other economists felt around their prelims. Please let me know in the comments. + +  + + ]]> + + 1275 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + Year 1 = Finished (Hopefully) + http://www.econpointofview.com/2015/05/year-1-finished-hopefully/ + Wed, 27 May 2015 21:13:52 +0000 + + http://www.econpointofview.com/?p=1283 + + micro. I hope to write more reflections over the coming weeks about first year. I hope to get my thoughts down when I have a clear head, but also remember what first year is like. I don't want time to distort my perception. + +Both exams were easier than I expected. While that doesn't mean I passed both, it is nice to come out and feel better than when you went in. + +But it's hard to tell. As I said in a earlier post, the grading is a mystery. I'll have to wait until the pass/fail comes in to really know. + +The 5 hours of the actual exam was a unique experience. While I'd taken long exams for my physics undergrad or for things like the GRE, these were more exhausting than I anticipated. Luckily, there was lots of candy (the food of champions I believe) to keep me fueled for the exam. It was mentally draining. I expect to crash in about an hour. + +There was such a build up to micro that I crashed after that. The rest of that day and the next, I couldn't study for macro. I came to the office and tried to focus, but I was completely fried. That is something I did not schedule for, leaving me with 2 less days for macro than I expected. + +Overall, the exams were fair. + +I started studying in January, which made life easier for me at the end. It was still a rush over the past few weeks, but less so than for people who started in March. + +My advice to anyone who has to take these exams, start early. This seems obvious, but not everyone does it. Maybe other strategies work for other people. It wouldn't have worked for me. Seeing stuff over several months allowed some things to stick by the end. + +Maybe what I did wasn't enough. Maybe I should have started last September. I won't know whether my strategy worked until the end of June when we get the results. + +But this year is now sunk. I did what I did. All I can do from here is maximize my utility going forward. In the immediate future that includes a BBQ with our department. Over the weekend that involves a bachelor party. Over the summer that involves more time with my wife and maybe some economics. Actually, there definitely will be lots of economics. I can't give it up. It's an addiction...]]> + + 1283 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + 554 + + + + + + + + + + 0 + 0 + + + + Behind First Year: The Numbers + http://www.econpointofview.com/2015/06/the-numbers/ + Wed, 03 Jun 2015 19:14:30 +0000 + + http://www.econpointofview.com/?p=1295 + + If it turns out I failed my exams, I'll make a note on this post in the future.) + +Instead of relying on my biased recollection, I used data. Of course, this has its own biases, but it is better than my memory. + +Since about 2 years ago, I've used an app called Toggl to track my time. I highly recommend it. It pushes me to work more and stay focused. I always feel bad when I'm clocked into work and I'm actually checking Twitter, since I'm only fooling myself. That pushes me to get back to work. + +A quick note on how I track my time: when I arrive at the office and start to actually work, I mean actually work and not just get ready for the day making tea, I begin clocking my time. I have the app on my phone, iPad, and on a browser. I am able to keep them synced reasonably well. When I take a break to eat, I switch the tag to "Personal." When people come into my office to chat, I do the same. I want to get a real estimate of my time doing each activity. + +I originally tried to keep track of smaller categories of activities, but I've found my optimal tracking is with broad categories like Personal, Courses, Studying, and specific projects. +

Categories I included as "work" time:

+
    +
  • Courses: the actual course lectures
    • +
  • Coursework: studying, problem sets, related readings
    • +
  • Non-Coursework Econ: reading for my Adam Smith fellowship, fun economics readings like Hayek, programming, departmental lectures
    • +
  • Projects: I have three papers at various stages and I've tracked the time on them.
    • +
  • Blogging: This is the least like work, but I only tracked about 10 hours over the year. I likely missed a lot of blogging time or put it as personal.
    • +
+The most obvious bias is from checking Twitter. If I just glanced quickly, say less 30 seconds, I wouldn't mark the time. If I got in a conversation, I would count that as personal time. + +I tracked personal time to try to see how much time I was wasting at the office. If I wasn't working, I wanted to be home with my wife. My apologies to her for wasting the time I did at the office. +

Categories I included as "personal" time:

+
    +
  • Eating
    • +
  • Browsing the internet
    • +
  • Working out
    • +
  • Practicing Spanish
    • +
+So here is my non-perfect data from September 1st to May 27th. +

Aggregates:

+Number of Weeks- ~39 weeks - 4 for Christmas Break and my honeymoon = 35 weeks. This is what I will use for my averages. + +Hours: 1664 hours - 100 "Personal" Hours = 1,564 working hours + +Hours per week = ~44.7 working hours per week + +  + +monthly + +  + +As you can see, there is a dip around the holiday time. Otherwise, the monthly average is quite steady. There wasn't an upward movement toward the prelims. This is because I switched from working on other stuff to studying for prelims. + +There is one estimate for potential students: 200 hours per month. + +Don't take it as gospel, but it is a more precise estimate than what I heard from grad students, "I worked a lot." Although each person is different, it is my impression that I am fairly normal (on this aspect). Remember though, that this is time actually spent working, plus some quick glances at Twitter. It is NOT time at the office. + +After an undergrad program, master's program and one year in a PhD, my impression is that when students say they "worked X hours," they mean they were at the office, library or computer for X hours. Again, that is only an impression. Some students in my different programs worked much more than me, no matter how one tracks it. Some probably worked much less. + +If asked me before looking at the numbers, I would have guessed I worked almost 60 hours a week. That comes from my bias. I remember the times I work 65 hours and forget the times it was only 30. + +For example, I traveled to the Mercatus Center three times this year for a fellowship. I did not include that time, because it was hard to distinguish work and personal time. Since I was only at the office 3 days, those weeks were much lower. I forget these short weeks when looking back on the year. But enough excuses. That is what I worked. 44 hours. But what exactly was I doing? +

Time Actually Working

+This is where I am different from other students. I got extremely, EXTREMELY bored with the coursework and needed to do other stuff. The professors were fine. It's just that my interests are a little too weird to be excited about the material. + +While I would not recommend submitting a paper during the week of prelims, I would recommend doing other economics to keep life interesting. If you like first year, good for you. I didn't and would have dropped out if I worked solely on the coursework. + +weekly + +  + +The rough averages per week is +
    +
  • Coursework: 21 hours
    • +
  • Courses: 8.5 hours
    • +
  • Teaching: 5.5 hours
    • +
  • Non-Coursework Econ: 5 hours
    • +
  • Administrative (just dumb other random stuff I had to do): 1.5 hours
    • +
  • Smith/Hayek + Panic of 1907 + Network Papers: 2.7 hours
    • +
+Not surprising, I spent the largest part of my time on coursework. This increased over the last few months as my work on other papers turned into time for prelim studying. + +What surprised me is that I spent less than half of my time studying. Only about 21 hours a week were directly studying with another 8.5 hours at the lectures for class. In the spring, I devoted less time to the courses since I took fewer courses and attended fewer TA sessions. + +Teaching took up another 5.5 hours. That was the most consistent from week to week with 3 hours in the classroom, an hour for prep and an hour for my office hours. It was a great experience and I hope to devote a whole post to it. Other sections of time varied greatly through the year. + +Most surprising to me is that I spent around 36 hours on stuff I had to do for my first year. The other 8 hours or so were just things that kept me going, things that I found fun. And believe me, they were a lot more fun than coursework. I'm excited to get back to learning more programming and reading more Austrian economics. + +So that's that. I know I'm almost committing blasphemy to the Church of PhD Students by admitting to working only 44 hours a week. But my goal is to be honest with incoming students, not to make myself feel like I'm working hard. If I'm working hard, it will show in my output. I don't need to talk myself up. + +So as I said, my information is not perfect, but it is one more piece of information for people to know about when they are deciding to enter a PhD program.]]> + + 1295 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 555 + + + + + + + + + + 0 + 0 + + + 556 + + + + + + + + + + 0 + 0 + + + 557 + + + + + + + + + + 555 + 1 + + + 560 + + + + + + + + + + 0 + 0 + + + 561 + + + + + + + + + + 560 + 1 + + + 604 + + + http://www.econpointofview.com/2016/01/second-year-update/ + + + + + + + 0 + 0 + + + + Setting Up a EC2 Instance for Cloud Computing + http://www.econpointofview.com/2015/06/setting-up-a-ec2-instance-for-cloud-computing/ + Tue, 23 Jun 2015 14:31:34 +0000 + + http://www.econpointofview.com/?p=1310 + + Things To Do Only Once +First you need to create an Amazon Web Services (AWS) account. Click here and follow the instructions. Simple enough. You've done this a billion times. You will need a phone number and a credit card. Don't worry about the credit card. Everything I will show is free and I will show you how to get AWS to email you if it starts charging for some reason.1_signin + +  + +After you have created an account, go to the AWS management console. In the top left of the screen, click on EC2, which stands for Elastic Cloud Compute. The "elastic" comes from the fact that you will be using some Amazon CPU when it becomes available. + +2_ec2 +

Each Time You Create an Instance

+Click "Launch Instance." An instance is just a virtual server that you will be using. Think of it as a virtual machine that you get to set up and customize. + +3_launch_instance + +  + +Next you need to select the instance type. This tutorial is for Ubuntu 14.04. That is what I use, both on my local machine and on EC2. This means your virtual machine will run Ubuntu with all the Ubuntu commands. + +Every tutorial I've seen is different, because Amazon keeps updating the process. Here are the steps on June 18th, 2015. Keep the "t2.micro" instance selected. It is the slowest type, but also free. Click "Next: Configure Instance Details" + +5_step2 + +  + +Simply click through until Step 5, where you can add tags to this instance. Tags aren't vital, but nice if you're trying to use multiple instances. + +Step 6 is the important step in all of this. It is where you create a security group for the instance. Multiple instances can have the same security. In the future, you can change this, but for now, select the source to be just "My IP" on the bottom right of the screen. This only allows your local IP address to get access to your instance. + +Click "Review and Launch" and then "Launch." + +8_review + +  + +You need to download the Key Pair. This is what allows you to use the instance. Save it on your local computer. If you lose this, you will need to copy your instance and create a new key pair. Download key pair and click launch instance. + +For the key, I put it in a folder on my desktop called EC2. + +Your instance is now launching. You will also get a notice about billing alerts. I recommend you set these up to make sure you don't accidentally leave a paid instance running. + +9_billingalerts + +  + +Follow the instruction on Amazon. + +After that, return to your AWS tab. Click the orange box in the top left and click on EC2 again. This will bring you to the screen that you will always use when accessing your instances. + +The first time, you might see a status check on your instances saying "Initializing." Wait for that to finish. +

Every Time You Use EC2

+On the left bar, under "Network & Security," click on Security groups. Then click on the security group you just created and the "Inbound" tab. This sets what is allowed to use the instance. Click Edit to allow access from the computer you're using. (I have to do this each time I use the instance. If there is a way around, let me know.)11_security + +  + +Again, on the left bar, click on Instances. Then click the instance you want to use, likely the only one you have. On the bottom half of the page, you should see a Public DNS. Copy the Public DNS for later use. + +Now, it is finally time to get into the instance. + +On your local machine, open up a Terminal Window.  Change directories to the folder that has your .pem file that you just saved. + +(Note: The first time you access your instance, you will have to type "chmod 600 name_of_your.pem". + +Type ssh -X -i "the name of your pem file" ubuntu@ "your public DNS that you copied" + +11_terminal + +You are now in your very own instance. Congrats. You computing are on the cloud. Give yourself a pat on the back. That wasn't so hard. + +To make sure, type "pwd" to make sure you aren't in your local directory. Type "ls" to see the instance is clear, nothing fancy going on. +

One Time: Installing Software

+Well, the instance is pretty worthless now. There is nothing on it. Installing programs is simple enough. I use the list below. I use EC2 for Python (and various packages connected to Python). +
sudo apt-get update
+sudo apt-get upgrade
+sudo apt-get install xfce4
+sudo apt-get install jockey-gtk
+sudo apt-get install xdm
+sudo apt-get install ipython
+sudo apt-get install python-numpy
+sudo apt-get install python-scipy
+sudo apt-get install python-matplotlib
+sudo apt-get install python-dev
+sudo apt-get install git
+sudo apt-get install python-sphinx
+sudo apt-get install liblapack-dev
+sudo apt-get install thunar
+sudo apt-get install xfce4-terminal
+sudo apt-get install gedit              # my favorite file editor
+sudo apt-get install gitk               # to view git history
+sudo apt-get install python-sympy       # symbolic python
+sudo apt-get install imagemagick        # so you can "display plot.png"
+sudo apt-get install python-setuptools  # so easy_install is available
+sudo easy_install nose                  # unit testing framework
+sudo easy_install StarCluster           # to help manage clusters on AWS
+When it asks you if you want to continue, type Y and hit Return. + +Now you have a operational instance on the cloud for computing using Python. If you want to use something else, like Fortran, just search do the same thing as above, but "sudo apt-get install gfortran". This is just an Ubuntu computer where you can do everything you could do on a local Ubuntu. +

Running IPython

+I use IPython and will show you how to get it running. There are two simple ways to start using IPython on your instance. + +The simplest is to just type "ipython --pylab". The -- preloads IPython with the Pylab package. This opens up IPython to start playing around with. Enter "quit" to leave IPython. + +12_ipython + +This should pop up an image. It might take a long time. On the free instance, images are slow to load. But this should give you an understanding of how you can use EC2. It is just like a local Linux machine. + +Your other option is to use the gedit package to write Python scripts. The options are endless. + +To exit the EC2 Instance, simply type "exit". + +I hope that convinces you that the cloud is easy and manageable, especially once you are comfortable on the command line. I'll post more about different ways that I use EC2. I learned most of what I do from a Coursera course page. + +Comment below with any questions! + + ]]> + + 1310 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 592 + + + http://businessdailyreport.com/setting-up-a-ec2-instance-for-cloud-computing/ + + + + + + + 0 + 0 + + + + Summer Before PhD, What to Read? + http://www.econpointofview.com/2015/07/summer-before-phd-what-to-read/ + Wed, 08 Jul 2015 15:53:21 +0000 + + http://www.econpointofview.com/?p=1328 + + fools young economists start math camp before their first year. One month after that, they are starting actual class. Oh what a joyous time! + +In the meantime, students are frantically trying to prepare, turning a 9 month school year into 12. At least that's what my friends and I did. + +After an article about what law students should read, Pete Boettke asked what should economists read? + +Before spending months with your face in MWG (micro), SLP (macro) or maybe Greene (econometrics), take the summer to read other stuff. These are the books I'd read if I was just 12 months younger. +

Books To Stay Excited About Economics

+For me, the hardest part of first year is staying excited about economics. First year is a long slog (it's frickin' boring) and it's easy to forget why you decided to become an economist. Take the summer to build back up that excitement. + +

Books To Put First Year in Perspective

+It's easy to get lost in all the Lagrangians and proofs. Take the summer to read some books about how to do economics beyond first year. +
    +
  • What Should Economists Do? by James Buchanan- I've reread the first five chapters at least four times. The whole book is worth a thorough read, but the beginning makes me think deeper about what it means to do economics than anything else I've read.
    • +
  • How to be Human *: * Though an Economist by Deirdre McCloskey- I love anything McCloskey writes on economic me. This is a great collection of essays.
    • +
  • Living Economics by Peter Boettke- For anyone sympathetic to Austrian economics, Boettke offers a fresh perspective on doing economics. This is the only book I'm aware of that is specifically geared toward incoming economics students. I read it before my masters and again before my PhD. It's worth it.
    • +
+

Books to Prep for First Year

+Learning technical skills before first year will help. However, don't overestimate how much you will learn on your own. If you're like me, you'll learn more in a few weeks of class than through all of summer. But if you want to work on technical skills, I'd stay basic. +
    +
  • Book of Proof by Richard Hammack- For my first year, given my training, learning proofs was the biggest hurdle. This book brought me from 0 to okay in no time. I wish I had used it earlier in the year.
    • +
  • Economic Theory by Gary Becker- This book can teach an immense amount about price theory. While price theory is out of vogue in most schools, the material in here would have helped me greatly during consumer and producer theory.
    • +
+I'd say don't pick up any books you are going to read during the year. You have 9 months to torture yourself with those book. Pick up something else. + +All of these recommendations are biased toward the reasons I feel in love with economics (I'm weird) and what it took me to get through a year at Minnesota. But hey, that's all I know. Good luck! + +What am I missing? What should be skipped?]]> + + 1328 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + Summer Update + http://www.econpointofview.com/2015/08/summer-update/ + Mon, 10 Aug 2015 22:32:45 +0000 + + http://www.econpointofview.com/?p=1335 + + few posts looking back at first year (which sucked btw, BORING!, the year... and maybe the blog post), now I've hit a dry-spell. I do want to write more about first year, but I also need to look forward. Lots of other things are going on and blogging just falls down. + +In the meantime, here's what I've been up to since I'm not blogging. You can read this post as a long excuse to both my readers... +

Official Duties (ha ha)

+My main focus over the summer has been for a fellowship I am receiving this summer. The fellowship is for students to spend the summer working 1-on-1 with a faculty member. Prof. David Rahman was kind enough to agree to put up with my shenanigans for the summer, and hopefully longer. + +I'm working with him on developing a simple, intuitive model that looks at how dictators use propaganda. My question is simple, when will dictators use propaganda and when will citizens believe it? It is related to my master's thesis, but I'm following a different literature this time. It's a variation of something called global games. + +Rahman has been suggesting tons of papers to read through and because I'm a little slow it has taken a lot of time. Trying to figure out the model is even harder. Surprise, surprise! After 2 months, I have not mastered the ability to create simple models and solve them. That's what I need to work on... I'll keep trying. + +Also, as I wrote before, I was an Mercatus Center Adam Smith Fellow this past year. (I also get the pleasure to do it again next year!) For one week this summer, I got to attend a conference on classical liberal economists. I was able to also present and discuss my paper on Smith and Hayek while there. I received lots of great feedback and had many fun discussions about all things related to social science. The program is just a blast in so many dimensions. It allows me to get out of the strict confines of pure econ. + +Despite the great feedback from people at the Smith Fellowship, I sent it out earlier in the summer and got my first reject. That was an odd feeling, but good to get the experience. It's not going to be the last rejection. Now I'll need to revise it and send it out again. With everything else going on, I don't know when I will focus on it. +

Other Random Econ Stuff

+I've also been lucky enough to spend the summer doing other fun econ stuff and I have more to come. In addition to a week out at Mercatus for the Smith Fellowship, I spent a weekend out at the Public Choice Outreach Conference and another weekend out discussing recent work in the politics, philosophy, and economics tradition. As always, these weekends are fun and I learn a lot. + +The peak of the summer econ activities was a week talking about Hayek. Liberty Fund hosted a week-long colloquium discussing Hayek's contributions. The group was made up of economists, political scientists, and philosophers. It was a lot of Hayek for one week, but exciting. I learn so much when I'm around non-economists. They see the world differently than me and that's great. That's how you get gains from trade, when each side has something unique. + +Besides that, I've been filling the time with lots of random ideas on all topics, from optimal taxation to the Panic of 1907 to rational irrationality. A typical grad student, I have no idea what I'm working on. + +I also started a food blog with my wife to keep some non-econ things in my life. +

What's Coming Up

+I have one more personal vacation and two more professional trips this summer. That will be enough traveling to get me through the summer... I'll have another weekend out at Mercatus (about the 100th in the past year, wait, that can't be right?) and a few days at the Sante Fe Institute. At Mercatus, the topic is Austrian economics. At Sante Fe, the topic is complexity. Both should be a lot of fun. + +All that traveling has made me almost forget this coming year. Oh well. I'll think about that when it comes. I'll probably also indulge myself by blogging about the second year in my econ PhD also... + +In the meantime, I'll just thank God every day that I get to spend my days learning economics. It is the coolest subject in the world and I am truly blessed to get paid to learn about such fun stuff. + +  + +  + +  + + ]]> + + 1335 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + Austrians vs. Chicago School vs. Samuelsonians: *Only* a Difference of Emphasis + http://www.econpointofview.com/2015/08/austrians-vs-chicago-school-vs-samuelsonians-only-a-difference-of-emphasis/ + Mon, 17 Aug 2015 19:59:43 +0000 + + http://www.econpointofview.com/?p=1342 + + Man, Economy, and State, George Stigler's Theory of Price, and Mas-Colell, Whiston, and Green's Microeconomic Theory, or as I separate them: Austrian, Chicago, and Samuelsonian. + +Boy, was I naïve then? I also set myself the goal of trying to translate these texts into short blog posts as a way to learn. While I gave up on the blog posts (to no-one's disappointment), I kept reading each book. Almost two years later I can report that I've finished working through each book. Worked through, not necessarily understood everything... + +I chose this strange task, because I had always been fascinated by different approaches to economics. What does it mean to do economics? How have different people answered that problem? All these questions are generally things grad students aren't supposed to worry themselves with. + +I couldn't help it. + +While my perspective can never be completely balance to judge these three books, I worked hard to give each a friendly reading. As I'll explain, reading each with a friendly eye was extremely valuable. Maybe I even understand a thing or two from each book. I definitely understand more thoroughly why different economists believe different approaches are the right way to go. I'm more sympathetic to the disagreements in presentation and style. Honest people just have disagreements on what is important. +

A Few General Thoughts

+This post is about  my thoughts after studying each book. If you want to read this as a comment on different "schools" of thought, go ahead, but I'm focusing on the books. However, there is an inherent problem in reading too much into this, because I'm talking about textbooks, compared to pioneering research. Deal with that as you wish. + +I came into this project most sympathetic to Rothbard's approach, but left sympathetic to Stigler's. At no point was I a fan of MWG, probably because grad school forced me to study MWG, while the others were simply "for fun." There is a dryness is MWG that is hard to handle, although it was more wordy and entertaining than a lot of the references I used for first year. What does that say about graduate school? + +MWG is clearly the most advanced in terms of mathematics and is only workable for grad students. There is no value in studying it before you know the math. Stigler reads like an intermediate text these days, but funnier and clearer. Man, Economy, and State is basically an intro textbook, so it's accessible. Sorry, Rothbardians. It's true. That's not an insult. + +Luckily for me though, Rothbard throws in comments that an intro student would glance over, but are food for thought for an economist. Anyone who tries to disregard his book because it seems simple is missing out on lots of insights. It was definitely worth going through for me, even after reading Mises's Human Action a few times. If you're someone who is sympathetic to Austrian economists and would read with an eye to learn from it, it is worth the read. If you're going to read it just to find holes, it's not worth the investment. Finding holes is too easy if the reader doesn't appreciate the Austrian approach. + +Similarly, if you're going to read MWG and stop on page 116 because the term "social welfare function" appears without a sneer, fine. You're not going to learn. If you absolutely reject the use of mathematics in economics as a Mises Institute presenter said in a speech to students (48:00), the same thing will happen. You cut yourself off from a whole world of economists. + +If you pick of Stigler and laugh at the fact that he doesn't define axioms to start from, you're missing out. Does everyone get my point? Read these books to learn from a grow, not criticize. That's my goal in general. +

A Difference Of Emphasis

+The rest of this post is where I am going to get in trouble... + +While I went into this project expecting to see completely different approaches to economics, the books were remarkably similar. This might make sense when one remembers that each book is still within neoclassical economics, roughly Walrasian, Marshallian, and Austrian. Nothing is heterodox. However, I was surprised. I had learned economics on the internet where everyone spends their days criticizing how dumb the "other" side is. + +No. Each method is valuable in its own way. + +The distinction comes from each book's particular emphasis, what the authors think is important. The emphasis of MWG is on a completely closed, axiomatic system, defining every part of a model and solving for an equilibrium. For Stigler, the emphasis is on simple, intuitive models that can applied to many problems. For Rothbard, I see the emphasis on coordination of production through prices. Of course there is Rothbard's emphasis on his form of praxeology and being able logically derive economic theory. Yeah, yeah, yeah. + +But this is a "peculiarity of presentation." + +Speaking about various school of thought in 1933, Mises (p. 288) wrote that +
these three schools of thought differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings.
+Just to see how many people I can make mad, this quote still applies to neoclassical schools of thought in 2015, as exemplified by Rothbard, MWG, and Stigler. Mises didn't believe this even by 1957. But I'll disagree with The Master. + +Each book's main focus is what Hayek called the pure logic of choice. Given some axioms, derive implications about people's choices. Each books focuses on equilibrium, even though they may have different ways of dealing with disequilibrium. Each has their demand curves sloping downwards, although MWG and Stigler might allow for hypothetical "Giffen goods." Each talks about markets that work to coordinate everyone's actions. + +Of course there are also some differences in the tools that people will get hung up on. +
    +
  • MWG's theorem/proof style is confusing to people who didn't study that type of math.
    • +
  • Rothbard's rejection of advanced mathematics, indifference curves, or cardinal utility might confuse many economists.
    • +
  • Stigler's hand-waving, trying to balance between rigor and applicability might turn both sides off.
    • +
+Yes, if you want to read the three books only looking for the differences, there are plenty of faults in all books. + +However, I consider these ancillary to the general topic. None of these should stop readers from being able to learn economics from each book. These are all still *micro* texts. They deal with individual, purposive action. The have buyers and sellers interacting in a market. They have models to capture this. They are working to understand how markets work. Again, all are within the same neoclassical tradition. + +The authors change the presentation of the material, but I don't see the fundamental issues that arise from these distinctions. Certainly nothing that would make it impossible for all three groups of economists to learn from one another. + +Austrians may disagree with omitting discussions about the structure of production. MWG fans might miss the formal game theory in the other two books. I'll argue that the more fruitful way to read this disagreements is not worry about it. MWG thinks game theory is one of the important topics; the other do not (and they are old). Rothbard spends 300 pages on production; the others do not. Each book has a set of priorities. Space is limited. + +Now, I'm sure some people will say that I do not appreciate the importance of some of these differences. They may say that cardinal/ordinal utility is too important to just brush aside. Or math is too fundamental that anything without math isn't "real economics." Fine. Spend your days tearing down the other approach. I'm not sure that is fruitful. + +If person A says that the important thing in economics is having a model derived from axioms of preferences, but person B says the important part is having an easily applicable model, how are we to decide? Certainly, it is not a matter of science. I have my thoughts on what are important things to include and what are not. However, I see that as closer to disagreements over favorite band than to substantive disagreements that would hinder learning from each other. + +To all economists, this is a plea saying that "the other guy" is not as crazy as you might think. That is my main take-away from reading these books. Authors have thought through economics seriously, but happens to disagree with you. You are only hurting yourself if you don't learn from him. +

Moving Forward

+I am constantly looking for common ground for research. I want to use insights from all of these and will keep reading in each traditions, particularly their approach to the core theory through textbooks. It helps me understand the hidden assumptions in each framework and clarifies these ideas in my teaching. I'm working through Kirzner's Market Theory and the Price System, Becker's Economic Theory, and Krep's Microeconomic Foundations. Wish me luck! And tear me apart in the comments :)]]> + + 1342 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + 562 + + + http://www.farmerhayek.com + + + + + + + 0 + 0 + + + 563 + + + http://www.farmerhayek.com + + + + + + + 0 + 0 + + + 564 + + + + + + + + + + 0 + 0 + + + 565 + + + + + + + + + + 562 + 1 + + + 566 + + + + + + + + + + 563 + 1 + + + 567 + + + + + + + + + + 564 + 1 + + + 568 + + + http://www.farmerhayek.com + + + + + + + 564 + 0 + + + 569 + + + http://www.farmerhayek.com + + + + + + + 566 + 0 + + + 570 + + + http://www.farmerhayek.com + + + + + + + 565 + 0 + + + 571 + + + + + + + + + + 568 + 0 + + + 572 + + + http://www.farmerhayek.com + + + + + + + 571 + 0 + + + 574 + + + + + + + + + + 562 + 0 + + + 575 + + + http://www.farmerhayek.com + + + + + + + 574 + 0 + + + 577 + + + + + + + + + + 575 + 0 + + + 610 + + + http://chicagoillocksmith.net/locks.php + + + + + + + 0 + 0 + + + 612 + + + http://chicagoillocksmith.net/locks.php + + + + + + + 0 + 0 + + + + Emphasis of Economics and Math + http://www.econpointofview.com/2015/08/emphasis-of-economics-and-math/ + Tue, 18 Aug 2015 14:34:07 +0000 + + http://www.econpointofview.com/?p=1352 + + Yesterday's post tried to lay out why I believe the fundamental difference between Austrians, Chicago school, and Samuelsonian economists is only one of emphasis. Thinking more about it, I was reminded about an interview with Kirzner that also bring in the use of math in economics (one of my favorite topics to get myself in trouble). + +In an interview for Liberty Fund, Kirzner says the following (54:20): +
If one believes that the description and analysis of equilibrium states constitutes the central task of economic analysis, then the role for mathematics is clear and indisputable because mathematics can and should and is able to grapple with the meaning of an equilibrium state... and to the extent that's all one has to do, then mathematics would be fine. The problem is, as Austrian see it, is that that is mere footnote to what economists ought to and should be doing, that is understanding the market process.
+If I keeps things like this in mind, I am forced to be more sympathetic to different approaches. The reason some people don't use mathematics is because it is not well equipped to analyze what those people think is important. The reason other people force everything into mathematics is because they do want to analyze equilibrium states. + +The same applies to non-math differences. In Becker's textbook, the focus is on describing how whole markets work. If that's what I want to do, his aggregation techniques might appeal to me. If I think the study should be that actions of individuals, I will not want to aggregate in such ways. It's a difference of emphasis, compared to anything antithetical. + +This whole point might be trivial, but I forget it. I doubt I'm the only one. + +Of course, that just kicks the can. Then the question becomes, not what techniques and models should we use? But, what is worth studying? And I wish I had an answer for that... If you do, let me know. + +Update: + +Michael Harris tweeted at me something I found quite interesting. + + +I think that gets at one important aspect. If Austrians wanted to study the same things as non-Austrians, they would use the same tools. I'd bet the reverse is also true.]]> + + 1352 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Altruism, Welfare, and Refugees + http://www.econpointofview.com/2015/09/altruism-welfare-and-refugees/ + Tue, 15 Sep 2015 14:51:38 +0000 + + http://www.econpointofview.com/?p=1357 + + + +I have a hard time making sense of the world without simple models. The recent refugee situation/crisis out of Syria is one example where thinking through simple models has helped me make sense of small part of it. Let's see if people agree. + +Consider two countries, both with 100 people and a government. Each has 40 rich people and 60 poor. The poor make $10 per day and the rich make $100. The only thing that is different between these two countries is how they set governmental policies. + +In country 1, all people vote in an altruistic way to redistribute so that all wages are equal. Everyone agrees to redistribute. After redistribution, each person has $46. In country 2, each person is selfish and wants to use the state to take money from others. In a simple vote, the poor vote to redistribute income1. Again each person now has $46. + +If policy is set in such a way, or this social welfare function that I've assumed approximately holds, we are left with the same prediction for what policy will be: complete redistribution. How could we differentiate whether a government's policy is more like 1 ("altruistic") or 2 ("taking")? + +Now imagine another policy issue: whether to let another person outside of country 1 or 2 move to that country. This person has $0. Here, the two countries set different policies. If policy was set altruistically or benevolently, country 1 would let the person it. Country 2 would not. + +What do we see around us? It's not controversial that we see both redistribution and immigration restrictions, although not completely. That suggests to me that governmental policy is more like country 2 than country 1. Policy is not to help the poor, but to take from some and give to others. + +Of course, country 1 isn't the only world consistent with redistribution and no immigration. A SWF where people are altruistic nationalists (people are altruistic but only to people within the imaginary border that we call a country) would work too. There are probably many more. + +What policy would distinguish between "taking from the rich" and altruistic nationalism? + +
+ +1. I assume the poor can't take all the money for themselves. I could come up with a voting scheme that would make this the outcome, but that is beyond the scope of this post.]]> + + 1357 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + Nobel Predictions and Wishes + http://www.econpointofview.com/2015/10/nobel-predictions-and-wishes/ + Tue, 06 Oct 2015 16:21:30 +0000 + + http://www.econpointofview.com/?p=1362 + + +
  • Robert Barro - "for his contribution to the theory of economic growth"
    • + +Wishes (and why): +
      +
    • Israel Kirzner - "for his contributions to the theory of entrepreneurship" +
        +
      • Because he's my favorite living economist. The opening of his book Competition and Entrepreneurship is the reason I became an economist. I can still remember reading it in the library. My blog is named after his first book. Need I say more about how I'm a fan of Kirzner?
        • +
      +
      • +
    • AndreiShleifer and RobertVishny - "for their contributions to the study of corporate governance and finance" +
        +
      • Shleifer is one of the most creative economists in the last few decades. His work on regulation, behavioral economics, and law and economics is top notch.
        • +
      +
      • +
    • Randall Wright andNobuhiroKiyotaki - "for their contributions to the theory of money." +
        +
      • Wright is teaching my monetary class next semester. I enjoy his work enough and would love to say I studied with a Nobel winner. I know it's stupid, but hey, why not cheer for the home team?
        • +
      +
      • +
    +There we are. With the full backing of science, my prediction and hopefuls. + +What do you guys think? + +P.S. I don't care that the Economics Nobel isn't a "real" Nobel.]]>     + + 1362 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +     + + Two Cheers for (Good) Theory + http://www.econpointofview.com/2015/10/two-cheers-for-good-theory/ + Thu, 22 Oct 2015 02:14:24 +0000 + + http://www.econpointofview.com/?p=1367 + + data analysis: +
    +

    His method of careful analysis of data from household surveys has transformed four large swaths of the dismal science: microeconomics, econometrics, macroeconomics and development economics.

    +

    He has brought microeconomics — traditionally a field populated by theorists — into closer connection with the data. Partly because of his influence, modern microeconomists are more likely to spend their days knee-deep in large-scale data sets describing the real-world decisions made by millions of people, and less likely to be mired in Greek-letter abstractions.

    +

    Much of the empirical revolution in economics has been enabled by the tools that Mr. Deaton developed. These tools reimagine the role of economic theory, using it to organize and interpret the tidal wave of data coming from the hundreds of household surveys conducted around the world each year.

    +
    +

    Bloggers have gone nuts over it, but it's not only them. The John Bates Clark award has been heavy on the empirical micro lately;

    + +
    +

    (E)ssentially changing this prize from “Best Economist Under 40” to “Best Applied Microeconomist Under 40”. Of the past seven winners, the only one who isn’t obviously an applied microeconomist is Levin, and yet even he describes himself as “an applied economist with interests in industrial organization, market design and the economics of technology.”

    +
    +

    I get it. Increased data and computational power have allowed us to do things we couldn't do 10 years ago. It has exploded.  Plus, for the blogosphere, the data turns into pretty pictures that we can all uuuhhh and aaawww at. FiveThirtyEight and others have made a whole industry out of this.

    +

    It's great. I love it.

    +

    But theory is ultimately the force that drives our understanding of the world. As Hayek wrote, the abstract is primary. That's why I love seeing Rakesh Vohra come to the defense of theory. I know; shocking that a theorist would defend theory... It's short, snarky, and spot on, as blog posts should be. (And hard to excerpt it so read it.)

    +

    If you'll indulge me and let another theorist try to defend the first theorist, using theory... I'll use a theory to try to think through the marginal benefits of theory and empirical work. I think Supply and Demand is a pretty useful theory for thinking through things... But I might be biased.

    +

    Let me try my best at making pretty pictures. (If FiveThirtyEight wants me to start designing charts for them, I'm available. Call me.)

    +

    Suppose because of a technology "shock" the marginal cost of empirical work declines. This causes a shift to the right of the supply curve of empirical work, lowering the marginal value of empirical work.

    +

    supplyshift (1)

    +

    This LOWERS the marginal value of empirical work. The next regression gives less value than before the technology shock.

    +

    If you believe, like I do, that empirical work and theoretical work are complements, then this should cause a shift of the marginal benefit of theoretical work. I don't think that markets adjust instantaneously, so there might be lag for the theory market to adjust to the change in the empirical market.

    +

    demandshiftIf this model gives us any insight into the markets for research, I'd say it says the exact opposite of the standard conclusion.

    +

    The marginal value of theory is now HIGHER, because of the "data" revolution. If today is between the shock and the final adjustment of theoretical work, the marginal value of the theory will continue to grow.

    +

    So I'll get back to my theory work...

    +

    ]]>     + + 1367 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + 581 + + + http://www.farmerhayek.com + + + + + + + 0 + 0 + + + 582 + + + + + + + + + + 0 + 0 + + + 583 + + + + + + + I doubt the likelihood is high that we'll get a lot more good theory +Do you mean the supply curve of good theory is vertical? + +I'm not quite sure the exact mechanism you are thinking of. How does better data reduce marginal quality of theory? Could you use a model to help explain it? :) + +I agree that this post doesn't talk about good vs. bad theory. I'm taking it as given that we are talking about a certain fixed quality of theory and empirical work.]]> + + + 581 + 1 + + + 584 + + + + + + + + + + 582 + 1 + + + 585 + + + + + + + + + + 0 + 0 + + + 586 + + + + + + + + + + 585 + 0 + + + 587 + + + http://www.farmerhayek.com + + + + + + + 583 + 0 + + + 588 + + + + + + + + + + 584 + 0 + + + 615 + + + https://beatricecherrier.wordpress.com/2015/10/24/theory-vs-data-computerization-old-wine-and-new-bottles-morgenstern-and-econometric-society-fellows-1953/ + + + + + + + 0 + 0 + +     + + Self-Driving Cars and the Market for Ethics + http://www.econpointofview.com/2015/10/self-driving-cars-and-the-market-for-ethics/ + Tue, 27 Oct 2015 15:19:08 +0000 + + http://www.econpointofview.com/?p=1374 + + + +People are talking all over (in my small world, at least) about the ethics of self-driving cars. Self-driving cars inherently face ethical decisions. Cars must be programmed to make these ethical decisions, trading off different costs including the relative value of people's lives. The MIT Technology Review asks: +
    How should the car be programmed to act in the event of an unavoidable accident? Should it minimize the loss of life, even if it means sacrificing the occupants, or should it protect the occupants at all costs? Should it choose between these extremes at random? (See also “How to Help Self-Driving Cars Make Ethical Decisions.”) + +The answers to these ethical questions are important because they could have a big impact on the way self-driving cars are accepted in society. Who would buy a car programmed to sacrifice the owner?
    +That's an interesting discussion and I'm glad people are having it. The article highlights some work using experiments to try to understand how people would make these trade-offs. + +I'm not an ethicist, nor a computer program, so I don't have much to add to those conversations. But I'm an economist and know a little about spend time thinking about markets. What interests me about the situation is how markets might arise between different ethical systems. People will be able to choose (and pay for) software that makes different ethical decisions for them. Have we seen that before? + +The beauty about a market in ethical systems is the same as the beauty of a market in other issues. Markets won't rely on the research of economists, but the choices of individuals who have to make these trade-offs. The decisions of disparate people are given a voice through the market. + +(I doubt that governments will let such markets work for long before mandating certain ethics, but indulge me for a moment that governments allow markets to operate. A later post might deal with how government would mandate a certain ethical system.) + +Imagine Larry, animal lover. He has a real fondness for all animals, especially large animals: deer, moose, rhinos, whatever. He believes it is wrong to harm these animals. When given the choice between a 100% chance of killing an endangered rhino and a 0.1% chance of killing a person, he'd save the endangered rhino. That's the ethical trade-off that he chooses for himself. + +Now Larry's friend, Sarah, doesn't care for animals as much. She puts more value on saving the person and in this situation would choose to save the person. In a world without markets, what are self-driving cars to do? + +That's where the beauty of markets come in. Markets developed to coordinate marginal trade-offs across people. Markets in ethics (as in groceries) give the consumers more options between goods. If Larry and Sarah want different software and are willing to pay the different costs of making and using that software, they can pick out the feature of their car, just like they pick out leather seats. + +Now that seems odd. People can choose among ethics at the same level as the type of seat? We don't often make such obviously ethical decisions, but who knows about in the future? We have markets now in ethical decisions that would have seemed odd to our ancestors: free-range beef, "fair" trade coffee, environmentally friendly. People can pay for their different preferences. Self-driving cars seem a little different, because the decision is so explicitly ethical. The owner gives specific weights to the value of lives, animals, and property. Just because it is explicit doesn't mean it is fundamentally different than the market for grass-fed beef. Markets would still work to coordinate people's choices in this market. + +If people have expensive tastes, like they want to avoid every squirrel on the road, they must pay for that through better, more expensive technology. Each individual would be able to make such trade-offs for himself. Markets do that. + +People, whether they realize it or not, will explicitly buy a utilitarian + +Maybe people will not want to make these decisions and they will simply take whatever Google or Uber gives them. But maybe not. Maybe vegans will form a strong enough group to have a market that values animals highly. A beauty of markets is that no one needs to know in advance. The market will develop spontaneously as people learn more. +

    Legal Questions

    +Of course, markets do not operate in a vacuum. All markets function in a system of more or less protected property rights. How property rights come to be defined in the self-driving car market will have huge implications for how the market develops. Particularly, liability laws will change the marginal trade-offs people face. + +Take an extreme example where owners of self-driving cars have zero responsibility for the damage that their car causes. In that property right system, any marginal trade-off that the driver is facing tilts toward protecting the driver. This is Econ 101. Since he does not pay anything if he imposes a cost on other people (by hitting them), he will hit choose a software/ethics that has a higher chance of hitting people outside of his car to protect him inside. I doubt many people hope for that property right structure to develop. + +A more realistic example would involve liability similar to what drivers face today. Drivers have to pay some amount to hurt victims or damaged property. If liability develops in a successful way, we return to a situation where people have to pay people for costs the car imposes on outsiders. + +In the ideal liability world, this might greatly simplify the calculations for the software. The software can simply choose the route that minimizes expect costs, which include costs to the driver, vehicle, and liability. + +Where exactly these calculations will go, I have no idea. But I'm excited to see how it develops, if the state allows for a market to develop which would allow people to "vote" for what they value through what they buy. + +How do you think a market might develop? Let me know in the comments.]]>     + + 1374 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + +     + + Rents vs. Rent-Seeking + http://www.econpointofview.com/2015/12/rents-vs-rent-seeking/ + Mon, 21 Dec 2015 18:42:53 +0000 + + http://www.econpointofview.com/?p=1385 + + Dean Baker (HT: Nick Bunker)  on rents, I needed to make sure the terms were clear. + +First, what do we mean by rents? Let's take Baker's definition. +
    “Rent” is used to refer to an income that is generated that exceeds what would be needed to meet the same economic purpose given an alternative set of institutional arrangements. (p. 2)
    +Right away, I'm confused. Is it helpful to talk about the "same economic purpose" under different institutional arrangements? If we are playing a different game (chess vs. checkers), how does one tell what actions have the same purpose? Making a ten ton steel nail in the Soviet Union is not the same thing as making that under capitalism. + +For sake of generosity of reading, let's say we can define the same economic purpose. Now the question is what is the "alternative set of institutional arrangements"? If I make $15,000 teaching undergrads, but would make $0 teaching under an institutional arrangement that permits slavery, is it useful to say my whole teaching salary is rent? I guess we could define rents that way, but I don't think we want to. + +I'm guessing that's why I've never seen "rent" defined (as Baker defines it) in any economics textbook or course. +

    Defining Rents

    +From what I've learned which is admittedly little, rent is almost the economic equivalent of "profit." It's market value minus cost. +
    That is, economic rent is the difference between the actual payment received (the hire-price) and the lowest payment the owner would have been willing to accept. (Hirshleifer et al. 2008, p. 402) + +Defined as a return in excess of a resource owner's opportunity cost. Tollison (1982)
    +An economic rent is simply the market value of resource in its highest valued use minus its market value in its second highest use. Thinking in pure dollar terms, it is the price paid minus what it could have been sold for in another market. If people define value and cost properly, economic rents are equivalent to economic profits. Reading Baker's piece with this definition in my mind, I don't see the connections that he makes. + +Rents get associated with "excessive" fees and income in the Baker paper. With my definition, it's not clear that rents have anything to do with "excessive" prices. + +Excessive can't simply mean greater than zero. In one way, rents are always greater than zero. Trivially, the highest valued use is above the second highest valued use. This can't be what people are worried about when they worry about rents. The fact that 10 > 8 is nothing to get worried about. There must be something else that worries people. + +Perhaps, it is not any rents that matter, but only "excessive" rents means an increase in rents. That seems to be Baker's focus. But that can't be it either, since rents are neither necessary, nor sufficient for high incomes, which is the connection that Baker tries to make. + +To see how rents are not necessary for high income, consider an extremely skilled person such as LeBron James. To simplify matters, let's assume he only cares about money. (This isn't an important assumption, but helps with the clarity.) According to Google, his salary is $24 million for 2016. Clearly, that's a high income by any standard. + +Does that mean he has high rents? Not necessarily. That would be like seeing high revenue and saying a company has high profits. They're conceptually distinct. To see if he has rents, we'd need to know the cost side for him. If he wasn't playing in Cleveland, would his salary be much lower? It's not clear to me that it would be. Therefore, his opportunity cost of playing for Cleveland is high also, whether we are talking about alternatives that include playing for Miami, playing in the NFL, or making commercials. Therefore, any increase we see in his salary does not imply there is an increase in rents. + +Do higher rents mean a higher salary? Not necessarily. What if opportunity costs drop dramatically? That would mean a higher rent without any change in income. In fact, you could see a drop in income associated with higher rents. Consider supply and demand drawn below. The rents are the difference between price and marginal cost (the supply curve). If opportunity cost drops, that leads to a shift of the supply curve. Price, which is income in a labor market, drops while rents for each person increase. + + + +So we have neither a necessary, nor sufficient connection between rents and income. That's the reason I'm hesitant anytime someone is trying to make the rents-inequality connection. Maybe it's obvious to others. It's not to me. + +However, the empirical work that Baker presents is about income increases. Rents are a trickier thing to deal with. +

    Rent-Seeking

    +Do people mean "rent-seeking" when they discuss rents and inequality? Rent-seeking for government protection does involve a logical connection between rents and income, if the right assumptions are made on the cost structure. Tullock taught us this back in the 1960s. (Well I didn't learn it until years later, given that I wasn't born yet in 1967...) People will lobby for government protection to limit quantity in a market, such as the AMA restricting the number of doctors. The reason they engage in this rent-seeking is to drive up their own profits or rents. + +I think that's what Baker is getting at. At least, that seems his focus in the sections on patents and on professionals. +
    In the last three decades as a matter of policy, these monopolies have gotten considerably stronger and longer. (p. 5) + +The most highly educated professionals, most notably doctors, enjoy far higher pay than their counterparts in other wealthy countries. This is due to the fact that they have been largely able to protect themselves from both domestic and international competition. (p. 16)
    +If that's the argument Baker is pushing, he needs to provide empirical evidence on the rent-seeking behavior, not the income. He hints at rent-seeking and gives some estimates of savings from ending patents, however these estimates don't seem to be based on calculations of rent-seeking. But again, I'm not sure what people are usually talking about since they use odd definitions or slide between different terms. + +I'm not sure of much though... + + ]]>     + + 1385 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 590 + + + http://www.econpointofview.com/2015/12/profits-under-competition/ + + + + + + + 0 + 0 + + + 599 + + + + + + + + + + 0 + 0 + + + 600 + + + + + + + + + + 0 + 0 + + + 601 + + + + + + + Profits go to firms. If total revenue is above total opportunity cost of all the resources it uses, then the firm earns a profit. Rents go to resource owners. In the taxi cab example, whoever owns the medallion might receive a rent. In my simple, S&D example I don't distinguish the two. I believe that is okay, if the firm owns the resources it uses. That's how I am trying to use the terms. I'm sorry if I am not consistent. + +Now, I'll try to work through your taxi cab example. First, indulge me and let's assume for simplicity that the taxi cab companies can't "rent" the medallions, but must own them. Suppose the taxi cab market it competitive, as you say. You claim that the free entry will drive up the opportunity cost of running a taxi company, so that economic profits are zero. That's absolutely true for the marginal entrant. It need not be true for the average entrant. The average entrant might have lower opportunity costs, meaning that there are profits in taxicab market. + +Now suppose the taxi companies don't necessarily own the medallions. Then part of the surplus will go to the medallion owner, but the analysis above still holds. Since there is not free entry in the medallion market, it might not be that competitors will bid up the opportunity cost of the medallion so that the marginal medallion owner earns zero rents. Rents might remain for the scare resource "medallions." However, given the price of a medallion, it is just another input and the above paragraph holds. The marginal taxi won't earn profit, but the other's might. If there is no resource that the firm owns that separates it from the marginal taxi, the surplus will all go to resource owner rent and none to profits. + +Finally, I agree completely with your final paragraph in the first comment. + +I don't know if that clarifies what I'm trying to say or not.]]> + + + 600 + 1 + +     + + Profits under Competition + http://www.econpointofview.com/2015/12/profits-under-competition/ + Mon, 21 Dec 2015 20:57:49 +0000 + + http://www.econpointofview.com/?p=1391 + + last post probably generated more confusion than clarity. Let me try to clarify some conceptual points that might help bring my thinking into focus. In that post, I was trying to work through the inequality/rents connection. I argued that the standard way I've seen it presented doesn't make sense to me. I tried to argue that increasing rents is neither necessary, nor sufficient for increasing inequality. In the more speculative parts of the post, I suggested why I think this confusion exists. + +Let me try to make a related point that I might clarify what I have in mind. I'll try to be less speculative and simply present basic economic theory. + +Let me tell the story I've heard: + +Economics rents, sometimes associated with monopoly rents, are often presented in opposition to the perfectly competitive market. They are two "extreme" forms of markets. It's said that in the perfectly competitive markets profits are driven to zero. However, with a monopolist in the figure below, quantity supplied is "restricted" to Qm. This drives up the price of the good the monopolist sells to Pm, which allows him to make a producer surplus, profit, or a monopoly "rent," whatever one wants to call it. + + + +Monopolists are bad, because they generate a deadweight loss shown in the figure. In addition, because monopolists make profit, this creates an incentive for firms to try to make themselves a monopolist. If for example, a firm can get the government to prevent other firms from producing a produce, then a firm will lobby for such protections. This lobbying is called "rent-seeking," which I talked about in the last post. Rent-seeking is wasteful.  That's another reason that monopoly rents are bad. + +Therefore, the contrast presented is between perfectly competitive markets with zero profits, which is sometimes endowed with a positive connotation, and monopoly markets with profits, which is sometimes endowed with a negative connotation. Rent-seeking is thrown in for good measure. + +That's not the actual theory though. + +The sleight of hand came when defining the perfectly competitive market. A perfectly competitive market does not require zero profits. Let me say that again. A perfectly competitive market does not require zero profits. My students make this slip often, which is my fault as an instructor. + +Perfect competition doesn't require zero profits in the Econ 101 version or the fancy math versions we learn in graduate school. We can make assumptions that lead to zero profit in the long run, but zero profits is neither part of the definition of a competitive market, nor a direct implication. + +Take the standard example below with an upward sloping supply curve and downward sloping demand curve. + + + +This market can be perfectly competitive. There are no externalities and everyone takes prices as given. + +But there are still profits. Only good number Q* has zero profit. Inframarginal goods before that make a profit, or economic rent. + +As is hopefully clear from this, profits or rents cannot be used to distinguish the monopoly case from the perfectly competitive. In both, firms make profits. Nor can we use "income" as a proxy for rents, because of what I said in the last post. + +The connection between income, rents, inequality, competition is just not tight enough to make inferences between two of them. Remember that when someone tries to use "rents" to make you react like Pavlov's dog. "Rents" are not enough for positive predictions, let alone for normative policy implications. +

    Institutional Details

    +We need to have a more subtle theory to make these connections. This is where we need to look at the property rights structure and broader institutions that a market is a part of. Such institutional details are the way to distinguish monopoly from competitive markets, "good" profits from "bad" profits. + +This means looking at the rules of the game, not looking at the outcomes of the game, say by looking through the balance sheet. In the article mentioned in my previous post, Dean Baker hints at the institutional details, but mainly focuses on outcomes, such as revenue. + +If one examines a market, say in pharmaceuticals, and wants to judge whether "rents" are increasing or decreasing, we need to look at the rules of the game. Are patents extended? Is it harder to get drugs approved? That's the evidence of increased rents from monopoly privilege, not the increased revenue or accounting profit. + +Distinguishing these two aspects is vital for talking about clearly about monopoly rents and inequality. Once we've established an increase in rents associated with monopoly privilege, then we can possibly see a connection to inequality.]]>     + + 1391 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + +     + + Best (Old) Journal Articles I Read in 2015 + http://www.econpointofview.com/2015/12/best-old-journal-articles-i-read-in-2015/ + Sun, 27 Dec 2015 13:30:55 +0000 + + http://www.econpointofview.com/?p=1397 + + other blogs or like I did last year. I need to get back to books soon... I miss books :'( + +Anyways, where was I? Oh yes. Those old articles. + +Well, some of the articles I read were actually good and after some feedback on Twitter I decided to do an end of the year recap of those articles. Most of them I read since June for silly-things-about-Phd-programs reasons.  I'm thankful for many of these suggestions which came from my good friends on social media. They might seem a bit eclectic, but I liked them... The one's related to my research are marked with a *, if anyone can reconstruct what I'm working on. In no particular order, (some gated) + +Come to think of it. They weren't all old. I'm still read some new articles too that were a lot of fun. + +So there they are. They each taught me a lot and were fun for me to read. I don't know how many other people will find them fun, but I sure did. + +I can't imagine how much fun stuff I'll get to read in 2016. I love this job!]]> + + 1397 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 596 + + + http://donskerclass.blogspot.com/ + + + + best of list, though given my tastes I don't know if mine would be of interest to any other economists...]]> + + + 0 + 0 + + + 597 + + + + + + + + + + 596 + 1 + + + + Second Year Update + http://www.econpointofview.com/2016/01/second-year-update/ + Sat, 16 Jan 2016 16:55:24 +0000 + + http://www.econpointofview.com/?p=1417 + + first year stuff. That's a big year in an econ PhD, so it's maybe natural to be more conscious of everything going on. As with any "first year," it is also a confusing time. You don't know how everything works and you're just trying to get by. + +Second year is much more... routine. I taught a course on Micro 101 last fall, which I'm teaching again this spring. That's slightly new, but not that much of a change from being a TA. Courses that I'm taking are like courses from last year. Not a lot of the changes from first to second year are overly stressful. + +So that's my long justification for not blogging more about second year. It's mundane... + +But since this is my blog and I can be as self-indulgent as I want (and because a few relatives actually care), I figured I give an update of what is going on for me as I'm about to start the spring semester. + +Like last year, two big things on my plate right now are courses and teaching. However, courses are a smaller role than during first year. While I need to pass two "field" exams in the spring (monetary and public economics), courses aren't overly burdensome. (I probably should have focused on coursework more last semester...) They can be 100% of your focus, if people want them to be, but they don't have to be. First year courses have to be your main focus. + +So I don't have a lot of courses that I worry about and I only teach once a week... What do I do with my time in the second year? That's a great question and I'm not quite sure. I guess the answer is "research," whatever that means, trying to come up with something original. It's not easy. + +I'm in the transition stage, learning how to produce independent research. It's a completely different struggle than anything I've done before, but it's also a lot of fun. There is lots of freedom to explore ideas that I want, compared to classes. I appreciate that every day. + +I get to wake up and read papers that interest me. That's pretty neat. + +I won't claim to know what it means to do research. I certainly haven't figured it out. But the approximation that I'm working with for me involves reading, writing, staring at a whiteboard full of equations, and occasionally looking through data. I probably put too much time into the reading part, but it's a lot more fun than staring at the whiteboard all day and making no progress. + +Since theory interests me more than empirical work, my "hard work" involves the same stuff as Raj and Sheldon. + +[embedyt] http://www.youtube.com/watch?v=Dy8EsHZr6DI[/embedyt] + +Unfortunately, the past semester of research has ended up in more circles and dead-ends than actual progress and insights. I feel like my research ideas completely change every week. I've learned a lot about what I don't want to do and what doesn't make any sense. It's a confusing process... But we will see if any of it turns out. +

    Things I'm Working On (And Excited About)

    +Friends and family often ask what I'm working on, so let me try to explain: +
      +
    • A large part of my semester was spent working on a project about inequality and coordination, using something called global games. I'm looking at how inequality changes the ability of people to work together on projects, say a large investment. Imagine there are two types of people, rich and poor. If those groups are very very different from one another, they might have a hard time working together and coordinating. I need to do more data work and expand the model, but my simple model matches some simple empirical aspects. We will see where it goes, but it has been a fun project to start on.
      • +
    • The most progress I've made is on a paper about entrepreneurship and coordination. I have an early, early, early.... early draft up if you want to check it out. In it, I'm thinking through the relationship between coordination (a recurring theme for me) and entrepreneurship. If people need to coordinate their actions, such as buyers and sellers going to a farmer's market together, there can be trouble. If everyone believes that everyone is staying home, then staying home is self-fulfilling and is the outcome. In the paper, I look at how entrepreneurs can help avoid this problem. If economists look at the bigger picture, with the entrepreneur involved, the image changes. Let me know what you think. I'm presenting this at a conference in the spring.
      • +
    • The most frustrating project has been a paper I'm trying to write on interpreting optimal taxation papers. I'm trying to formulate a way of talking about optimal taxation without being purely about normative policy recommendations. To do that, I have to figure out how everyone else is talking about optimal taxation. The problem is that no one articulates what they mean when they have a result that says "optimal taxes are increasing..." How are we to interpret such statements? No one can tell me what those papers mean, so I don't know how to formulate my counter. In fact, it's odd to be thinking about a counter when you don't know what you're actually countering... I'm also presenting this, if I ever get my argument together.
      • +
    • My most recent project is looking what it means to do "optimal taxation," if the government is not perfect. If the government doesn't perfectly maximize the utility of it's citizens, what can we say about their own desired tax system? To do that, I'm building a model that combines regular optimal taxation, where the government wants to help people out as much as possible, and a monopolist model, where the government wants to get as much as possible and reach the top of the Laffer curve. I'm thinking that reality has governments somewhere between perfectly benevolent and perfectly malevolent. Maybe this model can generate some insights.
      • +
    +Don't ask me if I'm working on the same things next month. They might completely change. I'd love to hear if people have any ideas about these projects, based on an admittedly short and confusing summary. + +But, that's what my life is now in second year, if anyone is interested. I'm doing less coursework than most classmates, so I need to replace that time with other stuff: trying to make sense of these four projects and not go insane. + +Wish me luck!]]>     + + 1417 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + +     + + The Economics of Constraining Leviathan + http://www.econpointofview.com/2016/11/the-economics-of-constraining-leviathan/ + Thu, 10 Nov 2016 16:58:32 +0000 + + http://www.econpointofview.com/?p=1425 + + hobbes-leviathan + +While everyone is busy making sense of the election, I figured I would stop on by ye olde blog and talk about something completely unrelated... + +A question I have thought a lot about lately is how can institutions evolve or be designed as to constrain Leviathan. For those of you who forgot your Hobbes, remember, Leviathan is the all-powerful government which people empower so that we can stop killing each other in a state of nature. + +But how do we constrain Leviathan once we have given it power? + +Some economists might view that question as outside of their purview (it isn't taught in "core" economics courses). I do not. This is at the core of economics, a field all about understanding constrains and the trade-offs that constraints impose. + +In fact, going back to at least the work of James Buchanan this question has been seriously addressed within the technical economic literature. Buchanan argued that these questions are exactly what economists should tackle. As he wrote when starting The Thomas Jefferson Center in 1958: +
    The Thomas Jefferson Center strives to carry on the honorable tradition of ‘political economy’ – the study of what makes for a ‘good society.’  Political economists stress the technical economic principles that one must understand in order to assess alternative arrangements for promoting peaceful cooperation and productive specialization among free men.
    +One aspect of promoting peaceful cooperation requires a taming of Leviathan, a taming of the overpowerful staes. And that aspect of study seems especially relevant today. + +But political economists need not start from scratch. Economists have built up a technical framework to answer these questions, much of it done by Buchanan and his colleagues.  For an overview of Buchanan's work on this topic, see Dennis Mueller (gated or ungated WP). From Buchanan directly, I'd also recommend (all free online thanks to Liberty Fund) + +Outside of Buchanan's work, I'd suggest Mueller on Constitutional Democracy, Boettke and Palagashvili, and Weingast on Market Preserving Federalism (HT: Scott King). Some of these deal directly with how to constrain Leviathan. Others look more broadly at how the rules governing state action affects outcomes. All important questions that economics can help address. + +So I urge my fellow economists to "strive to carry on the honorable tradition," especially as it relates to understanding which institutions will allow us to constrain Leviathan. If you have further recommendations, let me know in the comments. It is a noble topic for us to study. + +Or we could keep looking for those illusive optimal tax policies to tell a "social planner."]]>     + + 1425 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +     + + "New" Writing Gig at AIER + http://www.econpointofview.com/2018/12/new-writing-gig-at-aier/ + Wed, 19 Dec 2018 22:10:43 +0000 + + http://www.econpointofview.com/?p=1436 + + American Institute for Economic Research. I don't know why the let ME write, considering the other people who are contributing, but I've enjoyed the opportunity. You can find my articles here. + +I mostly summarize recent NBER working papers, such as +
    +

    When direct records do not exist, researchers must rely on fragmented information and reconstruct the numbers from a variety of sources. A recent NBER working paper by Cory Cutsail and Farley Grubb reconstructs such numbers for North Carolina’s paper-money regime from the time of its first paper money, emitted from 1712 to 1774.

    +

    Cutsail and Grubb compiled a yearly record of newly printed bills, the value of those bills relative to the British pound sterling, the total bills in circulation, and more. By using a combination of tax records, personal letters, and government letters, Cutsail and Grubb put together the most complete data set so far assembled. While the main contribution of Cutsail and Grubb’s paper is to reconstruct the monetary data, which is interesting in its own right, the paper also explains the structure of the paper-money regime in North Carolina.

    +
    +

    Otherwise, I go off on obscure things that interest me, like how we model money:

    + +
    Modeling money as a medium of exchange is almost as old, going back at least to Joe Ostroy’s 1973 paper. It has seen a resurgence in the last 30 years through the monetary search literature started by Kiyotaki and Wright. All such models are fundamentally about a lack of a double coincidence of wants: I want your good, but you do not want mine. Instead of being stuck without the ability to trade, you accept an alternative good — money — that you will use as a medium of exchange in a future trade. + +While economic theorists have developed many models for money as a store of value or medium of exchange, explaining money’s role as a unit of account remains elusive. Recent work, such as a paper in Econometrica by Matthias Doepke and Martin Schneider, is correcting that shortcoming. But there is still much work to be done.
    +Anyways, I hope you subscribe to the AIER feed to keep up to date on what I'm writing and lots of other great economists.]]>     + + 1436 + + + + + + + 0 + 0 + + + 0 + + + + + + + + + + + + + +     +     +