Category — Readings

Reading this classic article by George Stigler, one could be forgiven for thinking he’s talking about Ireland’s doom and gloom merchants.

From pages 19 and 20 (I have the original 1980 working paper (U.Chicago 1980, WP No. 011) version rather than the book chapter):

The main lesson I draw from [economists'] experience as preachers is that we preach what the society wishes to hear. Perhaps all preachers achieve popularity by this route.

The degree of popularity of a preacher does not necessarily measure his influence as a preacher, let alone as a scholar. In fact, one could perhaps argue that unpopular sermons are more influential, —certainly if the opposite is true, and preachers simply confirm their listeners beliefs, pulpits should be at the rear of congregations.

I’ll add to this post as I finish the books and write up reviews/comments/etc.

I am a strange loop. By Douglas Hofstatder

Computational Economics by Kendrick et al, review here

Information and Learning in Markets, by Xavier Vives, review here.

Wikinomics. Really sad I bought this one. Three word review: Awful. Management. Drivel.

“Reinventing the Sacred: A New View of Science, Reason, and Religion” (Stuart Kauffman)

The Woman who waited, by Andre Makine. Lovely, lovely novel. Highly recommended.

Here comes everybody, the power of organising without organsisations, by Clay Shirky. (crap) Review here.

“Nudge: Improving Decisions About Health, Wealth, and Happiness” (Richard H. Thaler, Cass R. Sunstein). Review (plus Parenting policy-rant) Here.

“The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It” (Robert J. Shiller). Review Here

“Hedge Funds: An Analytic Perspective (Advances in Financial Engineering)” (Andrew W. Lo) Review here.

Image via Wikipedia

I’ve just finished Robert Shiller’s Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about it.

The book is a short, sharp taste of Shiller’s trademark clarity as a writer, polemicist, and thinker, and he makes some interesting points.

First, he thinks the subprime meltdown had more to do with psychology and sociology than economics. People believed themselves into a bubble, to the point where even rational, conservative people like the heads of Fannie Mae and Freddie Mac couldn’t forsee price drops of more than 13.4% in the housing market.

There is a strong theme of irrational responses in the face of fundamental uncertainty in this book, something The Black Swan author Nassim Taleb (who wrote a blurb for Shiller’s book) has a lot to say about. Most of the leaders of the day couldn’t see the subprime crisis as it happened, simply because they didn’t think these issues could ever get that bad.

Shiller spend a lot of time comparing the housing bubble in the US from 2000-2007 to the housing bubble which existed in the 1920’s just before the stock market crash of 1929 and the ensuing Great Depression. Then, as now, people let prices of houses outstrip the prices of building those houses, and people borrowed cheap money, knowing the interest rates wouldn’t stay so low, in the hopes of flipping the house or re mortaging it later on based on continually rising house prices. People bought to flip, and in that Ponzi game type scenario, when there are no more willing buyers, the bubble collapses, as we can see from the Case-Shiller (yep, that Shiller) index below:

Shiller devotes a lot of time to setting out his stall for the `irrational exuberance‘ argument for manias, panics, and crashes (to rob a term from Charles P. Kindleberger), concluding the economics of the situation were clouded by a story we all told ourselves enough to believe it beyond the point where it was smart to do so. We fooled ourselves, so shame on us.

The historical narrative Shiller threads through the opening part of his book is both enlightened and well placed, but I don’t think experts on the Great Depression would agree it was primarily caused by a housing boom. There might be an element of Whig history to the professor’s argument here, but nonetheless, it makes sense, and isn’t wrong, per se.

So Shiller sets out his stall: there is a deep seated problem in the economy reaching from the US real economy through to the US financial sector, across the world via a highly interwoven financial industry, and back again to the US real economy. There are striking parallels between the current situation and the conditions which preceded the Great Depression. We are in trouble.

Fine. I agree. But how to solve the problem?

First, Shiller is in favour of bailing out those worst affected right away, and on a massive scale. Think Dobb-Frank on steriods. Shiller wants to stop millions of people getting thrown out of their homes, because to allow this would be an injustice. A bail out seems, in my opinion, to me an enlightened policy.

Second, Shiller wants policy makers to change regulatory environments and financial institutions in the same broad sweeping reforms we saw after the Great Depression. Shiller wants a New New Deal. For example, changing the rules on selling variable rate mortgages to people who most likely will default would kill the subprime crisis. People in the financial industry knew this would happen, but no one wanted to tell them this, because they weren’t legally obliged to do so. The incentives weren’t set correctly, and those are what Shiller wants to change through institutional reform.

(It seems to me Shiller wants a more efficient information transmission mechanism, ala Joseph Stiglitz and George Akerlof, but the likelihood of getting such sweeping reforms through the US Congress seems overly optimistic. The institutional innovations (Fannie Mae and Freddie Mac amongst them) spurred on by the Great Depression occurred in a period of political optimism and also crisis, but without the neo-liberal influence and increased financial and economic globalisation which characterise the modern era.)

Third, Shiller wants us to understand the psychological nature of the crisis: over-confidence created the crisis, but under confidence made it worse.

Fourth, the subprime crisis is a truly global financial crisis, perhaps on the scale of the Great Depression, but the problems generated by the crisis’ effects like the credit crunch can be solved before they are allowed to worsen.

Overall, I enjoyed reading this book, I’ll read it again, and I’ll make it part of my EC4024 financial economics course next semester as background reading. The Subprime Crisis might, in 100 years’ time, be seen in the ranks of the great policy-relevant polemics of economics like Keynes’ Economic Consequences of the Peace. I won’t be around to see it, neither will Shiller, but if people take on board some of Shiller’s suggestions, they might have the luxury of looking on all of this as a historical episode, an artifcat of an undeveloped financial regulatory infrastructure, and a curiosity to be studied by economic historians. Or they might be getting booted out of their houses. Either way, history will prove Shiller right or wrong, as it did Keynes

Related articles

• Paulson Backs Bush On Wall St. Hangover
• Krugman: Partying Like It’s 1929
• Financial Regulation Plan Proposed
• It may not be a Depression, but save now just in case…
• Credit crisis: After the binge, the mortgage hangover
• Sweeping Fed Plan Draws Intense Debate
• White House unveils financial-rules overhaul
• Interview with Eugene Fama
• Shiller: Housing slump may exceed Depression
• Housing Now: Worse Than the Depression?
• A New Housing ETF From Robert Shiller
• The ideology of financial instability
• Cascades Are a Poor Excuse for Stupidity
• Max Keiser: Fixing the Problems on Wall Street is Easy: Raise Margin Requirements
• James Boyce: No Bailout For Bear Stearns. Or For Any Homeowner For That Matter.

Nice review of a great book I reviewed last year and which was subsequently published in Challenge.

Best bit of this review:

Looking beyond the superficial, three other traits stand out. First, many of these economists have over the course of their professional lives been able to strike a balance between working on fairly abstract problems and very practical ones. The practical problem-solving often came about because many of the older economists helped their defense establishments during the Second World War and the Cold War. Aumann, for instance, worked on the abstract mathematical problems, but also used game theory for very practical matters like how best to defend a city from a squadron of aircraft, most of which were decoys but a small percentage carried weapons. He was also one of a group of game theorists involved in the arms control negotiations with the Soviet Union in the 1960s—this followed the Cuban missile crisis during which, Aumann says, U.S. President Kennedy was influenced by the game-theoretic school in international relations, which was prominent at the time.

One small thing though. It’s a book review. A 1,000 word book review. Why are does the author cite themselves twice? Self citation doesn’t make a lot of sense. Or does it?

link, via Bayesian Heresy.

What life will be like for a middle class family in 2050 is still the most read and emailed article on the Irish Times website as I write this, more than 24 hours after it was published. I’ve gotten some really smart emails from readers interested in what it had to say. Some more interesting comments on the article, and my reaction to them, are below.

1. “Irish people have enjoyed relatively low population densities.” Because of our low population density it has made it difficult economically for the government to provide infrastructure and social services to the population. Secondly it increase or oil dependence as people have to travel more. It would be far better for us if the country lived in more concentrate areas.

2.”transition from oil dependent energy” I agree but im not sure about the timescale every energy age comes to a end rather quickly. The change from coal to oil took about a quarter of a century. So i would say the transfer to a mix of nuclear and renewable will happen fairly suddenly.

3. 8 million people our infrastructure can’t cope with 4.2. Looking back on the past on irish economic history its hard to put much faith into any politicians that would take the hard decision to improve our infrastructure. Plus the problems of multi culturalism, irish people have yet to be seriously changed with living with diversity. In Dublin we are beginning to get ghettos. Hardly fairs well for race relations in 2050.

How do you propose to encourage the middle class to save more for the future? Keynes never had children but Sweden practiced Keynesian demand management before keyens wrote general theory and came through the thirties much better than most countries. Which shows that small countries can come up with bright ideas.

P.S. i think its quite ironic that the Jim Kemmy(formally socialist indepdent TD) school that you should be talking about middle class family life.

and my reaction:

1. We do enjoy low population densities, because with a large population comes the problem of dealing with and feeding masses of people. Holland is a case in point. Malthus said if the dutch were put into Ireland, they would feed the world, and if the Irish were put into Holland, they would starve.

2. This may be true, but don’t forget in all previous case studies we were looking at a single country or at least an empire. Now we’re talking about an entire global infrastructure. Also, our dependency on coal hasn’t eased off—it’s increased over the years due to population increases.

3. I didn’t address this issue, because in 2 generations, many of the teething problems we see in Irish society dealing with new arrivals will be gone—they will be Irish people, as integrated into society as we let them become. It’s up to us to encourage them.

4. We encourage people to save the same way we encourage anyone to do anything: provide incentives in the form of government backed securities people buy into. The SSIA scheme is a case in point.

5. Sweden had a nice time of it in the 1930’s, and they did have some good ideas, but don’t forget the backstory which is crucial: in an international atmosphere to protection and throttled trade, Sweden had a social democratic party (elected after neoclassical-style wage dropping policies caused riots in the streets and some killings) which took workers and gave them public works jobs with borrowed money. But, Sweden was a resource rich economy which could do these things in large scale. I don’t think the Swedish story can be transplanted elsewhere. But yes, it was a good idea at the time.

I don’t find it ironic at all to be from the Kemmy Business School talking about the middle class. Kemmy was a worker and a socialist, but he was a forward-looking guy. He held forward views on introducing women in the workforce 30 years before it became politically or socially acceptable, he was all for entering the EU, and he was a champion for Limerick, at least, in bringing business to Limerick at a time when people wouldn’t come here. He was also a self-educated scholar, editing the Limerick Journal for many years until his death.

82 interesting and nice emails, 1 nasty email, and 1 radio interview later, and it seems the little bit of buzz about today’s article has died down. The article was the most read and most emailed article on the Irish Times site today, which is great, I hope people enjoyed it. I’ve gotten some very interesting comments, including Prof. Vani Borooah, his comments on the article are below:

Some more thoughts on what 2050 might be like:

1. Communication will be more fragmented and fractured as text messaging and emails becoome the sole mode of communication.

2. With information so readily available, there will less information on knowledge and more on information: want to learn about the French Revolution? Just read the relevant page in Wikipedia.

3. There will be more emphasis on “virtual” rather than “real” relationships: friends made on Facebook or Beebo will seem real friends. A throwback to the “pen friends” of my generation?

4. The quality of life will change as “home working” becomes more common.

5. There will be greater inequality as those who “can” earn large rewards and those who “can’t” slave for low wages.

Further update: Hi to the Crooked Timber readers!

De Grauwe gets raw on Central Banks and their reliance on DSGE modeling:

One of the surprising developments in macroeconomics is the systematic incorporation of the paradigm of the utility maximizing forward looking and fully informed agent into macroeconomic models. This development started with the rational expectations revolution of the 1970s, which taught us that macroeconomic models can only be accepted if agents’ expectations are consistent with the underlying model structure. The real business cycle theory (RBC) introduced the idea that macroeconomic models should be “micro-founded”, i.e. should be based on dynamic utility maximization of individuals.

link

Some days, the web feels like 5 people trying to make something; 5k people turning it into a list; and 500MM people saying, “FAIL.”

—Merlin Mann

Months ago, a reader asked me what software I use to create all the different blog posts, handouts, podcasts, lecture notes, and audio files for the website. It’s quite a long list, which could use some paring down in the next semester. I’ve broken it up into three bits: Website & Podcast, Slides and Handouts, and Other. I’ll finish off with some thoughts about where to go next with the blog, the podcasting, and slideshows.

Here’s the list, and what I use each piece for.

1. Website

1. Wordpress for the website, with Podpress for integration with iTunes. About 20 plugins for different bits of functionality like printing posts and integrating into each post and search engine optimisation.

2. Apture for autolinks and auto content generation on the site.

3. Vimeo for hosting podcasts, because hosting them myself shags me straight in the wallet. It cost me nearly 300 euros one month for all the extra bandwidth. These podcasts are huge files, so it makes sense to host them somewhere else and stream them.

4. iShowU for making screencasts.

5. Profcast for making the podcasts, or if there’s no slideshow, Audio Hijack Pro for recording the talk.

2. Slides and Handouts

1. I use Keynote and Beamer for the presentations, depending on how mathematical the subject is. Never PowerPoint. I’m starting to look at 280slides.com though for producing quick presentations on the fly.

2. I made all of last year’s EC4333 handouts using Apple’s spreadsheet program, Numbers. They looked great, I’ll probably keep some of them in next semester’s iteration of the course. Examples of the handouts are here and here.

3. I use Mathematica for simulations and demonstrations of different models, also for some lecture notes, for example, all of Financial Economics, EC4024, had their handouts made in Mathematica (examples here and here).

I don’t really like the way they look though, so I might move the lecture notes over to for the coming semester.

4. for typesetting mathematical documents, lecture notes, slideshows, and articles. I might begin using this exclusively from now on, even though it looks pretty boring for the reader. There is a latex class built on Edward Tufte’s visual schema I might try. We’ll see.

3. Other

I’m using a lot of Web 2.0 Applications to distribute the content I create. This is for several reasons. Either hosting them on my own site would be expensive, or I’d lose control of the versions of these things if I just let everyone download .pdfs, or I think the app adds something to the exposition, or I’m just messing around with the functionality and seeing what works. Whatever the reason, these are the apps I tend to use for editing/viewing and displaying content on the site.

1. Google docs for reading Word, Excel, Powerpoint documents people send to me.

2. Scribd to allow viewers of each document I put up to view them online as well as allowing me to keep download statistics on each document. My scribd page is here.

3. Vimeo, see above.

4. slideshare.net to allow viewers of the slide shows access to them without, again, doing horrible things to my wallet. My slideshare page is here.

5. flickr.com for photos, but I’ve never really used this. I put up an account to share charts and graphs, but IBM’s cool visualisation software seems to have beaten flickr on that score.

4. Moving forward with the site, lecture notes, and other content

I’ll try hard to emulate Terry Tao’s style of lecture exposition in next semester’s classes, with comprehensive handouts written as blog posts, linked to textbook or online resources, and Mathematica demonstrations, or what have you. I’ll definitely use slideware for the 350+ EC4004, Economics for Business, but I’m not so sure about Economics of European Integration, EC4333. That one, I might just teach old school, and see what happens.

Next, I’ll do the podcasts again, on Vimeo, the hosting site. The handouts will be pdfs, most likely , and the mathematica demonstrations will be available on the site as well as the Wolfram website for their demonstrations.

If anybody has any suggestions on improving the content or the website, please let me know.

I’ve just finished Clay Shirky’s Here Comes Everybody, an interesting book describing the impact of online social networking tools like Flickr, blogs and mailing lists on top down and bottom up organisations.

The basic idea of the book is these tools dramatically lower the transactions costs associated with running a complex organisation (which Ronald Coase, Shirky notes, highlighted a long time ago). We see bottom-up organisations and ‘happenings’ like flash mobs, meetups for single moms, helping mailing lists for software, and open source software development.

Crucially, these online networking tools provide us with the ability to fail much more easily and cheaply, while allowing some projects, businesses, and other online entities to become superstars, something Arthur DeVany and Nassim Taleb are experts on.

The book is entertaining, witty, and a quick read. If you’re interested in this area at all, pick it up.

Also, I’ve been messing around with data visualisation tools after reading Edward Tufte’s latest book, and here’s a tool which creates mindmaps out of simple indented text. This will be great for making lecture notes. It’s free. For nuthin’. Here’s my first go at a mindmap of Shirky’s work using the Text2mindmap tool.

Click on the link below to take a look at Here Comes Everybody.

Here Comes Everybody

Information and Learning in Markets represents the culmination of fifteen years of Xavier Vives‘ work in applying Bayesian ideas to game theoretic models of finance and the real economy. Vives’ homepage with his working papers is here.

{Image: Morning Meeting at the Fish Market}

The book starts off by building simple Cournot models of large markets, showing where and when the informational equilbria correspond to efficient allocative equilibria. The first few chapters are tough going (especially chapter 2), but once you’ve gotten your head around the general approach, which is, assume a continuum or assets and workers, and draw statistical inferences from the assumed interactions of these players, which correspond to equilibria in defintie settings according to standard Bayesian criteria.

The goal is to show the equivalence of anomalous results in behaviural economics to rational expectations equilibria, in different assumption-settings.

I found the first part of the book really interesting, and will use the approach Vives develops in my financial economics course, EC4024, next year. The second half of the book really loses me, however, especially chapter 9, sections 9.0–9.2, where we see a rational expectations equilibrium emerging, even though some of the traders are ’slow learners’. I can’t get my head around why a slow learner in a financial market could persist for long enough to attain an equilibrium. We see that market microstructure really matters for the information revelation properties of prices, but we don’t see the connection with the real world.

All in all though, this book is a nice, well paced, and at the end a very technical introduction to Bayesian thinking about price dynamics in markets with asymmetric information. The going is tough, but in parts the work one puts in will really worth it. Expect to see more of Vives’ work on my financial economics course next semester, in elementary from of course.

Courses this book will be good for: PhD financial economics and mathematics, industrial organisation, or a Bayesian decision making seminar.

Notes for Kendrick, Mercado and Amman’s 2006 Princeton University Press book:

(Code for the programs in this book is here)

This is a pedagogical book with a lovely idea at the core: teach standard micro and macroeconomic models and principles using computer programs like Excel, Mathematica, MATLAB, and others.

The book takes us through a series of simple and well known examples, using student’s familiarity with the textbook models as a foil to show the usefulness and extensibility of the computational approach.

So, we see partial equilibrium analysis and game theory in Mathematica, Derivatives analysis and genetic algorithms in MATLAB, and CGE models in GAMS as well as other programming languages. Throughout students are encouraged to go it alone by modifying the authors’ code (which is itself a point of interesting pedagogy, see this Journal of Economic Education article for more)

The bits of the book which are most interesting for me are the Mathematica and Excel chapters on Growth, Game Theory, and Partial Equilibrium analysis.

Each chapter follows the same structure. For example, in the first real chapter, the authors give an Excel solver routine to solve the Neoclassical growth model in it’s simplest form, as presented by, say, Romer in Advanced Macroeconomics. The exposition is clear and concise, and any student with some previous exposure to the mathematics will have no trouble fathoming the model’s basics. Then we see the Excel implementation of the model, with links to the code for the model itself so students can use and modify the parameters and basic assumptions as they like. That code, by the way, is here.

The Mathematica notebooks all run well in Version 6.02, and the use of game theoretic concepts in a LISP-like environment such as Mathematica really makes it clear what a high level and extensible computer architecture Mathematica is. The work, really, is a precursor of the currently white-hot topic of Algorithmic Game Theory, even though the authors don’t mean their work as such, just seeing the canonical models implemented in a computable set theoretic way (by definition, because it’s on a computer) is a real step forward.

One thing I would have loved to see was a comparison of one model built in two different languages: how one would go about translating, say, an Eviews program to MATLAB, or something like that. Maybe I’ll add that to the ideas list. Another idea to really sell the book would be to make each ‘program’ section of the book downloadable separately. Most institutions don’t have blanket subscriptions to Mathematica, MATLAB, Eviews, GAUSS, TSP, Stata, etc, so by allowing readers to pick and choose by program, the authors might make themselves a few more shekels. Who knows?

So all in all, a very nice pedagogical book, and well worth purchasing for a library or graduate student interested in teaching computational economics. Glad I read it.

Here are Mathematica notes, slides, and code for a course I taught at NUI, Galway in 2006. I recall it didn’t go down that well, but the notes are pretty cool implementations of standard Solow/Ramsey type models, so I think, on reflection, I’ll put them out there.

You’ll need Mathematica or the free mathematica player to view the .nb files, but look at the .pdfs if you’re interested.

You’ll need to evaluate the mathematica file to generate the figures and solutions. Right click the link below to get the files in a .zip file.

Barr and Serneels: Reciprocity in the Workplace

Abstract: Using combined experimental and survey data, this paper provides empirical evidence that firm productivity is related to worker’s pro-social behavior in the workplace. At the firm level, we find a strong positive relationship between firm productivity and reciprocating behavior among workers. Investigating workers’ individual behavior we find a similar, strong relationship when regressing earnings, a proxy for productivity, on reciprocity. To address simultaneity we use an instrumental variable approach and find that the initial estimate was upwards biased, presumably because it did not take into account the positive feedback from earnings to reciprocity. The new coefficient remains substantially above zero, but it is statistically insignificant.

link (restricted access)

Kruger: Productivity and Structural Change: A Review of the Literature

Abstract. This paper is a survey of the existing research on structural change at various levels of aggregation with a special focus on the relation to productivity and technological change. The exposition covers the research concerning the development of the three main sectors of the private economy, multisector growth models and recent evolutionary theories of structural change. Empirical studies of the reallocation of market or sector shares as a result of differential productivity developments are also discussed. The synthesis emphasizes the crucial interaction of supply- and demand-side forces in shaping structural change.

link (restricted access)
Luttmer: Selection, Growth, and the Size Distribution of Firms

Abstract.This paper describes an analytically tractable model of balanced growth that is consistent with the observed size distribution of firms. Growth is the result of idiosyncratic firm productivity improvements, selection of successful firms, and imitation by entrants. Selection tends to improve aggregate productivity at a fast rate if entry and imitation are easy. The empirical phenomenon of Zipf’s law can be interpreted to mean that entry costs are high or that imitation is difficult, or both. The small size of entrants indicates that imitation must be difficult. A calibration based on U. S. data suggests that about half of output growth can be attributed to selection. But the implied variance of the combined preference and technology shocks is puzzlingly high.

link (restricted access)

Here are the papers by group.

Decide on one slot, and fill in your first preference (no more than 1) using the scheduler here:

Click here to schedule your presentation.

Each group should produce a summary of the article as a handout for the audience, as well as slides if you feel they would be useful. Your intended audience is upper level undergraduates with some training in economics. Both your peers and I will be marking you on your presentations. I expect everyone in the class to make it to all the presentations.

Click below to get the individual papers by group.

[Read more →]

Econometrics should have been called ‘Guinnessometrics’. Here’s why.

“The Paper Wall: Newspapers and Propaganda in Ireland 1919-1921″ (Ian Kenneally)

This book is going to be a big one, folks. Take a look.

“The Three Trillion Dollar War: The True Cost of the Iraq Conflict” (Joseph E. Stiglitz, Linda J. Bilmes)

Following our discussion yesterday I did some reading on the stimulus package announced by President Bush, and here’s something I found I’d like to share with the class.

Read it, and I’ll open up the comments section so if anyone agrees or disagrees, they can have their say.

(Why the stimulus shouldn’t stimulate you)

EC6012

BBC NEWS | In pictures: Urban life in Zimbabwe, Dollars and cents

Photos of urban life in Zimbabwe today: shortages, queues, hyperinflation, and hardship.

Blogged with Flock

On Friday we’ll be looking at Trade Creation and Trade Diversion, concepts that define whether a trade agreement is, in a very specific sense, ‘good’ or ‘bad’. They were developed by Jacob Viner, a professor at U. Chicago and one of the foremost trade theorists of his generation.

Click here to browse his online works. For those interested, look in particular at Studies in the Theory of International Trade. 1937, and Free Trade and Customs Unions.