The visible hand in economics

John Maynard Keynes again 😉

The market can stay irrational longer than you can stay solvent.

An apt quote given current extreme uncertainty, and the talk about stock being “cheap”.

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Michael Lewis:

He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.

Found in the December 2008 portfolio magazine (ht Robbie Allan).

Although I don’t agree with all Thomas Sowell has to say, this quote is brilliant:

The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics

I think this quote is apt following an election. All political parties prefer to ignore trade-offs – they just focus is ability in different policy areas 😛

Joan Robinson (*):

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.

Training to be an economist does not tell you the answer to any economic question – it gives you the tools with which to determine answers for yourself, given your own set of value judgments.

Robert Solow:

Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers. (*)

This quote is Solow’s humourus way of reminding us that the study of inflation isn’t the whole purpose of economics.

John Maynard Keynes:

The long run is a misleading guide to current affairs. In the long run we are all dead

More commonly written as “in the long-run we are all dead” putting the quote in wider context makes it more reasonable.  Fundamentally all this tells us is that the long run (when prices can all clear and agents have responded to a shock) differs intrinsically from the short run.

John Maynard Keynes:

I see three outstanding dangers in economic nationalism and in the movements towards national self-sufficiency, imperilling their success. The first is Silliness–the silliness of the doctrinaire. It is nothing strange to discover this in movements which have passed somewhat suddenly from the phase of midnight high-flown talk into the field of action. We do not distinguish, at first, between the color of the rhetoric with which we have won a people’s assent and the dull substance of the truth of our message. There is nothing insincere in the transition. Words ought to be a little wild–for they are the assault of thoughts upon the unthinking. But when the seats of power and authority have been attained, there should be no more poetic license.

I found this quote on Paul Krugman’s blog. In the paper it comes from “National Self-Sufficiency” Keynes states that self-sufficiency in some things is a luxury society may be willing to pay for – this makes sense given that people inherently value goods made domestically by more, even if there is no difference in the quality or prices. Stats NZ 2008 year book took a survey that recorded 90% of people felt this way.

However, this article was merely a critique of economists that felt that “free-trade” in itself is the goal – in this quote he turns the argument back onto the “economic nationalists” when try to push self-sufficiency as the goal.

Ultimately, the goal of any policy should be to increase the happiness of society. The language of economics allows us to describe situations at this level in a fairly “objective fashion” – a tool that allows us to assault the thoughts of the unthinking and hopefully put these issues in their proper context.

Lionel Robbins (*):

Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses

This is the fundamental definition of economics that I adher to when I write here. In all honesty this is not the sole definition of what people “see” economics as – however, it THE definition of what I would term “economic science”.

This definition fits neatly with the theoretical and applied versions of micoeconomics – however, without appropriate “microfoundations” it is hard to decide whether marcroeconomics sticks to this definition of what economics is – is macroeconomics raising the TRUE trade-off between scarce resources in the entire economy?

Ultimately, Milton Friedman felt we make macroeconomics consistent with this view (and useful) bu focusing on predictive accuracy – like many economic models, this made sense once you converged to your result, but not out of equilibrium 😛

Kevin D Hoover:

The claim that representative-agent models provide micro-foundations succeeds only when we steadfastly avoid the fact that reporesentative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models

Kevin Hoover is a professor at Duke University.  I put down this quote as I believe that the modern day process of macroeconomics is likely to come under scrutiny following recent global events – and Dr Hoover’s writing has convinced me that the representative agent model isn’t really the same as reductionism/micro-foundations.

Microeconomics is beautiful descriptive discipline, macroeconomics needs to either find ways to apply it, or use a different holistic method to explain what it is doing – doing something that is (possibly) half and half might not cut it in the end.

Frederic Bastiat:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them

ht Kimble.

I have not read any Bastiat – so I have very little to say.

Lionel Robbins:

In the absence of rational grounds for supposing intimate connection, there would be no sufficient reason for supposing that history “would repeat itself”. For if there is one thing which is shown by history, not less than by elementary logic, it is that historical induction unaided by the analytical judgment, is the worst possible basis of prophecy.

From Chapter 4 of The Nature and Significance of Economic Science.

John Maynard Keynes:

… the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher–in some degree.  He must understand symbols and speak in words.  He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought.  He must study the present in the light of the past for the purposes of the future.  No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.

ht Anti-Dismal, Bluematter, and India’s Development. Note it is also mentioned under the Economist post on Wikipedia.