The visible hand in economics

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Dear avid TVHE readers,

We’ve finally set up our own hosting and have a new site  at, if you could be so kind as to set your links/bookmarks/feeds to the new web address it would be much appreciated!

We have lots of exciting things planned for the blog in the future (including some new commentators and some tax calculators for you to play with!), we look forward to seeing you there:)


The TVHE team


Update: Thanks to the journalistic skills of Kimble and StephenR we know this chart is a hoax, it has however sparked some amusing comments on the IQ/party matches for NZ:)

While procrastinating doing work on the weekend I found this little stunner

Would be interesting to see a similar exercise for the 08 election


A few weeks ago a fellow named Jeffrey Doyle posted a “history of economic thought” type comment/post on the blog, which can be found here.

Beyond this he also added one additional criticism of “neo-classical economics” – the focus on “monetary flows” instead of energy.  Of course, as a criticism of economic science this is a misnomer – economic science is the study of scarcity, and “monetary flows” are merely a convientent way of representing this scarcity.  Using energy as a representation should – if the models are sufficiently specified – provide the same results.  Now, in when applying models there may be substantial differences, given what is implicitly assumed to be useful or not in different models – while this argument is important for application it is not something I can argue about, as I do not have the scarce intellectual talent to go around and apply a new set of assumptions to an underlying framework of scarcity.

However, my impression is that Dr Doyle is not criticising the individualistic methodological process in economics – he is attacking the “economic unit” used when we study scarcity, something that is constantly occurring and is a healthy part of any discipline.

However much I was looking forward to launching my own incredibly risky finance company, I’m glad that the RBNZ and Treasury have tidied up what was a terrible decision by the government to extend deposit protection to finance companies at no charge.

Details here (ht: Migeul Sanchez). News coverage here

I particularly like the quote in the stuff article from an anonymous commentator

“The two-year deposit guarantee announced by the Government on Sunday was a “free lunch for [finance company] gluttons”

While I prefer the term economic opportunist to glutton:) I thin it sums up the situation before the rule change quite nicely.

Now that I think about it, 3% off the 30% return I’m promising may not actually be that bad given how risky our investments will be, we just need to work out how to get a BBB- credit rating….


This video was doing the rounds amongst the investment bankers/consultants a  while a go. I must say it’s hilarious. However I’m sure the management consultants that this video mocks are feeling slightly more secure about their jobs at the moment.

note: Youtube is blocked at work so I have no idea if my first attempt at posting a video has been successful:)

I wouldn’t go as far as saying being an economist is a recession proof career. But at the moment I would say “damn it feels good to be an economist” relative to being an investment banker. If I had any rapping/video editing skills I might try and make a reply video. It would definitely have Matt Nolan as the front man, given he is such a pimp:)


p.s. Obviously economists can’t be trusted with youtube at work. I think it’s fair enough, I definitely suffer form bounded will power:)

Brilliant video, I love that Alec Baldwin has reinvented himself as a comedian:)


That is the topic of my Dom Post article this week.


Over at Econlog Bryan Caplan asks a good question – he asks why economists who often rail against the free market will also often state that they strongly support civil liberties. Fundamentally he is asking, why do these people not support freedom to trade but do support freedom of expression.

Now I agree with Dr Caplan that economists should use the same tools to discuss civil issues as they do trade issues – any limits on civil liberties should be the result of externalities, asymmetric information on the value or relevance of ideas, or the undue power of an idea which in turn reduces social welfare (in the same way that in trade, people will rally against externalities, asymmetric information, and undue market power).

However, this does not suddenly imply that I am a stanch supporter of a completely free market – in the same way that I am not a stanch support of blanket calls to remove regulations that reduce civil liberties. Ultimately, in both cases there are trade-offs, and our ultimate goal is to maximise social welfare.

Lets discuss the “social-democrat economist’s bias” a bit more below the flap:

Read the rest of this entry »

There seems to be a lot of discussion surrounding economists position on the political spectrum. My answer to this would be that economists are not a political group or a club so economists themselves will be spread over the political spectrum.

However, I have to admit that the process used when discussing economic issues does lend itself (or suits people would already think like it) to a specific way of thinking. As a result, I’m going to discuss where I THINK my own views stand using the definitions of wikipedia. As I am not a political scientist this discussion will be quite useless – so if any political experts would like to help me out in figuring out where my views lie, please give it a go in the comments section.

Ok here we go.

Read the rest of this entry »

I’m currently in the US on business/visiting family and thought I might share with our kiwi readers back home some interesting things (from an economics perspective of course!) that I have come across in my travels. I’ll post any other random things I come across while in the land of the free.

A few things have jumped out so far:

Read the rest of this entry »

Back in 1970 George Akerlof wrote “The Market for Lemons”, where he described a game where if, buyers have less information than sellers, it is possible that mutually beneficial trade may not occur. (Wikipedia)

Now I’ve noticed a bunch of my favourite economics blogs discussing this paper by Arif Sultan, on empirical evidence and the “lemons problem”. (Blogs are Anti-Dismal, Division of Labour, and Marginal Revolution). The paper appears to say that, empirically, the quality of new and used cars is the same – something that would not occur in the case of a “market failure” based on asymmetric information.

Overall I enjoyed the posts offered by Anti-Dismal (descriptive) and the Division of Labour (stating it was an interesting result), but I think Marginal Revolution takes more out of the paper than it actually offers. Read the rest of this entry »

When justifying progressive taxes or any type of transfer people often use the idea of diminishing marginal utility. Now I am not against transfers, I think there are many good reasons justifying transfers, however DMU is not one of them.

We’ve discussed issues with this approach before here and here. Fundamentally these were:

  1. The utility from income differs between people and we can’t observe it. Furthermore, people with higher utility from income will work more – so if there is any “choice” in the work decision then DMU is not sufficient to ensure the optimality of progressivity.
  2. Liquidity constraints and the discrete nature of purchases ensures that even if we have diminishing marginal utility for individual products we cannot assume that marginal utility is falling in income.

Another possible critique of the DMU justification for transfers comes from prices. Read the rest of this entry »

You probably all remember the shady tax deal that Transpower did a while ago whereby they sold the South Island Grid to a US bank who kindly leased it back to Transpower for 100 years.

Well it appears that the credit crunch is hitting Wachovia (said US bank) pretty hard which has called into question the future ownership of the grid. Some people fear that the grid could be used to settle Wachovia’s debts.

Now I don’t know about you, but I’m pretty worried about some greedy creditors overseas either

A) Pulling up the power lines and selling them

B) Being even greedier then our current owners (a greedy bank present)

How do we solve this dilemma and protect our “strategic” asset? Well if you believed that A) or B) were a problem you would nationalize the grid! That will certainly help us attract investment into the country.

At the end of the day, it doesn’t really matter who owns it, Transpower will continue to run it. The assets have little use outside New Zealand (a sunk asset in economic terminology) and thus any other owner would have little option but to also lease the asset to Transpower.

It would be funny if the government nationalized it though!


An excellent, and often forgotten, point in favour of limiting our response to climate change is the opportunity cost of reducing carbon emissions. Opponents of a policy response often point to the monetary cost to the developed world. Proponents reply that you can’t put a monetary cost on saving the planet. As economists we should always try to think about things in real rather than nominal terms, so what is the real opportunity cost of climate change policy? It could be investment in the developing world, reducing the number of people living in poverty or controlling the African AIDS epidemic.

Are the costs of limited climate change enough to persuade you to sacrifice the lives of so many who will die if the funds that could be used to save them are spent combating global warming? Read the rest of this entry »

I’m not sure if anyone has noticed, but we’ve moved to a flashy new address at! It doesn’t really make a lot of difference if you just read the blog, cos our old address points to the new one. BUT our resident statistician is mourning the nosedive of our Technorati ranking from ten bajillion down to 50 squillion, since nobody links our new address. So if we’re on your blogroll or you ever link to us please use the new address. It’ll give you warm fuzzies to know you made someone feel a little better today, and it’s easier than helping old ladies with their shopping 😉

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