New School Economic Review

Ramsey didn’t discount over time

by Benjamin on July 1, 2009

Frank Ramsey (1928) condemned the use of a discount factor to the utility of future generations. However, for postwar growth economists, who consider Ramsey to be one of their patron saints, the discount factor, applied either to individual‘s or to social planner‘s decision making, is a technical requirement of dynamic general equilibrium models.

That is part of the story told by Pedro G. Duarte (University of São Paulo, Economics Dept) at this weekends History of Economics Society conference, and it is a particularly poignant argument, seeing the discounting debates currently taking place in areas as diverse as ressource economics and microeconomics.

Ramsey “assumed that we do not discount later enjoyments in comparison to earlier ones, a practice which is ethically indefensible and arises merely from weakness of the imagination” (Ramsey 1928, 543). But he was still able to solve the micro model mathematically, through a method forgotten perhaps by todays modellers who find the discount factor essential… More details in the paper below.

Duarte, Pedro G. 2009. “A Path Through the Wilderness: Time Discounting in Growth Models.” Presented at History of Economics Society Annual Conference 2009: Denver, CO: http://hes-conference2009.com/papers/SAT1E-Duarte.pdf

Ramsey, F. P. 1928. A Mathematical Theory of Saving. Economic Journal 38.152:543-59.

Free copy of Adbusters upcoming Economics Issue

by Benjamin on June 24, 2009

Adbusters Sept/Oct magazine is completely focussed on economic theory, and especially on the alternatives to the Neo-Classical paradigm. it will feature interviews with Herman Daly, Robert Nadeau, Lourdes Beneria and Joseph Stiglitz as well as papers, short articles and a lot more.

There’s more information and you can request a free copy here if you are a econ student, faculty member, student rep, etc etc by snail mail (offer expires 26 June – that’s friday). I’m looking forward to seeing what’s in the issue :)

Samuelson: “Look to History”

by Benjamin on

Conor Clark has been interviewing Paul Samuelson for The Atlantic and the good professor, who at 94 is still very productive, had a new piece of advice for economics Graduate students:

Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come.

Once that is accomplished, the recommendation is to go empirical on the past, but not necesserily in the context of a formal model.

History doesn’t tell its own story. You’ve got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.

So that’s the new wisdom from the man who brought us the Foundations of Economic Analysis, who had this to say about that classic:

With the Foundations, I looked around for the best bicycle in town. It wasn’t perfect, but it was better than what had been assigned previously.

The interview is in two parts covering everything from Larry Summers through Mankiw, the crisis and much much more, here and here, while a tip of the hat goes to Stephen Kinsella for reading and commenting on the interviews in the first place.

Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come

Chicago and Macro goes the way of the Dodo

by Benjamin on June 18, 2009

Alright then, has everyone now heard the argument that more debt funded government spending will crowd out an equal and opposite private investment or consumption? I’m sure it sounds familiar, because there is something about that story, especially as it is sold by Chicago’s Eugene Fama and John Cochrane very recently.

The story excludes the current circumstance of the economy (recession), it assumes – in its classic form – that the economy is not credit driven, and as Paul Krugman complains: “What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship”. In fairness Krugman is only responding to Brad DeLong who goes a little further in lambasting the Chicago guys:

Milton Friedman knew this. Irving Fisher knew this. Simon Newcomb knew this. David Hume knew this. John Cochrane does not know this: does not know that the velocity of circulation is an economic variable rather than a technological constant. I do want to pound my head against the wall. I do not know what else to do…

Continue Reading…

Free Pictures of ‘29 Recession, FDR & WWII

by Benjamin on June 17, 2009

from the library

In a search for documents I have come across the Franklin Delano Roosevelt Library and Museum in New York  State, which has a lot of archival material for anyone working on war policy, the New Deal and the 1929 depression but also offers a copyright-free archive of pictures from the period.

Not all their Pictures, images, videos and text are available on-line, but a good portion can be accessed directly and can make for a nice addition to any lecture / talk / paper on the period or its people.  And you can get 1,000 pictures of FDR and his wife, 500 Great Depression and New Deal Photos, as well as 500 WWII and Lend-Lease images, and lots of  sound or video from the period.

An amazing ressource for the on-line researcher, and of course for anyone who has access to the actual library.

An Alternative to Discounting

by Benjamin on June 16, 2009

In a comment to the previous post, Brandt W noted that there are many humanistic factors which we can never fully appreciate or work into cost-benefit analysis. I would expect the standard reply by policy economists to be that cost-benefit is the best tool we have, and regardless of the factors we need a valuation which will allow us to guide policy. [Afavourite example is: If you could build a roadside barrier which would save 1 life per year on average (a tenuous method for approaching the costing side, which I will look at in a later post) and the barrier cost $1 would you do it? - ok... What if it costs one billion dollars? Would you still do it? If the answer is yes and no, then somewhere in the middle you must have placed a value on a 'life', and then the marginalist approach is to find that 'tipping point' and set the maximum cost of the project... and so we have cost-benefit]

Lets accept that argument for the moment, but then I think we need to consider the issue of discounting within the cost-benefit framework. Sticking with the barrier example, the modeler would then apply a discount rate to the value of life over time, and work out the ‘total’ benefit of the barrier. 

I am not convinced discounting is the way forward here. I see the rationale behind discounting an asset over time at some given interest rate or depreciation, but surely a ‘life’ is not worth less in the future than it is now? From our current perspective dying tomorrow is preferable to dying today, but the loss and externalities will be the same when the even occurs, they will not have depreciated like some outdated computer, whose loss you might mourn as you nostalgically recall the happy days of playing pacman. The new computer will let you play the latest games and (hopefully) run Vista, it is inherently more valuable than the old machine. A new child is certainly a treasury, but no more so than the one who was killed in the accident. Let’s not even try to calculate the externalities associated with the death.

That ranting aside, at The History of Recent Economics conference I attendend this weekend, one presentation reviewed an alternative idea which is to avoid discounting. This was in the context that Ramsey (of the growth model fame) himself had been staunchly against discounting in macroeconomics.

The example given was for inputs, renewables like trees. If we apply a discount factor to the value of trees over time, and use cost benefit to decide when to chop them down, we will, regardless of how small the discount factor, predict a point in the future when all the trees are worth zero and chop them down before that point in order to maximize x.

x = (1, … , 1), (0, … ,0)

x = (0, … ,0) , (1, … , 1), (0, … , 0)

But if we do not discount the stream of wood taken out of the forests, we can still maximize x, but our consumption would be very different. We would consume the amount required to maximize the average inputs harvested per year, (or technically, you maximize the output in the limit).

x = (1/5, …, 1/5, … ,1/5)

Over time you avoid the (0, … ,0) period when there are no trees, which under discounting is irrelevant as the value of those inputs today is zero. Trust me, when we run out of rainforest, I get the feeling we will be rather dissatisified with that discount factor.

Economic logic

by Benjamin on June 10, 2009

Your reasoning is perfectly logical but totally insane… Your thoughts [provide] a concrete example of the unbelieveable alienation, reductionist thinking, social ruthlessness and the arrogant ignorance of many conventional ‘economists’ concerning the nature of the world we live in.

Wrote José Lutzenberger, Brazil’s then-secretary of the Environment, to Larry Summers in 1991 when Summers was still chief economist at the World Bank, in response to a memo by Summers on how low income countries should bear the burden of all ‘health impairing’ pollution from the industrial countries as the lower per capita income would make it more efficient to reduce the life-spans of people in these countries, as Summers put it: 
 

I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

This quote and story from Frank Ackerman’s new book Poisoned for Pennies which I am currently enjoying on how and why cost-benefit analysis is not the transparent, all-encompassing idea which economic analysts want it to be. Expect more along these lines from me, as conference season intensifies.

Ackerman, Frank. 2008. Poisoned for Pennies: The Economics of Toxics and Precaution. London: Island Press

WolframAlpha

by Jeanne aka JStor on June 8, 2009

What questions have you asked WolframAlpha?

Here are some of mine:

• The distance from NYC to San Francisco to Limerick Ireland:
  2578 + 5053 = 7631 miles (Markus & Kendra’s wedding)

• The statistics of my name: Jeanne
• How old my nephew is: 6 days (Yes I could have done this in my head.)
• How many ounces are in 450 grams (converting a cake recipe): 15.87

Posted 3 weeks, 4 days ago at 11:58.

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The evidence is in….

by Jeanne aka JStor on June 4, 2009

Read this article this morning: How Testosterone Poisoning Wrecked the Economy.

Fell over laughing. Not quite sure what to make of it. But near the end, Andrew Leonard writes:

Neoclassical economics tells us that markets know best and individuals, en masse, will make rational decisions based on the information presented to them. The theory has taken some severe blows lately (and is utterly demolished in Justin Fox’s soon-to-be-published “The Myth of the Rational Market”),

There are a number of books coming out this year on the history of finance (more to come on that next week) but this one might be a good read….

Keeping up with the Jones’

by Jeanne aka JStor on June 1, 2009

It’s a simple fact: the law just can’t keep up with speed of change. Last week, I read a book review on two books that discuss the problems the music industry is having with copyright infringement (i.e. free music downloading, file sharing, CD burning/copying). This obviously has taken a toll on the music industry. (I still like to buy some CDs since I am a huge fan of CD cover art.)

And obviously, the world of finance is facing it’s own problem.

The Levy Institute recently published a policy note by Professor Martin Shubik on The “Unintended Consequences” Game. It’s interesting to say the least. (You know how when someone asks you what you thought of something and you answer “It’s interesting.”? And it’s always a bad sign? Well, yeah this is probably one of those times …) I’m not quite sure what to make of it. Professor Shubik is partially right. When something bad happens (i.e. financial crisis), the public and the politicians look for a scapegoat and a quick-fix solution ASAP. And that quick-fix will end up having loopholes galore since it was obviously just thrown together. But his solution is really puzzling.

His solution: Continue Reading…