by Benjamin on August 16, 2009
How bad are things when economists are writing the Queen of Britain first to explain why they were wrong, and now to say that the economists who admitted they were wrong, were also wrong… The queen herself asked questions of the profession and its failure to see the crisis coming as far back as July 2008, and what did ‘we’ have to offer as an answer?
So where was the problem? Everyone seemed to be doing their own job properly on its own
merit. And according to standard measures of success, they were often doing it well. The failure
was to see how collectively this added up to a series of interconnected imbalances over which
no single authority had jurisdiction. This, combined with the psychology of herding and the
mantra of financial and policy gurus, lead to a dangerous recipe. Individual risks may rightly
have been viewed as small, but the risk to the system as a whole was vast.
Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well. The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction. This, combined with the psychology of herding and the mantra of financial and policy gurus, lead to a dangerous recipe. Individual risks may rightly have been viewed as small, but the risk to the system as a whole was vast.
For anyone whose even opened one of the Minsky books or even a bit of Taleb this will be familiar territory – even the description of the market. But lets leave that aside. The retort from a new group of economist is that the education of economists, on all educational levels, is insufficient, as it lacks institutional, historical and sociological context. So far so good. What can we do to help the situation:
Models and techniques are important. But given the complexity of the global economy, what is needed is a broader range of models and techniques governed by a far greater respect for substance, and much more attention to historical, institutional, psychological and other highly relevant factors.
Skidelsky himself wrote something similar, and very interesting in the FT a couple of days ago [cached by google here], but here’s an obvious question… What action is taken beyond talk??? The latest instalment of the American Economic Review seems to almost not have noticed any change, and frankly why should it? There’s a year long back-log and it doesn’t look like a revolution is about to happen wit hthe foundations of the discipline. Especially when the ‘official’ reply from the discipline seems unable to step aside from models which cannot include a crisis in its analysis (cf. Robert Lucas’s reply) and the ‘dissenters’ who want do not want to change the discipline but would like a ‘broader range’ of models… It’s a long road ahead I fear.
Posted 2 years, 5 months ago at 08:56. 3 comments
by Benjamin on January 23, 2009
There are two things economists can never find an example for. Perfect Competition and Giffen Goods. We may now be left with only one, as Robert T. Jensen and Nolan H. Miller have presented empirical evidence – experimental evidence no less – for two Giffen goods, or as they say – evidence of Giffen ‘behavior’. I think that distinction is very useful, and they justify it:
We use the term “Giffen behavior” rather than “Giffen good” to emphasize that the Giffen property is one that holds for particular consumers in a particular situation and therefore depends on, among other things, prices and wealth. Thus, it is not the good that is Giffen, but the consumers’ behavior… Giffen behavior is a phenomenon that arises entirely within the neoclassical framework where consumers care about price only inasmuch as it affects their budget sets. If demand is Giffen the good in question must also be inferior, which rules out Veblen, snob and signaling effects.
In their American Economic Review article from September 2008, they present results from two experiments in Chinese Provinces – Hunan in the south, where the staple food is rice, and Gansu in the north, where wheat is the staple food. They present evidence which suggest Giffen behavior exists strongly in Hunan Province, whereas in Gansu, where there are more substitutes for the staple, there is less pronounced Giffen behavior.
Giffen Good: As price rises, demand goes up
They had observed some empirical trend back in a 2002 working paper, but to separate out some causality (what if high prices were being driven by higher demand and not vice versa?). To do this, they went to the provinces and did a controlled experiment by giving a range of subsidies “urban poor” households for five months, and using consumption surveys before, during and after the subsidies were given (and taken away) they present evidence that households did demand more as prices rose, and conversely bought less as their individual prices fell.
It’s an interesting result, and it provides a great showcase for using experimental evidence (a previous blog complaint) and it includes a smattering of the classic indifference curve analysis in the paper.
You can see a (free) working paper version of the paper here, or look at the published article: Jensen, Robert T. and Nolan H. Miller. 2008. “Giffen Behavior and Subsistence Consumption.” American Economic Review 98(4): 1553-77
Posted 3 years ago at 16:43. Add a comment
