Some of the papers had stock-flow consistent models or purely theoretical models built around the quantity theory of money and similar devices and this led to some debate after the issue of a standard fiat money was raised. The argument was made that any fiat money needed a denominator, be it a price level, gold ingots, goods bundle or something which it could base its value on. I suggested that this was not the case, and there were several cases where paper money had been based on ability to pay taxes in that currency. The Maryland Dollar (1720-70)  and French Asignat (1790s) were both examples of this, and papers presented by Farley Grubb and Patrice Baubeau had earlier talked about them, so it seemed an obvious thing to say. The problem is that economists don’t like modelling, or thinking about,  money not based on a common denominator. “It feels wrong” was a comment made. The irony is that not only does it feel wrong, but in set theory, which all our economic modelling in this field is based on, it is wrong. Ben Fine has made the point in a paper well worth reading that money as a variable ‘M’ would be mathematically inconsistent if it values itself and stood as a measure of value for all other goods. Ironically that is exactly what fiat money does, and to avoid that in modelling we use M/x, where x is some denominator which, sadly, makes the money a relative price and not money at all. Funny thing money…

All in all, it’s a very nice place, given its main attraction is a lake. That is made up for with the caliber of the people it attracts. Of all the interesting things I heard, the scariest may be the chief economist at the WTO explaining how positive it was that the debate on TRIPs had shifted from one of static rent-seeking with winners and losers, to a more nuanced picture, even if it was a matter of rent seeking originally. Hmmm…

-I wish, that on every draft which people have commented on, I’d written the date it was returned, the draft number and the name of who commented. Now I have a pile of useful comments, but no idea when or why they were made on an ocean of paper instead.

-I am happy that I wrote out each of my references as I went along. Especially when I have single sheets of paper with notes, even there I pasted in any bibliographical detail at the end. It’s great! Because whenever I add new material this week I only need to copy-paste the reference off the note sheet into the bibliography.

-I wish I’d have some way of shuffling each chapter reference section into a aggregate reference section. This seems like a lose-lose situation though. Because if you work with a ‘thesis bibliography’ from the start, it becomes a pain putting out papers for conferences as the work is on-going, and if you don’t you get the pain in the last week.

-I wish I had asked more people to read my chapters, and to read them earlier. I’ve had lots of great feedback, and a lot of it from outside sources. But each draft seems to make the point clearer, and each comment tends to sharpen the mind. “If it’s unclear to the reader, then your writing is unclear” – regardless of who the reader is. Rough but true.

-I’m glad I went to conferences every year. Why didn’t someone tell me in my first year that going to conferences means you’ll meet people who are interested in what you do, have expert knowledge, and are generally willing to read your stuff (because they’re interested) and give you comments and feedback. Fantastic.

I’m sure more will come to me as I finish the thing up – and it has to be done – and once this week is over there will be more recurrent blog posts from my side. I already have two or three very exciting things lined up :)

Dr. Krugman & Mr. Paul?

Beatrice Cherrier, wrote a great piece on Krugman’s recent article and his relationship with mathematics today (“let’s have math in economics — but as our servant, not our master” ) and in the past (p. 1213) (“In the food sector we suppose that there are constant returns to scale…”). By coincidence, I was downloading a recent draft of McCloskey’s next book – which she kindly provides free drafts of – when I came across her 2002 article/booklet “The Secret Sins of Economics“.

Herein she makes the argument – which she has been making for years – that economics has become, and continues to be a discipline dominated by two failed approaches to doing scientific work: Qualitative Theorising – i.e. solving equilibria in constructed fantasies – and the use of statistical significance as a test for significance – we focus on the t-test, when you should care about the coefficient.

Both McCloskey and Krugman like the maths, and they want to see its use prosper in economics: But Paul Krugman is seemingly caught between his post-nobel public calls for reform (the Dr. Paul, Beatrice describes) and his academic (past?) self who is knee-deep in axiomatic models (Mr. Krugman). Deirdre McCloskey seems to be whole-heartedly in the game to change the discipline. Maybe it’t time for Mr. Krugman to retire, if he hasn’t already?

This is all part of the economists pod-cast series, which isn’t bad at all, if you ignore the name of the thing…

In that we have the Paradox of Thrift, and so enter the son, ‘a young jew’, preaching that we must spend more, not less. The economy is not some vengeful omnipotent being but is based on faith:

The full episode is great fun, and you can watch it (legally) in installments here [1, 2, 3]. But one last thing has to be mentioned. In dealing with the credit crunch, Stan – another boy – tries to return a blender bought on credit, eventually ending up at the US Treasury who owns the bad debt. The Treasury agrees to refund him, and goes off to value the blender… This is beautiful:

It reminds me of the Treasury spokes-person, who on the 23 September 2008 explained where they had gotten the $700 billion initial bail-out figure from: “It’s not based on any particular data point, we just wanted to choose a really large number.” Lovely.

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.

I am not saying that I disagree with Dr. Zencey’s argument, I am sympathetic towards it, and perhaps his best point is that “We could keep the actual number [GDP], but rename it to make clearer what it represents; let’s call it gross domestic transactions.” This is in the context that GDP doesn’t distinguish between costs and benefits, and only accounts for monetary transactions, while failing to recognise the cost to the natural balance sheet of digging ressources out of the ground. Zencey mentions the Hurricane Katrina phenomenon which cost $86bn to clean up, and claims this would have been added to the Louisiana GDP growth despite the wanton destruction and obvious poor state many parts of Louisiana and New Orleans especially still is in. His argument is fair, although government reports on the fall-out have emphasised slow-downs in GDP growth, so the exact numbers may be a bit controversial. The main problem about GDP for Zencey is that:

If you kept your checkbook the way G.D.P. measures the national accounts, you’d record all the money deposited into your account, make entries for every check you write, and then add all the numbers together.

Technically speaking that is not exactly accurate, as we seperate out the income flows and expenditure flows into two seperate accounts of the same GDP – although there is something to Zencey’s argument that we only count the Cash Flow – something unimaginable in a corporate situation. That said, the system does do a lot of funny counting: For example, business retained earnings are treated like consumer savings freely available to spend – something they are obviously not – while, in the US accounts, public hospitals and state universities are treated as transfer income institutions, not adding directly to GDP while all military expenditure (capital and current) technically adds to the US ‘growth’.

There’s a lot of things about GDP that needs to be addressed, but the UN would probably just point to the 2008-09 SNA revisions currently being finalised, although they will not fundamentally change the system onf national accounting… It’s a long road ahead before we might replace GDP with something more socially useful. A tip of the hat goes to Juan Pablo Pardo-Guerra for pointing me to the op-ed.

the simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring.

Let’s have that again, from the Nobel receipient: The economic models which failed to predict the crisis are fine, not because they came close, but because they don’t even consider crisis as a possible outcome… Tell me that isn’t beautiful!?

A whole roundtable discussion of Lucas’s article and the state of economics is on-going at The Economists website. Thus far written by Mark Thoma (U. of Oregon), Tyler Cowen (GMU), Marcus Brunnermeier (Princeton) and Brad DeLong (Berkeley) with more contributors to be added this week. Bard DeLong’s piece even emphasised that “Mr Lucas said he ‘didn’t really get it’ ” when the bank bail-out was being discussed back in March. It makes for interesting reading, if a bit ‘Wonky’ as Steve Kinsella noted… I’m still chuckling quietly at Mr. Lucas’s ‘defense’ though.