This article is very interesting. Trust is the foundation of all economic exchange.
As he put it in his New York Times blog, Paul Krugman had a funny thing happen to him this morning. Here is the official press release, information for the public and the longer article with the scientific background, the latter of interest mostly to economists. I am not an expert in international economics or economic geography, but I do know that Krugman’s work was very influential in both fields, essentially resurrecting economic geography. Congratulations are in order. I also feel that the selection committee has made this year’s prize look like a political award, given Krugman’s violent criticisms of George W. Bush in the New York Times. While I share Krugman’s attitude on Bush, I do not like the politicization of the prize. I admit the politicization goes back many years, though, and indeed seems to apply to many if not all Nobel prizes. How else can we explain that Dario Fo got he literature prize but Vladimir Nabokov (or a number of other worthy candidates) did not?
I find myself reading more and more items related to the current crisis than doing my work these days. I’m sure not the only one. So today, the day when the G-7 meeting came up with nothing concrete in the way of a plan, here are some things to read. First, Luigi Zingales, to whom I linked in this blog last month, now has an extensive proposal, his Plan B. Meanwhile, Vox EU, where he has published his Plan B, has put together a booklet on the crisis, written by several economists, that you can download for free. I refrain from putting my own spin on these, or making any predictions, as I am not a specialist on the topic. You can of course read Paul Krugman in the New York Times or any number of commentators and economists who maintain blogs. In fact, it’s almost too easy to not read anything else these days.
This article by Scott Reynolds Nelson in the Chronicle of Higher Education says we should look at the Great Panic of 1873 for the best historical analog of the current financial crisis. Fascinating, and I learned a lot from it that was surprising to me.
This article offers a perspective from medicine and the biological sciences. Its use of economics is correct. Its claims seem to hold in economics and related fields. I want to discuss here some thoughts it brings to my mind regarding the state of economic theory and economic science in general.
Indeed, most economists follow in the footsteps of “leaders of the field”, as the article mentions in the context of medical/biological research, which is why we currently study abstruse models even in areas of economics that will never be able to answer any important economic questions. Just as Rob Gilles reminds me in every conversation we have, we have not really managed, as a profession, to understand the Causes of the Wealth of Nations truly more deeply than Adam Smith had understood them in 1776.
We still try to understand what it means for people to trust in each other, for example. This is a necessary condition for market exchange and market exchange in turn appears to be a necessary condition for economic prosperity. But in all the years since Adam Smith’s big book was published, even after the development of powerful tools such as game theory, we are attempting to understand trust by studying little toy games and their equilibria. And by “we” I mean a pitifully small number of economists who try to understand the basic foundations of economic exchange.
When the economy is doing well, the great majority of economic research is oriented towards helping the rich get richer. Finance professors in particular are in this business, and will tell you over and over again that a smoothly running financial system is a tide that lifts all boats, so their work is towards everyone’s welfare. The majority of economists and finance types deride economic theorists who try to understand the basics in boom times. If these theorists are so smart, why aren’t they rich, or why are they not telling others how to get rich (at a suitable fee)? Let the financial system seize up, however, as in these days, and we all realize that the basic analysis of what makes it tick is perennially neglected and that research in basic economics has been consistently under-supplied and misdirected due mostly to the system of journal publication of academic research discussed in the article.
This post is practically co-authored with Rob Gilles; I can see in my mind his words tumbling from my ears to the keyboard in front of me. Rob, feel free to post a comment or two.
When a University uses a financial investment as a short-term revolving credit account, it can be a problem in times of crisis. I’m becoming a little apprehensive of reading anything in the New York Times these days… Their coverage is excellent, as the link above shows once again. It’s just one piece of alarming news after another.
Simulations are taken very seriously in all sciences but economics. This great article in the New York Times by Mark Buchanan makes an excellent case in favor of doing more simulations to deal with thorny problems in economics. Thanks to Rob Gilles for sending me the link. I completely agree with Buchanan. I am slowly learning how to do simulations, and am amazed at how good they can be at proviging insights into truly complicated problems, including the functioning and, lately, malfunctioning of markets.