A Balkan Spring?

Bosnia and Herzegovina
A joke often retold in Bosnia and Herzegovina says: “Why is there no sex in any state firms or government buildings? Because everyone is related to each other”.

A joke often retold in Bosnia and Herzegovina says: “Why is there no sex in any state firms or government buildings? Because everyone is related to each other”. Thanks to prevailing nepotism in the public sector, that is. This joke perfectly portrays the self-ironic attitude of the Balkan mentality that develops as one quickly learns that succeeding in life evolves more around building “a network” than spending time in the library. Yet, in February of 2014, “that joke isn’t funny anymore”[1]. Continue reading “A Balkan Spring?”

Modeling Independence

Ryan D. Griffiths,  Pablo Guillen, and Ferran Martinez i Coma of the University of Sydney released a working paper (PDF) in September with a model of Catalan independence. The abstract:

We propose a game theoretical model to assess the capacity of Catalonia to become a recognized, independent country with at least a de facto European Union (EU) membership. Support for Catalan independence is increasing for reasons pertaining to identity and economics. Spain can avoid a vote for independence by effectively ‘buying-out’ a proportion of the Catalan electorate with a funding agreement favorable to Catalonia. If, given the current economic circumstances, the buying-out strategy is too expensive, a pro-independence vote is likely to pass. Our model predicts an agreement in which Spain and the European Union accommodate Catalan independence in exchange for Catalonia taking a share of the Spanish debt. If Spain and the EU do not accommodate, Spain becomes insolvent, which in turn destabilizes the EU. The current economic woes of Spain and the EU both contribute to the desire for Catalan independence and make it possible.

HT: Tyler Cowen

Meeting Chomsky

(Editor’s Note: The following post was written by alumnus Miguel Ángel Santos (ITFD ’11 and Economics ’12). Follow him on Twitter @miguelsantos12 or at his blog)

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The first time I heard of Noam Chomsky was in the early nineties. During my senior year in college I was assigned to read a small book, “The true thinkers of our time(1989), a gallery of interviews with a select group of scientists from a wide array of disciplines. The author, a French journalist named Guy Sorman, had chosen them using three simple criteria: 1) once they showed up in their corresponding disciplines it became impossible to keep on thinking about it in the same way; 2) they had to be alive; and 3) they were willing to talk to him.

The book covered a wide spectrum, from the origins of the universe all the way to modern economic thinking. Each section presented two or three opposing views on the same topic, which were fiercely discussed and smartly presented, allowing amateurs to grasp the frontiers of human knowledge.

Chomsky had made his way into the group deservedly. He had revolutionized the field of linguistics, posing a theory that conceived language as a biological capacity. He identified common patterns to all languages (i.e. all made up plurals by adding characters in the end, none at the beginning) and hypothesized that while the environment allows our linguistic capacity to develop, it falls short of explaining its extraordinary complexity.

I mention this to highlight the thinker, the man working alone and facing the problems and puzzles of his time through a sheer exercise of athletic thought and intelligence. The fame and scientific status he earned by making his most relevant contributions early in his life (all date from around his thirties) would be applied later to bring the world’s attention on a set of political causes, most of them left-winged, all rooted in the United States plethora of foreign policy wreckages. He became an outcast, a role he obviously feels very comfortable with, always pointing towards the elephant in the room.

This latter version of Chomsky is the one most people are familiar with. Continue reading “Meeting Chomsky”

Economics Books of 2014

Happy New Year to the entire GSE community! I’m sure that I am not the only one with a resolution to read more books, so I thought I would try to help. Since few people fell in love with economics through graduate textbooks, here are some recreational economic reads to look forward to in 2014.

Fragile by Design: The Political Origins of Banking Crises and Scarce Credit by Charles W. Calomiris and Stephen H. Haber

GDP: A Brief but Affectionate History by Diane Coyle

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

Think Like a Freak by Steven Levitt and Stephen Dubner

The Transformation of the World: A Global History of the Nineteenth Century (America in the World) by Jürgen Osterhammel

In 100 Years: Leading Economists Predict the Future edited by Ignacio Palacios-huerta

The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance by Eswar S. Prasad

I hope you learn more in 2014 than in any prior year. Happy New Year!

Hat tip: Diane Coyle

If Economists Wrote Christmas Cards

Happy Holidays to everyone in the GSE community and beyond!

In honor of this day of massive signaling (and possible deadweight losses), I wanted to share a post by Derek Thompson of The Atlantic. The topic is “If Economists Wrote Christmas Cards.” I doubt that Hallmark cards hires economists as writers. Derek Thompson explains-

Cash is the most efficient gift, according to economists. Cash is also a terrible gift,according to economists. By guaranteeing that the recipient can buy exactly what she wants, you guarantee that the recipient will consider you an unemotional robot.

That’s why the vast majority of economists in the University of Chicago’s IGM poll said it’s absurd to give cash to loved ones for the holidays. “In some cases,”Steven Kaplan said, in a stirring defense for thoughtful gifts, “non-pecuniary [not cash-related] values are important.”

For everyone in the community, both those who will be giving and receiving gifts this holiday season and those who will not, I wish that your highest ordinal rankings be satisfied and may your deadweight losses not be too large!

 

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Alumni Research- Macro Imbalances and Culture

At the “policy portal” VoxEU.org, Macro Policy and Financial Markets alumni (’11) and current University of Munich Ph.D. candidate Sascha Bützer co-wrote a columnabout macroeconomic imbalances and differences in culture in the Eurozone.

Since the advent of the Eurozone sovereign-debt crisis, economic commentators have drawn attention to macroeconomic imbalances within the Eurozone. This column presents evidence on the link between macroeconomic imbalances and differences in culture – or more specifically, interpersonal trust. A conservative estimatation (sic) suggests that a one standard-deviation increase in trust reduces macroeconomic imbalances by about a quarter of a standard deviation. Moreover, differences in interpersonal trust can explain a fifth of the variation in intra-Eurozone imbalances.

This is just one more example of the creative research being done in greater GSE community.

The authors have a working paper on this topic here.

 

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Talking Past Each Other

(Originally posted at EconPointOfView.com)

While deep methodological differences exist across economists, many disagreements involve “talking past each other.” Each side uses similar words to discuss fundamentally distinct, though related, concepts. This is especially a problem with every-day language words and leads to more confusion than understanding.

One problematic term is information. Everyone believes they have a reasonable definition and that others have the same concept in mind. This is unfortunate and stagnated the discussion. Only through clarity of thought and language can these issues be resolved.

Complete and Perfect Information, or Ignore for Now

Doing what was necessary for early models, the economists started easy. They ignored it. They approximated that every actor knows everything. That made life easy.

Since Marshall and Walras, economics focused on equilibria. Starting from perfect competition, complete and perfect information are crucial. How do supply and demand equilibrate? Everyone knows everything. After a few easy steps, boom, supply=demand.

While all economists admit perfect information is an untrue assumption, it is still the default in many models.

Information as Commodity Xn

Stigler believed that academics should understand that information is not free. Academics make their living by selling information. Continue reading “Talking Past Each Other”

Jumping to Conclusions

(Originally posted at EconPointOfView.com)

Conclusions are easy to draw. I can look at any study and draw many different conclusions or policy prescriptions. That does not mean I am right or even that the data supports my argument.

Floyd Norris of the NYT Economix fell into this trap yesterday. He claimed, indirectly, that the US federal government is not bloated. I take bloated to mean too big or too intrusive. To argue this, he cites the latest job numbers.

In September, before the government shutdown, the government had 2,723,000 employees, according to the latest job report, on a seasonally adjusted basis. That is the lowest figure since 1966. Continue reading “Jumping to Conclusions”

Networks and Contagion in Financial Markets

Too well connected to fail

(This article follows on from a more general post on the study of networks in economics)

In this model, as well as those concepts Jackson discussed in the broader discussion on networks, we have the concepts of diversification and integration to separate the breadth and depth of connectivity of one organisation to others. A company/organisation/ country with many connections to others would be highly diversified; where those interests represented a higher proportion of their overall connectivity, they would be highly integrated. Continue reading “Networks and Contagion in Financial Markets”

It’s a Small World, After All

Where's wally?
Where’s wally?

We all know we’re only 7 steps away from Jonny Depp. Or Obama. Or Lionel Messi (maybe, quite literally if you’re here at the GSE.) However, the world is not only small; it is shrinking. We are becoming more interconnected through new forms of communication. We find out information through these networks, which then influences our decisions. What we do, therefore, is influenced by whom we know.

Matt Jackson at Stanford University has been analysing the increasing connectedness of the world and its implications on spreading information, and came to Barcelona to explain his findings at the UPF opening ceremony. (And there we were thinking we’d been here so long, you could look us up on the book directory at the library and know where to find us.)

So what is a network and how can we think about connectivity within one? Continue reading “It’s a Small World, After All”