Read, Listen, and Observe. Then Write.

I don’t know how I missed reading this paper earlier, but a conversation this past week helped me land up on a lovely little paper written by Hal Varian, called How to Build an Economic Model in Your Spare Time. The paper was written in 1997, but was published again in the AER in 2016, and the editor’s introduction is worth reading, excerpted below:

Originally published in Volume 41, Number 2, Fall 1997, pages 3-10. Hal Varian (born 1947) is widely known by professional economists for his pathbreaking work in the economics of information and networks. Many more know him as the author of two bestselling microeconomics textbooks, one written for undergraduate college students and one designed for advanced graduate students. Through his research and his books, Professor Varian’s ideas have influenced a generation of economists. In this paper, Professor Varian outlines how he approaches the task of building an economic model to explain an observed phenomena or solve a problem. His words are encouraging advice for graduate students and young economists learning how to “practice the art” of economics. Professor Varian offers a number of tips ranging from how to choose a topic, when to read the literature, and even to how to effectively manage your bibliographic citations. Professor Varian’s advice has passed the market test as this paper remains one of the most referenced and downloaded papers in The American Economist’s backfile. However, after including the paper on a course reading list several years ago, one doctoral student pointed out to this editor that Professor Varian fails to explain how to find the “spare time” that he references in the title!

Varian, H. R. (2016). How to build an economic model in your spare time. The American Economist61(1), 81-90.

It is a very short paper, and the faint hurrahs that you might hear in your neighborhood come from tortured souls who will no doubt be relieved to hear that there isn’t a single equation in this paper. Tortured souls (myself included), in this context, are those who have had to plod through Hal Varian’s graduate text. He mentions this text in the paper, and his undergraduate text (which is a lot more fun to read). In fact, his ruminations about how that undergrad book came to be form one of the most important takeaways from this paper for me.

But my favorite bit from the paper is about “where to get ideas from” in order to write a paper. Hal Varian says that one shouldn’t look to academic journals as a source (and I agree), but look at pretty much the world itself:

My suggestion is rather different: I think that you should look for your ideas outside the academic journals- in newspapers, in magazines, in conversations, and in TV and radio programs. When you read the newspaper, look for articles about economics. . . and then look at the ones that aren’t about economics, because lots of the time they end up being about economics too.
Magazines are usually better than newspapers because they go into issues in more depth. On the other hand, a shallower analysis may be more stimulating: there’s nothing like a fallacious argument to stimulate research.

Varian, H. R. (2016). How to build an economic model in your spare time. The American Economist61(1), 81-90.

This was written in 1997, remember – that explains the now-quaint advice about magazines. There’s also a reference to a JEL CD later on in the paper, for those of you interested in ancient history. But if you are a student wondering “what to write about”, this is excellent advice. Look at the world, and write about what puzzles you about it. Forget papers, entire books can come out of this (very fun) exercise.

And if you’re looking for a concrete example, the unbelievably prolific Matt Levine obliged us in a recent podcast with Longform, where he spoke about how he came to write about the aluminum “scam”. What is the aluminum scam, you ask?

During the summer of 2011, officials at the London Metal Exchange got an unexpected complaint from The Coca-Cola Company. The amount of physical aluminum in storage was piling up, said a representative of the soda maker, and, along with it, so was the expense of buying the metal for beverage containers.
The culprit, as Coke saw it, wasn’t simple supply and demand—in fact, there was plenty of aluminum sitting in warehouses. It was the shrewd tactics of Goldman Sachs, the bank that owned a network of metal-storage facilities in the Detroit vicinity, where waiting times for extracting aluminum were longer than ever. Every day those metal bars sat idle, Goldman’s warehouse company effectively drove up the premium amount that aluminum producers could charge for delivering supplies to beverage-packaging factories, a cost that amplified the expense of the actual metal and, thus, the prices Coke and others paid for soda cans.

If you want to find out whether it actually was a scam or not, you might want to read Levine’s column on it, which you can find here. TL;DR? Hanlon’s Razor. But the point is that if you’re looking to write an academic paper (or a Bloomberg column) on commodities, the place to look is the mainstream media, not obscure journals on commodities trading.

Learn the art of asking “but why?” when you read mainstream media, and if you do it long enough, you’ll realize that you’ve become an economist, like it or not.

My thanks to Pranav R Satyanath for recommending this paper to me.

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