Tag: business cycles

KISS and Macroeconomics

My PhD was in macroeconomics. Specifically, it was do with business cycles. It took my seven long years to finish my PhD, and that was mostly because I was (and remain) incurably lazy.

But here is what I know about macro and business cycles for having finished my PhD in the topic:

  1. Macro is hard.
  2. We don’t really know what causes business cycles.
  3. We don’t really know what to do about business cycles, and when to stop doing whatever it is that we choose to do about them.

That’s not what I said in my thesis, of course. Because one is not awarded a PhD for saying these three things, I ended up taking a lot of pages and a lot of words to make it seem as if I knew what causes business cycles. I also made it seem as if I had figured out what to do about them.

But the truth is that well, macro is hard, and we don’t really know what to do about business cycles.

And so these days, when I teach students introductory courses in macroeconomics, that’s what I tell them. That hey, macro is hard. And my job is two-fold:

One, it is to show you how and why it is hard. And two, to tell you what we think we know about how to deal with it being hard. And three, to tell you that we do all this because we think (hope, really) that tinkering with a big, complicated thing we don’t really understand will make our world a better place, at least in the short run.

What do I mean when I say “short run”? Well you see, we don’t really know for sure.

But anyways, the reason we study macro is because we wish to make our world a slightly better place. And in order to make it a better place, we need to:

  1. Understand the world better,
  2. …and we need to understand our current theories about how to make it better.

And so a good course on macro will teach us about the world, and about our macroeconomic theories of the world.

The problem is that most macroeconomic textbooks focus exclusively on the latter, and not at all on the former. This is a problem, because context-less theorizing doesn’t get us very far. Context without theory also doesn’t get you very far.

You need, in other words, both:

“while the conceptual framework influences our selection of contexts, a contextual understanding enriches our conceptual understanding and also points out the limits of economic theory. And to do good economics, it is necessary to equip ourselves with both concept and context by continuously reading—the classic books (and articles) in economics, the history of economic thought, studies based on extensive fieldwork in India, government and RBI reports, books of fiction and newspapers”

Amol Agrawal points us to a lovely essay by Prof. Annavajhula J C Bose of SRCC, which drives home this point with lovely, eloquent prose. Please read it here, and if you have not already, please read the macroeconomic textbook by Alex Thomas (EFE review here). It is that rare book that talks about both the world we live in, and how to make it better by thinking about macroeconomic theories.

EC101: Links for 28th November, 2019

  1. “The zeroth step, of course, is being open to the process of unlearning. We come with our own biases, shaped by our varied experiences and perceptions. But our experience or knowledge is not always indicative of the macroreality. An unrelenting hold on what we have already learnt is the equivalent of the sunk cost fallacy in economics.”
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    Pranay Kotasthane has a new newsletter out, and it is worth subscribing to. Stay humble and curious is the gist of his zeroth lesson, and the other points are equally important. Go read, and in my opinion, subscribe.
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  2. “China is still a one-party state, but it owes much of its current prosperity to an increase in liberty. Since Mao died, his former subjects have won greater freedom to grow the crops they choose, to set up businesses and keep the profits, to own property, and to move around the country. The freedom to move, though far from absolute, has been transformational. Under Mao, peasants were banned from leaving their home area and, if they somehow made it to a city, they were barred from buying food, notes Bradley Gardner in “China’s Great Migration”. Now, there are more rural migrants in China than there are cross-border migrants in the world.”
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    The rest of this article from the Economist is about migration to the cities – and I find myself in complete agreement – many, many more people in India need to live in her cities. But also see this!
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  3. “Mazzucato traced the provenance of every technology that made the iPhone. The HTTP protocol, of course, had been developed by British scientist Tim Berners-Lee and implemented on the computers at CERN, in Geneva. The internet began as a network of computers called Arpanet, funded by the US Department of Defense (DoD) in the 60s to solve the problem of satellite communication. The DoD was also behind the development of GPS during the 70s, initially to determine the location of military equipment. The hard disk drive, microprocessors, memory chips and LCD display had also been funded by the DoD. Siri was the outcome of a Stanford Research Institute project to develop a virtual assistant for military staff, commissioned by the Defense Advanced Research Projects Agency (DARPA). The touchscreen was the result of graduate research at the University of Delaware, funded by the National Science Foundation and the CIA.”
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    Mariana Mazzucato, about whom more people should know, on the role of the government in today’s economy.
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  4. “Back in the early 1970s, Xerox had figured out a strategy to block competitors in the photocopying business. It took out lots of patents, more than 1,000 of them, on every aspect of the photocopy machine. As old patents expired, new ones kicked in at a rate of several hundred new patents each year. Some of the patents were actually used by Xerox in producing the photocopy machine; some were not. There was no serious complaint about the validity of any individual patent. But taken as a whole, Xerox seemed to be using the patent system to lock up its monopoly position in perpetuity. Under antitrust pressure from the Federal Trade Commission, Xerox in 1975 signed a consent decree which, along with a number of other steps, required licensing its 1,700 photocopier patents to other firms.”
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    Timothy Taylor adds grist to the anti-patent mill.
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    “Thinking about how to facilitate a faster and broader dispersion of knowledge and productivity gains seems like a potentially important part of explaining the current economic picture and suggesting a policy agenda.”
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    That’s the concluding part of the blog post. Just sayin’!
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  5. Every time I begin to think I kind of understand macroeconomics…

Links for 15th May, 2019

  1. “Our science is past its childhood, but has not reached its manhood yet. On the one hand, our patience is still being tried by the phraseology of “schools ” and “-isms,” and there is still plenty of scope and shelter for the products of bad workmanship passing themselves off as new departures; but, on the other hand, the really living part of our science shows hopeful signs of, if I may say so, that convergence of effort, which is the necessary and sufficient condition of serious achievement. Those economists who really count do not differ so much as most people believe; they start from much the same premises; problems present themselves to them in much the same light; they attack them with much the same tools; and, although some of them have a way of laying more stress on points of difference than of points of agreement, their results mostly point towards common goals. This is not only true of fundamentals of fact and machinery, but also of what is going on within the precincts of every one of our time-honoured problems.”
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    Professor DeLong treats us to an extended excerpt from Joseph Schumpeter on business cycles, and while the extract isn’t light reading for anybody, I found the “isms” quoted above to be of interest.
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  2. “Oh, for sure. I’ve had three or four people tell me they called him on it on the first hole. He kicks the ball so much that caddies call him Pelé [a reference to the famous Brazilian soccer player]. He throws it out of bunkers, he retakes shots, he throws other people’s balls into the water.But every time people call him on it, he has the same answer, which is, “Oh, the guys I play with, you’ve got to do this just to keep it fair.” It’s the Lance Armstrong defense: Everybody’s doing it, so I have to do it just to keep up, otherwise I’m getting cheated. It’s the default rationalization of a cheater.

    But in reality, the National Golf Foundation says 90 percent of people don’t cheat when they play. But this guy cheats like a mafia accountant.”
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    Guess the sport, the person being spoken about, and most important, the reason for including this article in today’s set (hint:it’s not the obvious answer). I’ll write down the answer after the fifth link today.
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  3. “This assessment of BRI should not be taken to mean we can be complacent about other things that China does, some of which are most likely part of a conscious strategy. It’s just that we need to assess trends on their merits and not be led purely by conspiracy theories and our availability biases or preconceived notions.”
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    Urbanomics shares a useful set of links to do with BRI, China and how there may well be a simpler set of explanations than a grand over-arching theory that is mostly about a conspiracy.
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  4. “I think that what will take people by surprise will be:the failure of monetary policy to be adequately stimulative in the next downturn while

    there is so much polarity and conflict both within countries and between countries.

    I think that these things will be surprising to people because they’ve never happened before in their lifetimes though they’ve happened many times before in history. I suggest that you study the cause-effect relationships in the 1930s to see the mechanics that led to the outcomes of that period.”
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    Ray Dalio does an AMA, and all of the answers are worth reading (the one on time, for example, while being a bit obvious, is still an excellent one)
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  5. “When it had its premiere in 2011, “Now on My Way to Meet You” was a tear-jerking reunion program featuring families separated by the Korean War, but before the show had a chance to reunite anyone, it underwent a transformation. The way the producers tell it, in their scramble to recruit separated families, they kept running into a new generation of defectors. So they made the rather canny decision to reorient their show around appealing young women, whom they took to calling “defector beauties.” The show’s on-location backdrops of humble homes and noodle restaurants gave way to a glitzy game-show-type set, and estranged septuagenarians were replaced with girlish defectors. Pretty soon, the only thing left of the original program was its name and the desire for reunion.”
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    Since I chanced upon this via MR, I’ll use the phrase “interesting throughout” – and for a variety of reasons!

    What does that article teach us about how to judge ourselves?

Links for 12th April, 2019

  1. “Due to these challenges, the Belt and Road has provoked growing international resistance, most acutely in the Indo-Pacific. This rising backlash has not gone unnoticed in Beijing.3 Yet it is unlikely that China’s approach will fundamentally change in the years ahead. The sheer size of ongoing Belt and Road projects limits China’s ability to refocus on smaller and less controversial efforts. Moreover, the Belt and Road is ultimately a vehicle for China’s geopolitical ambitions. Liabilities for host countries – loss of control, opacity, debt, dual-use potential, and corruption – are often strategic assets for Beijing. ”
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    Worth reading in its entirety, both for how well they have framed it (10 issues, 7 challenges) and for understanding the scope, the scale of OBOR – as well as why China wants something like this to happen.
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  2. “Krugman’s assertion that capacity keeps on rising might be correct – but that probably depends on one of the following conditions:The recession is short enough not to significantly affect innovation and investment
    Growth depends on factors that are not (negatively) affected by recessions
    Underlying capacity growth will accelerate beyond trend as the recession endsThe first we can yet hope for, but it’s looking less likely every month.”
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    This was written ten years ago. It is a great way to understand the following: business cycles, trend stationarity, unit root hypothesis, innovation, capacity building, endogenous growth theory. It is simply written, engaging, understandable – and because it was written ten years ago, can be validated. Worth it!
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  3. “Whereas Liverpool’s pursuit of the league title has been characterised by anxiety, drama and late winners, since the turn of the year City have been gracefully efficient at tearing into opponents, getting an early goal and so being able to control a game. Gabriel Jesus’s header against Brighton in the FA Cup semi-final on Saturday was the sixth goal City have scored this season inside five minutes, the 12th before the 10th minute and the 26th before the 20th. That is clearly part of a policy: rip into opponents, prevent them settling and have the game won before any doubts can begin to creep in. It may be that in a two-leg tie there’s less impetus to do that – but then an away goal can make a huge difference.”
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    You might find this choice weird, especially if you don’t like football, but this resonated with me as a way to do more than just play football. Think about it!
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  4. “Mumbai is the engine of the prosperous western state of Maharashtra, India’s largest regional economy with a GDP somewhere between $350-400 billion; the city contributes well over half the total. For Maharashtra to become a $1 trillion economy, Mumbai would need to double or triple the size of its economy, on the back of its preeminent role in service industries, especially finance. That means competing with the likes of Singapore and Shanghai to attract global banks and other world-class financial institutions to the humid, traffic-choked city.”
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    Rueben Abraham and Shashi Verma in Bloomberg on how the port near Mumbai has the potential to change Mumbai into a truly global financial hub. The cynic in me wonders if it will be possible, but the nascent urbanization enthusiast hopes that this, at least, gets off the ground!
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  5. “Amsterdam transit commissioner Sharon Dijksma announced Thursday that starting this summer, the city plans to reduce the number of people permitted to park in the city core by around 1,500 per year. These people already require a permit to access a specific space (and the cost for that permit will also rise), and so by reducing these permits steadily in number, the city will also remove up to 11,200 parking spaces from its streets by the end of 2025.”
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    Speaking of urbanization done just right, here’s Amsterdam with a plan to reduce parking spaces in the city centre – and beyond.

Links for 20th February, 2019

  1. “There is no amount of growth that can’t be destroyed by an investor’s temptation to grab too much of it. And there is no opportunity so appealing that it will catch the eye of someone who refuses to look.But greed and fear aren’t always character flaws. People with the best intentions and ethics fall for their temptation. The two traits evolve from something innocent: the amount of confidence we have that our actions influence our outcomes.”
    I am currently teaching, at the Gokhale Institute, a course on Behavioral Finance. This blog post will be a part of the required reading when I teach the section on overconfidence (and it’s mirror image)
  2. “A Facebook press officer said, in a prepared statement: “This is one study of many on this topic, and it should be considered that way.” The statement quoted from the study itself, which noted that “Facebook produces large benefits for its users,” and that “any discussion of social media’s downsides should not obscure the fact that it fulfills deep and widespread needs.”
    What happens if you go cold turkey on Facebook? I haven’t read the paper itself, but this article from the NYT is a useful read – but not for the usual Facebook bashing reasons. There are benefits to using Facebook, for all of us. I myself no longer have the Facebook app on my phone, but freely admit to checking Facebook every now and then on the browser on my phone.
  3. “Mere hours into the first day of the Google block, my devices have tried to reach Google’s servers more often than the 15,000 times they tried to ping Facebook’s the entire week before. By the end of the week, my devices have tried to communicate with Google’s servers over 100,000 times, comparable to Amazon, at 293,000 times during its block. Most of Google’s pings seem to be in the form of trackers, ads, and resources built into websites. ”
    Speaking of which, what might life look like if you decided to go cold turkey on Google? Much worse, it turns out – your productivity takes a direct hit, as the article above makes clear.
  4. “We’ve made the case for the divergence among equipment manufacturers before: Ultimately robots and excavators aren’t dependent on the same business cycles. This is now playing out.”
    Partially because my own research during the PhD was on this topic, but also because it is a useful way to start thinking about which sectors in the economy tend to move together, and which don’t. More – does this relationship hold over time?
  5. “But the rental market is largely fragmented and unorganized. The build-to-rent model that has worked well globally in many countries hasn’t even scratched the surface here. It is a space ripe for disruption.And in the past 3-4 years, a slew of startups have begun to do just that, particularly targeting young adults and millennials (those in their 20s and early 30s) who need a place to stay when they move out of their parents’ nest or are moving to a new city.”
    This had to happen sooner or later in India – it was simply a function of the way the real estate market is, and has been in India for some time. Watch this space – I’d argue that future growth in India’s real estate sector will happen in this fashion.