Comparing the Difficulty of Undergraduate and Graduate Economics Programs

[Shackleford]

I don't understand why shackelford who has little experience in economics and finance compared to somebody who worked in a financial industry is arguing with somebody who has a phd in physics and WHO HAS WORK EXPERIENCE.

Well, I have been working in economic development for the past couple of years. I'm an old undergrad senior.

I couldn't have said it better (thanks to the above posters). Bottomline is, if you want to do economics professionally then forget about the Austrian School of Economics. In fact, even most places won't hire you as a professor if you can't do mainstream economics, and most universities teach mainstream economics.

By the way, graduate degrees matter in economics. An undergrad is not seen better than a Master, and a Master is not seen better than a PhD. The reason is PhD graduates will tend to have more Math, and thus be able to do more sophisticated mathematical modeling in comparison to Master and Undergrad. Actually, undergrads in economics are not even looked at favorably even by economic graduate schools. In fact, economic graduate schools tend to recruit students with degrees in math, physics, and engineering. The basic idea is that is less difficult to get an economic intuition than to learn all the required mathematics. In terms of paying jobs, PhD>Master>Undergrad as well.

Also, "brand" is important in economics degrees (to some degree). A PhD from University of Chicago is looked very favorable by both hiring universities, and professional jobs.

The difference (generally) between Economics programs and Applied Economics program is mathematical rigor. Both are actually similar, but Econ programs will tend to cover more in detail.

So, you think I should relegate my study of economics to hobby? If I went anywhere for Austrian/free market, it would be George Mason.

 

[inknit]

Well, I have been working in economic development for the past couple of years. I'm an old undergrad senior.


So, you think I should relegate my study of economics to hobby? If I went anywhere for Austrian/free market, it would be George Mason.

The department is wholly owned by the Koch brothers (yeah, that's some real science), plus a masters in econ from anywhere in the US, let alone GMU is not worth your money or time.

Your interest in Austrian economics will be better sated by rummaging through the internet blogosphere where economically illiterate know-nothings are free to spew their ideological drivel.

 

[Shackleford]

The department is wholly owned by the Koch brothers (yeah, that's some real science), plus a masters in econ from anywhere in the US, let alone GMU is not worth your money or time.

Your interest in Austrian economics will be better sated by rummaging through the internet blogosphere where economically illiterate know-nothings are free to spew their ideological drivel.

You have not refuted their merits, simply ridiculed and vilified.

 

[Pyrrhus]

You can learn Austrian economics. Nobody will stop you. It is your choice. However, you should make sure to learn mainstream economics, so you do not end up isolated. I am sure GMU also teaches mainstream economics (I checked the courses at the site, and looks like yes... At least the math is there!).

 

[Shackleford]

You can learn Austrian economics. Nobody will stop you. It is your choice. However, you should make sure to learn mainstream economics, so you do not end up isolated. I am sure GMU also teaches mainstream economics (I checked the courses at the site, and looks like yes... At least the math is there!).

When you say mainstream, do you mean the mathematical tools for modeling? I wouldn't imagine GMU teaching the mainstream "theories" very much, other than to contrast to Austrian/free market.

 

[Ryker]

Peter Schiff:

http://www.youtube.com/watch?v=Z0YTY5TWtmU&feature=related

I don't have anything to add to the discussion other than that the behaviour of some of the economists in the videos here was despicable. You can disagree with someone, but laughing in one's face on national television - you can't really go much lower than that. By which I don't mean that all economists are like that, of course.

 

[Shackleford]

I don't have anything to add to the discussion other than that the behaviour of some of the economists in the videos here was despicable. You can disagree with someone, but laughing in one's face on national television - you can't really go much lower than that. By which I don't mean that all economists are like that, of course.

It's at best very unprofessional. It's almost like they had an agenda to attack any criticism of the house of cards. I notice that a lot on the alphabet networks, frankly, for a number of issues.

 

[twofish-quant]

I don't understand why shackelford who has little experience in economics and finance compared to somebody who worked in a financial industry is arguing with somebody who has a phd in physics and WHO HAS WORK EXPERIENCE.

Because sometimes having a Ph.D. in physics and work experience is a bad thing.

I've been brainwashed into thinking that investment banks are cool. If it turns out that people that think that Wall Street is a parasitic organism that society would be better off without are right, then I'm never going to see it.

Sometimes an outsider can see things that an insider can't.

 

[inknit]

Economics isn't all about the study of free markets vs central planning as you make it out to be.

Economics can range from fields as diverse as evolutionary game theory, neuroscience and its relations to decision making, auction theory, experimental econ.

And I also think you need to make a distinction between ideology and methodology. The truth is most economists believe that the invisible hand of the market is indeed the best mechanism for allocating resources. In fact, economists receive a lot of heat from other social scientists, namely sociologists, for being too supportive of unfettered free markets. But again, they do realize that there are times when the government needs to step into correct for market failure such as when marginal social cost is actually greater than the private social cost (externalities), public goods contributing to the free rider problem, and also when sellers are knowingly deceiving buyers (information asymmetry). Austrians, on the other hand, tend to cling to their dogma of laissez-faire capitalism purely on ideological grounds, even when modern empirically supported economic theory suggests that intervention is necessary.

Sorta random, but this is a great paper to read for anyone interested in econ. It deals with market failure, specifically on the notion of information asymmetry. It's by Nobel Prize-winning economist George Akerlof.


http://hydrogen.its.ucdavis.edu/eec...s-readings/akerlof-the market for lemons.pdf"

 

[twofish-quant]

Why wouldn't shackelford argue? Twofish's economic(social) ideology is based completely around his personal worldview. It hardly is objective.

And part of my world view is that "objective" is not always "better."

The core argument isn't actually over which economic policy is better, the argument is over what version of society is better...

It's more complicated than that. There are things in economics that you can have somewhat objective arguments over. If you think that google stock will rise, and I think it will fall, that's something that can be objectively resolved.

One reason that economics graduate school is taught the way that it is is that a lot of the stuff that you learn involve things that you really can't have subjective arguments over. We can reasonably argue over whether or not the federal debt is a good thing, but we really can't reasonably argue over the size of the federal debt.

Also politics is interesting, one trick is to use objective tools for subjective outcomes. Even if I could mathematically *prove* that increasing government spending would fix unemployment, the Tea Party people would be nervous about increasing the size of government because they would be worried (and justifiably worried) that this would be an excuse to move the government in a subjective direction that they disagree with.

 

[Shackleford]

Let's not confuse fundamental political philosophy with the mechanics and operation of the markets. From the state of nature, people groups form government for the purposes of law and order and protection. They sacrifice some "rights" towards that end. Do not confuse those essential functions of government with the alleged necessary interventions afforded by government. In most cases they are not interventions. The government is merely effecting its essential functions. The most succinct example is asymmetric information as you so euphemistically put it, which is fraud. Friedman said having the courts of law consider cases of fraud is a desirable function of the market. I would say it's an essential function of government. However, this does not support, generally speaking, any government intervention. Modern empirical evidence does not support intervention being necessary. How does the government intervene? The two primary methods are fiscal stimulus and monetary policy. Before the Federal Reserve was created, there existed booms and busts in the market. Clearly, the actions taken by the Fed have not been the solution to such things. Asserting that fiscal "stimulus" is inefficacious seems almost axiomatic to me. The government takes large amount of money, or capital, from individuals and spends it as it sees fit. There is already an inherent inefficiency as it works its way through the government bureaucracy. At absolute best, which is practically impossible, the money would be spent dollar for dollar. In this case, it's simply redistribution.

 

[twofish-quant]

I think twofish would side with this article more than shackelford would, but its an interesting read; and you all can judge for yourselves!

The odd part is that this happens not to be true. I very strongly disagree with the conclusion. One thing I *like* about Austrians is that they focus on the "microphysics" of economic institutions and they avoid using numbers when possible.

Also, one of the things that I very strongly disagree with Krugman on is that I'm a huge fan of Ronald Reagan and Milton Friedman. For that matter, I'm a big fan of von Mises and Hayek.

 

[twofish-quant]

This is a problem with economics. It seems anyone with some insight can write a paper, and justify it because of the math.

And often the math is crap.

Before, I went into economics, I did my BS in Engineering. Coming from a Natural Science background where "experimentally verified" is paramount, it is difficult to stomach some of the papers I read in economics...

Which is why investment banks often hire physicists and engineers over economics majors. If you write a paper and it turns out to be wrong in academia, nothing seriously bad happens to you. If you are seriously mistaken about how markets work, then you lose a ton of money and end up on the street.

 

[Shackleford]

And part of my world view is that "objective" is not always "better."



It's more complicated than that. There are things in economics that you can have somewhat objective arguments over. If you think that google stock will rise, and I think it will fall, that's something that can be objectively resolved.

One reason that economics graduate school is taught the way that it is is that a lot of the stuff that you learn involve things that you really can't have subjective arguments over. We can reasonably argue over whether or not the federal debt is a good thing, but we really can't reasonably argue over the size of the federal debt.

Also politics is interesting, one trick is to use objective tools for subjective outcomes. Even if I could mathematically *prove* that increasing government spending would fix unemployment, the Tea Party people would be nervous about increasing the size of government because they would be worried (and justifiably worried) that this would be an excuse to move the government in a subjective direction that they disagree with.

You mean in an unconstitutional direction? You do know that the Constitution limits the scope of the federal government, right?

 

[ParticleGrl]

The most succinct example is asymmetric information as you so euphemistically put it, which is fraud.

Not all asymmetric information is fraud. For instance, an employer might not be aware of how hard a potential hire is willing to work (will the employee shirk his duties?) Even if the employee is 100% honest about his/her work ethic, the employer can't be sure of his honesty. One model for why college degrees are so important is that they signal a baseline productivity to potential employers, helping to defeat some of the information problems of the labor market. Sitglitz and others won nobels for studying this.

The key point is that the information dynamics of a market can shape outcome.

Modern empirical evidence does not support intervention being necessary. How does the government intervene? The two primary methods are fiscal stimulus and monetary policy.

No. Not even close- the primary method the government shapes markets is regulation. Compare the stock market, where companies have to disclose financial information regularly to all involved, to largely unregulated markets like exotic financial derivatives, where no disclosures have to be made. In the last few years, which of the two markets have been more problematic?

You mean in an unconstitutional direction? You do know that the Constitution limits the scope of the federal government, right?

What part of the constitution do you feel limits the governments ability to pass regulations/stimulus spend?

 

[inknit]

Let's not confuse fundamental political philosophy with the mechanics and operation of the markets. From the state of nature, people groups form government for the purposes of law and order and protection. They sacrifice some "rights" towards that end. Do not confuse those essential functions of government with the alleged necessary interventions afforded by government. In most cases they are not interventions. The government is merely effecting its essential functions. The most succinct example is asymmetric information as you so euphemistically put it, which is fraud. Friedman said having the courts of law consider cases of fraud is a desirable function of the market. I would say it's an essential function of government. However, this does not support, generally speaking, any government intervention. Modern empirical evidence does not support intervention being necessary. How does the government intervene? The two primary methods are fiscal stimulus and monetary policy. Before the Federal Reserve was created, there existed booms and busts in the market. Clearly, the actions taken by the Fed have not been the solution to such things. Asserting that fiscal "stimulus" is inefficacious seems almost axiomatic to me. The government takes large amount of money, or capital, from individuals and spends it as it sees fit. There is already an inherent inefficiency as it works its way through the government bureaucracy. At absolute best, which is practically impossible, the money would be spent dollar for dollar. In this case, it's simply redistribution.

I also have serious doubts about the effectiveness of fiscal stimulus due to 'crowding out' effects. In essence, if government spends money without raising taxes, it must borrow loanable funds, which which increases interest rates, and that decreases private consumption and investment, which are components of GDP (Y = C + I + G + X -M).

So you can guess what happens when G increases, while C and I decrease. These kinds of debates about macroeconomic policy continue today, but I was referring to government undertaking microeconomic policy to correct for market failure. And I also agree with you that we should be skeptical of government intervention at the micro level. If we consider the government bureaucrats who are instituting the measures themselves as economic agents maximizing their own utility functions, then we must take that into account when formulating policy. The study of this phenomenon is a field of economics known as public choice theory.

 

[twofish-quant]

Let's not confuse fundamental political philosophy with the mechanics and operation of the markets.

Let's not, but you'll never get people to agree on fundamental political philosophy. Getting people to agree about just enough so that no one gets killed is tough enough already. Something that you will have to get used to is that in any sort of pluralistic society, people are just going to disagree about some things.

This gets even messier because we are in a global economy and different countries and societies have different ideas about what is right. One reason that I have the views that I do is that I spend a lot of time around Europeans that have some basic differences in political thinking than Americans.

Friedman said having the courts of law consider cases of fraud is a desirable function of the market.

You have to realize the limitations of courts. Courts take a *long* time to act, and in some situations, you need to make decisions in hours. Also courts operate post-facto. If someone steals your money, they may end up in jail, but your money is still gone and you aren't getting it back.

Then we have the tricky problem of deciding who gets to be judges, and what the law is. One thing that's interesting is about the financial crisis is that no one ended up in jail, because everything everyone did was legal, and it was legal because the people that ran things had to power to set up laws to make what they were doing legal.

Also, if you can't afford a lawyer, and the other side has millions to spend on a legal team, then forget about winning the case. If you have two mega-corporations fighting each other, then it's a fair fight. If you have a mega-corporation fighting me, then I'm going to lose since they can afford better lawyers.

Modern empirical evidence does not support intervention being necessary.

*Very strongly disagree*

This is one of those "I was there, and you are wrong" sorts of things. Naturally since you aren't me, I don't expect you to change your mind based on that argument. But what's important to me is that while "I was there, and you are wrong" won't convince you, it will convince me.

At some point if someone keeps telling you that the sky is pink and they really see the sky being pink, then it's not resolvable.

Before the Federal Reserve was created, there existed booms and busts in the market.

And after 1929, the booms and busts decreased to the point where they were much more manageable.

Clearly, the actions taken by the Fed have not been the solution to such things. Asserting that fiscal "stimulus" is inefficacious seems almost axiomatic to me.

As I said, I don't want to get into a long discussion about this, because there are other people that you can argue with, but what seems obvious to you is far from obvious to me, and I'll just point out why it's obvious to me that you are wrong, and if you want to argue the point there are a lot other people that you can discuss this with (i.e. Brad Delong's website).

The government takes large amount of money, or capital, from individuals and spends it as it sees fit.

The US government can do one thing that individuals can't and that is to print federal reserve notes. One thing about federal reserve notes is that people will take it for payment. If I go up to a hot dog stand, and I offer my watch for a hot dog, they won't take it. If I can convert the watch to federal reserve notes, they will.

Part of where things almost went to hell, is that when you go to your ATM and you see that $1000 is there, most of that really isn't in the form of cash. About $50 is actually in cash, and 50% of that is in the form of real estate loans. There is the illusion that all of that is in cash, because if you ask for $1000 then the bank will sell the loans and get notes.

If it can't, then we have really big problems. Normally, people will buy real estate loans for cash, but we had about a month in which no one did. At that point the only group that would exchange real estate loans for cash was the Fed, and it can do that because the Fed can print notes.

There is already an inherent inefficiency as it works its way through the government bureaucracy. At absolute best, which is practically impossible, the money would be spent dollar for dollar. In this case, it's simply redistribution.

If people take all of their money and then bury it into the ground and don't spend it, then economic activity just stops. Does money exist if no one spend it? I don't think that does. Even if you are putting money in the bank, then *something* is happening with it.

Also you can imagine a situation in which everyone takes their money, puts into this giant pile and burns it. At that point no one has any real money left.

Both of those things happened...

People loaned money to build crap houses, and when it turns out that the people couldn't pay back, that loaned money ceased to exist. Once people got scared, they started burying money into the ground and everyone stopped spending. They stopped spending, because they were worried that they would need money in the future, and once that happened economic activity stopped which made people more scared.

So what the government did was to replace the missing money with printing press, and it also spent money when no one else would.

Any how, if you want to argue more on this issue, you should head over to Brad Delong's blog and someone will argue there. I'm probably not the best person to argue with on this issue because trying to argue that the money supply is fixed is like trying to convince me that the sky is pink or the Earth is 6000 years old. It's so *obviously* wrong based on my day to day experience, that I have difficulty arguing the issue.

 

[Ryker]

You have to realize the limitations of courts. Courts take a *long* time to act, and in some situations, you need to make decisions in hours. Also courts operate post-facto. If someone steals your money, they may end up in jail, but your money is still gone and you aren't getting it back.

Well, in all fairness, the bolded statement isn't true in general. Yes, you aren't getting your money back if the corporation that stole it doesn't have it anymore, but apart from that, you are. Other than that, I pretty much agree with most of what you are saying.

 

[Shackleford]

I also have serious doubts about the effectiveness of fiscal stimulus due to 'crowding out' effects. In essence, if government spends money without raising taxes, it must borrow loanable funds, which which increases interest rates, and that decreases private consumption and investment, which are components of GDP (Y = C + I + G + X -M).

So you can guess what happens when G increases, while C and I decrease. These kinds of debates about macroeconomic policy continue today, but I was referring to government undertaking microeconomic policy to correct for market failure. And I also agree with you that we should be skeptical of government intervention at the micro level. If we consider the government bureaucrats who are instituting the measures themselves as economic agents maximizing their own utility functions, then we must take that into account when formulating policy. The study of this phenomenon is a field of economics known as public choice theory.

I listened to some of a lecture today, by Roger Garrison I believe. According to capital-based macroeconomics, consumption and investment are inversely proportional (my words). He then noted the C I G macroeconomic equation. It makes more sense to me that individual consumption and investment are mutually exclusive and hence inversely proportional. You invest/safe to yield a greater consumption in the future, and how this back-and-forth changes determines economic growth. So, burying it in the ground only yields economic potential. Saving outside of the "system" is such a dirty word in Keynesian economics.

 

[Shackleford]

And you don't see a problem with arbitrarily printing notes?

 

[twofish-quant]

And you don't see a problem with arbitrarily printing notes?

I see a problem with arbitrarily printing notes. I also see a problem with arbitrarily not printing notes.

 

[Shackleford]

I see a problem with arbitrarily printing notes. I also see a problem with arbitrarily not printing notes.

There is no problem as long as there is a naturally-valued exchange medium.

It's funny because Hayek wanted competing monies. That's interesting.

 

[twofish-quant]

I listened to some of a lecture today, by Roger Garrison I believe. According to capital-based macroeconomics, consumption and investment are inversely proportional (my words). He then noted the C I G macroeconomic equation. It makes more sense to me that individual consumption and investment are mutually exclusive and hence inversely proportional. You invest/safe to yield a greater consumption in the future, and how this back-and-forth changes determines economic growth. So, burying it in the ground only yields economic potential. Saving outside of the "system" is such a dirty word in Keynesian economics.

Curiously and ironically, you've just pointed out the reason that I *like* von Mises and Hayek and the Austrian view of economics. The Austrians try to explain things in terms of the behavior of individuals. I disagree with a lot of the conclusions, but I agree with the methodology.

The problem with talking about consumption/investment curves is that it gets us too far away from real people. The reason that I like the Austrian approach to some things is that you look at the individual and how real people behave under some circumstance and try to figure out the consequences when large numbers of people behave in a given way. Where I disagree with Austrians is that they then come up with some wildly oversimplified rules which gets you in the same problems that most economic schools get you into.

In the particular situation of the crash, rather than coming up with an economic model with graphs, you go up to someone who is doing something, and ask them why they are doing it. In the case of 2007, no one was investing for the future. If you ask anyone on the trading floor, they were actually quite aware that what they were doing was going to be destructive. The problem is mass panic. People were putting money into Treasuries because no one had any idea which bank would collapse next, so they were pulling out all of their money and buying Treasuries.

 

[inknit]

The Federal Reserve is not printing money. Expansionary monetary policy is executed through open market operations, namely by buying short term treasury securities which increases bank reserves.

 

[twofish-quant]

There is no problem as long as there is a naturally-valued exchange medium.

Except there isn't. Gold is the closest thing, but then you have problems if the amount of gold doesn't match the wealth generated in the economy.

It's funny because Hayek wanted competing monies. That's interesting.

Then you get into the question of what is money, which I've been trying to figure out. As close as I can figure it, part of the problem is that people confuse "meters" with "meter-sticks." When we talk about dollars, we can talk about federal reserve notes "meter-sticks" and wealth being measured by federal reserve notes (i.e. meters).

One weird thing is to think about what actually happens when you write a check.

 

[Ryker]

It makes more sense to me that individual consumption and investment are mutually exclusive and hence inversely proportional.

But that's what the equation is already saying. Consumption is just the sum of consumption of all individuals. Although I wouldn't use the wording inversely proportional, but just mutually exclusive. You consume A, you make A less investments, not 1/A less.

 

[twofish-quant]

The Federal Reserve is not printing money.

It's a figure of speech. It's all done via computers.

Printing money is more poetic than "increasing the balance sheet liability of the Federal Reserve."

Expansionary monetary policy is executed through open market operations, namely by buying short term treasury securities which increases bank reserves.

Actually it doesn't work that way. It did in the 1960's, so a lot of textbooks are really, really out of date. Bank reserves are pretty much irrelevant for monetary expansion in the US. They are the key driving force in China, but the PRC economy is very different than the US.

What happens is that most lending happens on the money markets, so under normal circumstances, by changing the overnight discount rate, the Fed changes the level of overnight borrowing in the money markets, and this gets transmitted to the general economy via repurchase agreements. Investment banks are critical for this because they maintain the money markets so that when you had a collapse of a major bank, everything ground to a halt.

During the crisis that totally broke down. One thing that the Fed had to do which was extraordinary was to do direct lending to banks. What happened was that the Fed bought loans directly from banks and then expanded it's balance sheet which worked in some situations. However, one problem is that without legal authorization, the Fed can only issue $1 for something else that is valued at $1.

If the valuation is unclear or less than $1, then Treasury with Congressional authorization has to act, which is what TARP was all about.

 

[twofish-quant]

One other thing is that "my credentials are better than your credentials" really doesn't help me.

Shackleford may not have impressive credentials, but without too much trouble he can find Nobel prize winning economists that have come up with the same arguments that he has, so if it's a matter of credentials, I'm not going to win the argument.

 

[twofish-quant]

You mean in an unconstitutional direction? You do know that the Constitution limits the scope of the federal government, right?

And I also know that people disagree on what the Constitution means and how to interpret it. Operationally, the Supreme Court decides these things, but then you get into the mess of how gets on the Court, and what powers they have.

You can argue that the people that think that the Constitution authorizes expansive federal powers are "just plain wrong" but they don't agree.

 

[twofish-quant]

In essence, if government spends money without raising taxes, it must borrow loanable funds, which which increases interest rates

In some situations it won't. Whether we are in one of those situations, is something that people argue about.

And I also agree with you that we should be skeptical of government intervention at the micro level.

I've seen the sausage being made, so I'm less skeptical.

If we consider the government bureaucrats who are instituting the measures themselves as economic agents maximizing their own utility functions, then we must take that into account when formulating policy.

Sure. But sometimes the incentives are structured so that "good" things happen when government officials act, and something "bad" things happen if you leave private actors on their own. One problem that I've seen with a lot of economic models is that they don't take into account that the loan officer may have radically different incentives than the bank or the person loaning money to the bank.

If you make a ton of money from fees on bad loans, and then you leave before it blows up, it's not going to hurt you.

 

[twofish-quant]

Well, I decided not to argue anymore with two-fish because we have different political and hence economic worldviews - or vice versa.

Well, I like arguing with people with different views. Arguing with people that agree with me gets boring. One thing about getting exposed to new ideas is that you find something useful. There is a lot in von Mises that I think that he gets right, and a lot that I think he gets wrong.

The Keynesian simply want to arrogate more power to government under the guise of extricating an economy from a deep recession/depression.

This doesn't work for me. You can argue that I'm wrong, but I get annoyed when people ascribe to me motives that I don't think I have. Personally, I think that there are some things that government just does better than private entities, and so it makes since to have government use tax and borrow money to do those things, at which point you have increased productivity and increased incomes.

It's better to be taxed 30% of $200,000 than 0% of $10,000.

The weakness in all of this is figuring out how to do this, which is why I admire Reagan and Thatcher since they seemed to have done this.

 

[Pyrrhus]

Maybe, I shouldn't be in economics as I don't care much about the philosophy of economics (which is most of it, afterall economics evolved from political economics). The bottomline is take ECONOMETRICS, and and other advanced course (Static and Dynamic Optimization), if you can get a Master in Statistics, it is a popular degree among PhD in Economics.

Good luck!

 

[twofish-quant]

By the way, the Austrians, in particular Peter Schiff, back in 2006-2008 predicted with accuracy the impending financial crisis.

1) The problem is that he made a lot of other predictions that were off.

http://en.wikipedia.org/wiki/Peter_Schiff

One problem is that if you keep predicting an economic crash every year, sooner or later you will be right.

2) The other thing is that predicting a financial crash wasn't that rare. Lots of people including me figured that everything was going to blow up. But what do you do?

One reason I'm all for government regulation is that I knew before the crash who the idiots on Wall Street were, and who they weren't, and I deliberately avoided working for some companies, because during the interview, I figured out that they were idiots. But in the end, not working for people I thought were doing stupid things wouldn't have saved me if the world blew up.

In fact, it might have made things worse. Once you figure out that a bank is being idiotic, it finds it harder to get good people to work for them which means that things at the bank just get worse and worse.

He was ridiculed constantly by other "economists" and "financial experts" all over TV. It doesn't matter what two-fish's professional experience is. That doesn't automatically lend merit to her arguments. Clearly, that is not generally true for experience to produce correct results.

Except that a lot of the people on TV really have no clue what they are talking about. This is where the information asymmetry thing comes in. You have two economists that tell you different things, and you really have no idea who to believe.

 

[twofish-quant]

Also when sellers are knowingly deceiving buyers (information asymmetry).

Information asymmetry is rather tricky, because part of the reason that you are buying something from someone is presumably they know more than you about it. Also there is something that I actually saw happen...

Suppose you have an honest banker and a dishonest one. The honest banker can only guarantee to give you 0.1% interest whereas the dishonest banker will guarantee you 100%. If enough people believe the dishonest bankers, this will put honest bankers out of business. OK, so we put dishonest bankers in jail. Problem solved...

Except suppose we don't have honest or dishonest bankers but rather smart and stupid bankers. The smart banker can only promise you 0.1% interest, whereas the stupid banker guarantees you 100%, but you can't arrest him for fraud because he actually ***believes*** he can get you 100% return.

After a while, the stupid bankers start getting more cash than the smart bankers, and they can put the smart bankers out of business. What's more, because the stupid bankers are more stupid they pay (or promise to pay) more to their employees. Also if you have a smart banker work for a stupid company, then they will usually get fed up and leave, which means that after a while, you don't have anyone with any sense left.

Now if you can figure out a practical way of fixing this problem using just market mechanisms, I'd be quite interested. One reason I like Austrian economics is that this is the type of thing that von Mises might be interested in working on.

Austrians, on the other hand, tend to cling to their dogma of laissez-faire capitalism purely on ideological grounds, even when modern empirically supported economic theory suggests that intervention is necessary.

I think that somewhere in the 1970's, Austrian economics started to ossify. Personally, I find von Mises and Hayek to be very interesting reading, but after Rothbard, it becomes quite uninteresting because they aren't saying anything new. In some ways, they remind me of Trotsyists.

Also, I don't think that modern economics is *that* empirically supported. Von Mises made some very interesting arguments about historicism. One problem with historicism which von Mises mentioned is the lack of a "reset button" (he didn't use those terms but the idea is there). Just to give an actual example. I claim that without the stimulus things would have been worse, whereas Shackleford claims that without the stimulus things would have been better. OK. If we had a reset button to run things over again, we can resolve this, but we don't.

So my argument is based on what von Mises calls "praxeology". If we didn't have a stimulus, then people would have acted in way A causing result B causing people to act in way C, and in the end, we would have ended up in hell.

Curiously the reason I like government intervention in particular cases is because I'm using an bottom-up analysis that is more Austrian than Keynesian.

Sorta random, but this is a great paper to read for anyone interested in econ. It deals with market failure, specifically on the notion of information asymmetry. It's by Nobel Prize-winning economist George Akerlof.

Classic paper, but what I've been wondering is how to extend this from honest/dishonest to smart/stupid. What happens if you punish dishonesty is that you give a lot of incentives to be "honestly stupid" so that you can get the dishonesty reward without being dishonest.

Also was something that I call the "double asymmetry." A loans B money. B knows that he won't/can't pay, but doesn't care because they get the cash now. A knows that B won't repay but he/she doesn't care because it's C's money and if the loan goes through then they are going to get fees. C is some old grandmother that doesn't know enough about banking to know or care that all of this is going on.

This is not a "real" market, and none of the theorems about how markets are good will apply, but it's what happened, and it's really tough to figure out how to get around this with the intervention of D, a government official, who is going to be out of a job if this all blows up.

 

[twofish-quant]

One other reason that I think von Mises is such an important thinker is that von Mises ideas have been extremely influential in China. The basic critique of socialist planning is something that has very strongly influenced Chinese thinking on the topic. It's hard to see this, because no one explicitly talks about von Mises, and I bet that 99% of the people involved don't have any clue that von Mises came up with some of the ideas, but you see the same basic critique of central planning and the line of transmission goes

von Mises -> Janos Kornai -> Wu Jinglian

Also Austrian Economics is taken very seriously in China. The Dean of the Guanghua University in Peking University, Zhang Weiyin, is an Austrian.

 

[twofish-quant]

OMG...

I was just surfing and it turns out that you have a lot of economics people that assume that US monetary policy works the way that inknit says it does, when it hasn't worked that way in at least 15 years.

 

[Shackleford]

OMG...

I was just surfing and it turns out that you have a lot of economics people that assume that US monetary policy works the way that inknit says it does, when it hasn't worked that way in at least 15 years.

Which part?

 

[Shackleford]

Another great video. He is making some of the points I have been making.

 

[twofish-quant]

Which part?

Here is one part that's wrong

http://www.bis.org/publ/work269.htm

Here is a general overview of how monetary policy really works at the Fed level.

http://www.newyorkfed.org/education/addpub/monpol/

Banks today work like ebay. You find lenders, you find borrowers and then you make matches and take a commission. What this means is that reserve requirements don't really influence the volume of lending. They greatly impact profitability, but that's something different.

Also, you've heard of the "shadow banking system." What people don't quite realize is that in the US the "shadow banking system" *is* the banking system. When the Fed wants to change interest rates, it gets fed immediately into the commercial paper and repo markets. Commercial banks today are largely front end retail interfaces to the money markets.

But the basic problem is that reading some of the stuff that people writing about banking is as if you had someone talk about the computer industry assuming that he hasn't changed since 1985. The same technology that created google and ebay has had similar changes in banking, and it's really, really scary to notice that most people in academia don't seem to realize that.

One thing that frustrates me is with a lot of people in academia is that they deal with "cartoon pictures of markets" and this goes with both Austrians and Keynesians. They have wild oversimplifications of how markets work, and listening to them sometimes I get the feeling that they think that they can understand Boeing 747's with kindergarten pictures with crayons.

 

[twofish-quant]

Another great video. He is making some of the points I have been making.

One thing that you'll find if you talk to people that do this for a living is that the meltdown surprised no one. It was pretty *obvious* to anyone with half a brain working on Wall Street that we were heading for trouble.

The fact that Robert Shiller got awards for saying that were were in the middle of a housing bubble and that this was controversial at all shows out of touch academic economics were. However, the problem is that you had a lot of people in academia who believed that "markets can do no wrong" which is a totally nutty idea to me.

Heck, when you talk to someone at an interview and they tell you that "you have to be careful about what you say since smart people tend to get in trouble around here", I'm not shocked when said financial institution blows up. Conversely, if during an interview you have managers asking questions that show that they really care about not blowing up the world, you really end up wanting to work there.

The fact that employer A offered ***much*** higher salaries and bonuses than employer B makes the question interesting, and why I don't trust market mechanisms. I'm open to ideas on how you can fix these sorts of problems with massive bureaucracy, but it's tricky.

So other thing not work for people I don't trust, what do you want me to do? Look it's not illegal to be stupid, and if the government regulators aren't doing their jobs, then there's nothing that I can single-handedly do to change that.

Now you have lots of academics and talking heads that were surprised, but that's something different. I don't watch any financial news because the people there are generally quite clueless. Also follow the money. Financial news networks are there to make money from ads, so they don't care if what they talk about is useful or not.