March 06, 2009

A break from the world of claudia; a bit of the real world

Either I have a short memory (or was half-asleep at that particular history of economic thought class which is improbable because an attractive lecturer -which was the case - is always a good motivator to open your eyes and ears) or I had never heard of Pigou.

Either way, I've been defending his theory lately without knowing it was his.

(also, these days, I'm so proud I went to a Keynesian college)

*****

However, Keynes can be our savior only to a very partial extent, and there is a need to look beyond him in understanding the present crisis. One economist whose current relevance has been far less recognized is Keynes's rival Arthur Cecil Pigou, who, like Keynes, was also in Cambridge, indeed also in Kings College, in Keynes's time. Pigou was much more concerned than Keynes with economic psychology and the ways it could influence business cycles and sharpen and harden an economic recession that could take us toward a depression (as indeed we are seeing now). Pigou attributed economic fluctuations partly to "psychological causes" consisting of

variations in the tone of mind of persons whose action controls industry, emerging in errors of undue optimism or undue pessimism in their business forecasts.[5]

It is hard to ignore the fact that today, in addition to the Keynesian effects of mutually reinforced decline, we are strongly in the presence of "errors of...undue pessimism." Pigou focused particularly on the need to unfreeze the credit market when the economy is in the grip of excessive pessimism:

Hence, other things being equal, the actual occurrence of business failures will be more or less widespread, according [to whether] bankers' loans, in the face of crisis of demands, are less or more readily obtainable.[6]

Despite huge injections of fresh liquidity into the American and European economies, largely from the government, the banks and financial institutions have until now remained unwilling to unfreeze the credit market. Other businesses also continue to fail, partly in response to already diminished demand (the Keynesian "multiplier" process), but also in response to fear of even less demand in the future, in a climate of general gloom (the Pigovian process of infectious pessimism).

--excerpt from Amartya Sen's article at the NRB, yet another successful case of clear writing; it would make Feynman proud (he once said that if you really understand something in physics you should be able to explain it to your grandmother)

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July 14, 2006

I have the memory of a gossiper. I have a thing for the quirky, for the meaningless detail, for the piece of shiny shattered glass by the side of the road and seem to ignore completely the big picture or the big truck coming in my direction.

For some reason still unknown to me (maybe too much alcohol in my late teens) I majored in Economics. The only things I can remember from my History of Economic Thought are silly details of biographical nature. Most of them embarrassing. That and the jokes.

For instance, Keynes was married to a russian ballerina although he was gay. And he's known for saying "In the long run, we'll all be dead". Can I elaborate on the IS/LM model? Of course not. But I know he got rich by speculating in the stock market.

Walras proposed himself fot the Nobel Peace Prize for he believed his general theory of equilibrium would bring harmony between nations.

Jevons drowned while swimming in the south of England. Which seems to be a very un-utilitarian thing to do. And helped to give birth to the joke "An Economist Drowned While Crossing A River That Was An Average of 3 1/2 Feet Deep".

Mills had a nervous breakdown when he was twenty-one mainly because he spent his whole life studying and revealed himself to be a child prodigy since he had read all the classics - in the original greek and latin - by age 8.

John Kenneth Galbraith institutionalized, among other things, the phrase "the shit hit the fan".

Adam Smith died a virgin. It's not an historical fact. It's my opinion. Too many invisible women in his life.

Cantillon, a founding father of economics, was tried for usury, faked his murder and fled to South America.

Bentham's mummified body is on display in London as stated on his will. A hedonist: once his mummy disappeared and left the note "gone on holidays".

Lucas' ex-wife proved she knew what her ex-husband was talking about for she demonstrated very rational expectations when she asked for half of his Nobel prize money on a divorce settlement clause seven years before he actually got the award.

A student at a Milton Friedman class fell asleep. He was very upset and banged on her table with his fist. She awakes suddenly and says: "The answer is to increase the money supply".

And so, these are my mnemonics and ice breakers at economist's dinners.

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