No Free Lunch

民協馮檢基批評，政府過去一年公屋越建越少，醫療事故頻繁，未有積極製造就業，更無回應小班教學訴求。 More here.

So what should we do about it? I bet Mr Fung is going to say that we need more resources to be devoted to building new public housing, to buying better medical equipment as well as employing more medical staff, and more jobs for building roads to nowhere, tennis courts where no one uses, railways where utilitzation rate stays low....

Does he understand that more of these things require that we have less of other things? Who is going to pay for these things? And why? How can he tell the things we get as a result of giving up other things are more valuable than those things that we have (or are forced) to give up?

Go, Go, George Mason

According to this latest ranking of Economics Dept, my alma mater is assigned a rank of 85 among the top 10 percent of top level institutions (it's a world wide ranking, not just confined to higher learning institutions in the US).

It is ranked above:

Indiana U, Bloomington, ranked 91;

U of Washington, Seattle, ranked 100;

George Washingtonm, ranked 130.

HT to Greg Mankiw for the pointer.

Wow! Samuelson on Economic History

This bit from an interview of Nobel lauerate Paul Samuelson really surprises me:

Very last thing. What would you say to someone starting graduate study in economics? Where do you think the big developments in modern macro are going to be, or in the micro foundations of modern macro? Where does it go from here and how does the current crisis change it?

[Samuelson's response]: Well, I'd say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that's the raw material out of which any of your conjectures or testings will come.

And I think the recent period has illustrated that. The governor of the Bank of England seems to have forgotten or not known that there was no bank insurance in England, so when Northern Rock got a run, he was surprised. Well, he shouldn't have been. But history doesn't tell its own story. You've got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.

More here.

Larry White Moves to George Mason

Great news, Larry White, who has done a lot of work in advancing the theory of free banking will start teaching at my Alma Mater starting next fall.

Here is a bio of Larry in Wiki, and here is Larry's dissertation, "Free Banking in Britain" available free for download courtesy of IEA in England.

I met Larry a couple of times back in my graduate school days, twice when I visited the campus of U of Georgia where Larry used to teach, and once when I was attending a FEE Austrian Economics Seminar up in New York with my fellow classmate Wayne. Larry is a softspoken gentleman, and a graduate of UCLA.

HT to Taking Hayek Seriously for the pointer.

Cheung's Theorem

政府什么也不要管吗？不是的，政府还要做的项目多得很。我要重复此前说过的：医疗行业的一个大麻烦，是求医的人往往不知道购买的是些什么。鱼目大可混珠，浪得虚名之辈历来不少。在权利与责任界定这重要话题上，政府的工作重要。但他们要懂得分辨哪些工作他们要做，哪些应由市场处理。原则上，这分辨不难，只是做起来，政府的官员会因为自己的权力与利益，漠视了社会整体的需要。因为这一点，我对中国医疗改革的前途不看好。鱼目既然容易混珠，混水摸鱼的行为容易产生。

This is from Professor Steven N S Cheung's latest column, more here.

Several implications follow:

1. In situation where the problem of information asymmetry is serious, and where the government intends to intervene , we should expect more officials to act in ways that contravene public interests, like soliciting bribe, defining rights in such a way which would benefit their supporters...etc

2. It cautions against those who automatically ask for the visible hand to step in when information asymmetry prevents the market from discharging its ususal function.

The same asymmetry information which negatively affects the operation of the market also encourages or provides a better cover for officials to benefits themselves instead of working for the public interests. So the results generated by government intervention might be worse than that delivered by the market.

Furthmore, even if the incentive problem articulated by Professor Steven Cheung is resovled, say all officials are Angels, you would still encounter the Hayekian type knowledge problem. For officials would need to know exactly when to intervene and how to intervene. As the Professor mentioned, "但他们要懂得分辨哪些工作他们要做，哪些应由市场处理". We differ on this point because the Professor thinks the officials would do a pretty good job in this area if the incentive problem articulated by him could be ignored. I am far less sanguine about the officials' ability to resolve the knowledge problem.

How a Law Student, with No Prior Knowledge in the Auto Industry, Helps Restruture it

A very, very, very interesting read. More here.

Why the Worst Get On Top

The title of this post of course is taken from a chapter in Hayek's Road to Serfdom.

Now Bryan Caplan has offered another answer in addition to that offered in Hayek's work:


[A]ll successful politicians are big liars by the absolute standard we routinely apply to the people we personally know.

More here.

You can read a condensed version of The Road to Serfdom here for free.

Nice Cover

A soon to be released book named In Fed We Trust has a really nicely

designed cover. You can pre-order the book here.

The Most Damning Blogpost I Have Read Today

At least now we have finally gotten away from personal attacks, so let me say that Sachs is an inspirational and hard-working intellectual. His ideas on Africa are only sometimes totally wrong, the other times they are only fatally wrong.

More here. Blows again are exchanged between Columbia's Jeff Sachs and NYU's Bill Easterly.

Best Line I Have Read Today

"Besides, the sight of two middle-aged white men mud-wrestling on African aid may entertain the audience."

The two middle-aged white men refered to in the above quote are no light-weights, they are Columbia's Jeff Sachs and NYU's Bill Easterly.

Read more about their latest exchanges here.

Eat Your Way to Eternity

Gary Becker wrote:

the negative health consequences of being overweight and even obese will generally be significantly lower for children than for adults. The reason is that aside from very extreme obesity, the really harmful effects to overweight children will not usually kick in for another 25 or more years when they are in their forties or older. However, one can reasonably expect sizable progress during the coming decades in the development of drugs, such as lipitor, that will reduce the health consequences of high cholesterol and excess weight for heart conditions, diabetes, and some cancers. From that perspective, perhaps even ignorant and impulsive children are not acting so stupidly by indulging themselves in their eating since the future will likely see the development of drugs that will alleviate many serious medical conditions.

More here.

I see an externality being generated here. Say if the kids do not eat so much junk food or drink that much soda, they would not get overweight or even obese...then resources that would have been dedicated to cure illnesses which are byproducts of being overweight and obese could be used for something else. Afterall, scarcity rules. No?

BTW, as I have moved to a new job, and the position I am in does not allow me to freely comment on whatever stuff I like, hence the non-frequent up-dates of this blog, but I will try. So stay tuned.

So you want to learn cutting edge monetary theory without all the high-powered math?

Then you should take a look at these lecture (scroll down, the notes are at the very bottom of the page) notes written by Neil Wallance, one of the founding members of the New Classical School, for his undergraduate monetary theory course.

Enjoy!

Listen Up Secretary Geithner

A Utopian re-regulated financial sector, as envisaged by some pundits, would seek to avoid financial institutions’ taking excessive risks that could create systemic fragility, and give supervisors enough power to forestall any bubbles they saw developing. This regime would continue to facilitate the smooth and safe channeling of savings into socially productive investments, guaranteeing the future prosperity of a newer, low-risk world.

Before Americans — or Canadians — put too much stock in this imaginary future, however, they should ask if a regulator could recognize excessive risk and fragility as it began to emerge, could spot the point at which a boom that delivered socially productive innovation became a destructive bubble and subsequently design measures to halt the transformation without also discarding productivity gains. And they should ask how this wisdom would be translated into regulations that could be understood, followed and enforced by ordinary human beings in an environment where disagreements about how to interpret them will inevitably arise, and where decision makers’ own interests are affected by regulations’ interpretation.

The crucial point, which must not be missed in a populist rush to re-regulation, is that today’s financial systems in the U.S. and elsewhere are not the product of an unregulated market, but of a long history of interactions between regulatory interventions and private innovations in response to them.

The above is from the extremely wise Canadian monetary theorist, a student of the late Milton Friedman I believed and a retired professor at U of Ontario, David Laidler.

There are other bits in the piece where Secretary Geithner should pay attention, like this one:

First, as the U.S. financial system reconfigures, its evolution may be no more satisfactory under a newly minted set of rules designed to prevent past accidents than it would be if the process were driven by piecemeal, profit-seeking trial and error on the part of the private sector.

Regulators and the politicians who oversee them must remember that the profit motive is ever present, and that those who found ways to make money under past regulatory models will seek to do so under the next regime, too. The trick will be to design incentives so individuals’ behaviour stabilizes the system, rather than undermines it.


Read the whole thing here. And a list of David Laidler's works could be found here.

How To Win a Nobel Prize in Less than 30 Pages?

If you can do this.

HT to Peter Klein at Organization and Markets.

Sentence to Ponder

Back in graduate school circa early 1990s when I was taking Macro II taught by Tyler Cowen, I vividly remembered he once decribed the RBC (Real Business Cycle) view of what happened during the Great Depression in the 1920-30s as follows:

All workers decide to take a long vacation at the same time.


That is what I learn as part of the then State of the Art Macroeconomics. Seriously hope that those economic gurus who are at the helm power do not subscribe to that view.

If you were the President, imagine what your response would be if you senior staff told you, "you know what, my former professor told me that the current downturn has nothing to worry about, high unemployment only reflects workers have similar preferences with regarding to their leisure/labor choice." Amen!

What Do You Call a Nerd in Ten Years?

BOSS.

Source here.

It's a story about Quants, yes the math genius/nerds (delete whatever is appropriate) that have some commentators blamed them for indirectly causing the current financial mess through their math models which help create all the complex financial products.

But if math geeks and their models were indeed the source of the current problem, how reliable would it be now that governments all over the world are using similar models created by the same geeks to help assess whether banks are viable (the US Treasury is stress testing the major banks as I type and I know as a fact that HKMA, the local banking sector watchdog, asks local banks to perform such stress test all the time).

Advice from the Thugs to the Treasury Secretary Geithner

This is the best part:

The unanimous opinion among The Thugz was that you must base your work around a time-tested law of ghetto capitalism: losers must die in full view. What? This doesn’t make sense. O.K., well, let me explain. Your first mistake (more accurately, your predecessor’s error) was to mix the bad apples (banks) with the good (banks).

By doing so, you forgot what makes capitalism so much fun: winners win at the losers’ expense, and everyone gets to watch and laugh. Sort of like public hangings, except reported on the financial pages. Otherwise, why read The Wall Street Journal? (my emphasisi in bold)

Bottom Line:

The moral is: don’t ever take the joy of death away from the public. Because if you don’t see losers in pain, you begin to think the game is rigged.


Read the whole thing here.

Books I Have Been Reading

1. Animal Spirits by Yale's Bob Shiller and Nobel Laurate George Akerlof.

2. The Science of Fear by Daniel Gardner. I am more and more interested in the behavioral aspects of economics, though I do not necessarily suscribe to their policy prescriptions.

3. Bernanke's Test by the same guy who wrote a book on Chicago School of Economics.

Clash of Economic Ideas

For those who are interested in the debate of the 1930s on the potency of different economic policies in fending of economic downturn, which of course is relevant to the current debate on how to react to the current economic crisis, Austrian economist Larry White at U of Missouri St. Louis, is in the process of writing a book on the topic.

Here is one of the chapters. (Scroll down the page and you will see it, Larry is presenting the paper at the NYU market process seminar)

Dr Doom

An interview of NYU's Nouriel Roubini, aka Dr Doom, in WSJ, more here.

Here are the best bits:

What exactly is Nouriel Roubini's economic philosophy? "I believe in market economics," he says, with some emphasis. "But to paraphrase Churchill -- who said this about democracy and political regimes -- a market economy might be the worst economic regime available, apart from the alternatives.

"I believe that people react to incentives, that incentives matter, and that prices reflect the way things should be allocated. But I also believe that market economies sometimes have market failures, and when these occur, there's a role for prudential -- not excessive -- regulation of the financial system. The two things that Greenspan got totally wrong were his beliefs that, one, markets self-regulate, and two, that there's no market failure."

How could Mr. Greenspan have been so naïve, I ask, hoping to get a rise. "Well," says Mr. Roubini, "at some level it's good to have a framework to think about the world, in which you emphasize the role of incentives and market economics . . . fair enough! But I think it led to an excessive ideological belief that there are no market failures, and no issues of distortions on incentives. Also, central banks were created to provide financial stability. Greenspan forgot this, and that was a mistake. I think there were ideological blinders, taking Ayn Rand's view of the world to an extreme.