What theory has changed, since you last took Economics/Finance courses in college?

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Valuethinker
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Valuethinker » Thu Mar 14, 2019 3:42 am

acegolfer wrote:
Tue Mar 12, 2019 10:28 am
I'll go first. I updated my knowledge from another BH.

Open Market Operation used "corridor" system pre-2009. Post-2009, we now use "floor" system.
- irrationality of human beings, particularly acting in groups

- importance of asymmetric information in explaining what goes on in finance, business, law - and that this has implications on a macro scale not just a micro

- transactions costs are often the result of the existence of asymmetric information, and they matter, a lot
Last edited by Valuethinker on Thu Mar 14, 2019 5:26 am, edited 1 time in total.

Valuethinker
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Valuethinker » Thu Mar 14, 2019 4:03 am

4nwestsaylng wrote:
Tue Mar 12, 2019 5:13 pm
but at the time I knew not to question "free trade" or Keynesian theory too much, as it was dogma, and largely still is.And in my Marxist professor's class, one knew not to challenge too harshly his positions.

That is called "graduating from college". Nothing much has changed.
I believe that you are not up to date on what has happened in economics since you left college.

1. there's been a huge amount done on Trade Theory since the 1970s, and more than one Nobel Prize (Paul Krugman in particular, but others too). Suffice it to say the orthodox position now would be "free trade matters, but by how much depends". And we have empirical data like NAFTA and we are about to have negative empirical data from Brexit (severing of trade relations, maybe).

2. Macroeconomics at the post undergrad level (and the core undergrad courses) is all Rational Expectations Hypothesis/ "rigorous microfoundations" aka Freshwater School - graduate departments at Chicago, Rochester, Carnegie Mellon, Minnesota in particular. Lucas-Sargent Proposition, Real Business Cycle theory ("sunspots") etc.

https://angrybearblog.com/2009/01/backg ... -salt.html
In the field of macroeconomics there is a much deeper division between macroeconomics as practiced at universities closer to the great lakes than to an Ocean (Fresh water economics) and that practiced at universities closer to Oceans (Salt water economics). The geography has shifted some as Fresh water economics has been exported. I’d consider Professor Robert Barro at Harvard to be brackish (with, he reports, noticed salty contamination in the first 6 months after he moved from U. Rochester) and the economics department at the University of Pompeu Fabra (in Barcelona) seems to be distilled. It is a little difficult to explain the disagreement to non economists. Frankly, I think this is because non-economists have difficulty believing that any sane person would take ffresh water economics seriously.

Roughly Fresh water economists consider general equilibrium models with complete markets and symmetric information to be decent approximations to reality. Unless they are specifically studying bounded rationality they assume rational expectations, that everyone knows and has always known every conceivable conditional probability. I’ve only met one economists who claims to believe that people actually do have rational expectations (and I suspect he was joking). However, the fresh water view is that it usually must be assumed that people have rational expectations.

Over near the Great Lakes there is considerable investigation of models in which the market outcome is Pareto efficient, that is, it is asserted that recessions are optimal and that, if they could be prevented, it would be a mistake to prevent them.

Salt water macroeconomics is basically everything else with huge differences between people who attempt to conduct useful empirical research without using formal economic theory and people who note the fundamental theoretical importance of incomplete markets and of asymmetric information and of imperfect competition (as in everything you think you know about general equilibrium theory is known to be false if markets are incomplete or there is asymmetric information or there is imperfect competition – Market outcomes are generically constrained Pareto inefficient which means that everyone can be made better off by regulations imposed by regulators who don’t know anything not known to market participants who also just restrict economic activity and don’t introduce innovations like, say, unemployment insurance).

Leading fresh water macroeconomists include Robert Lucas, Ed Prescott Thomas Sargent, Lars Hansen, John Cochrane, Larry Jones, Robert Barro (mostly), and Kevin Murphy (usually). Leading salt water economists include Paul Samuelson, Edmund Malinvaud, Jacques Dreze, Joseph Stiglitz, Robert Solow, Paul Krugman, Andrei Shliefer, Olivier Blanchard, George Akerlof, Robert Hall, Ben Bernankle, N. Gregory Mankiw, Christina Romer, David Romer and, and Lawrence Summers. Brad DeLong is also a salt water economist and he is very very smart, but last I knew, he was a little too far out there to be really a member of the economists club. I can’t classify Paul Romer.

Notably all of the above have made important contributions to fields other than macroeconomics.

In the US there is a strong correlation between Fresh and Salt and Right and Left. The correlation is not perfect: I understand that Hansen and Sargent are politically left of center. Hall is far right politically, Mankiw is right of center. and I must admit that I have no clue about Bernanke (who I have never actually, you know, seen in the flesh).

An important discrimminant is opinions of John Maynard Keynes. Fresh water macroeconomists generally seem to think that he was not a competent economist. Salt water macroeconomists claim (often implausibly) to be in some way his intellectual followers. Barro for example clearly doesn’t remember what is written in “The General Theory of Employment Interest and Money.” Mankiw, in contrast, advised the students in his macro class (including me) to read it again and again searching for insights.

Interestingly, the fresh water macroeconomists are certain that salt water macro is discredited along the lines of the Ptolomaic model or the Phlogiston hypothesis. For a while they called their models “Modern Business Cycle Theory” stating that all incompatible models were obsolete. In the current debate many have considered it sufficient to say that arguments for the stimulus are nonsense (e.g. Cochrane). The surprisingly low quality of contributions to the debate from the vicinity of Great Lakes has a lot to do with the fact that Fresh Water macroeconomists haven’t thought about fiscal stimulus in decades and sincerely believe that it is an obviously invalid proposal so obvious arguments against it might be valid.

Even more interesting, Fresh water macroeconomists do not claim that their models have not been refuted by the data. Rather they note that all models are, by definition, false. They do test hypotheses from time to time, but don’t explain what the point is. As far as I can understand, they claim that a model *can* be both false and useful and, therefore, their models *are* useful.
The dominant strain of macroeconomics has been DSGE models and they include models of expectations formation. The Central Banks, which pick up the most recent graduates in macro, use Dynamic Stochastic General Equilibrium models.

There are not any old Keynesians left - IS-LM is not a widely used model. You do get the neo Keynesians, but that's taking the REH language and tools and using it against them - menu costs, etc. That's the Saltwater School.

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acegolfer
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by acegolfer » Thu Mar 14, 2019 6:51 am

DonIce wrote:
Wed Mar 13, 2019 8:43 pm
bottlecap wrote:
Wed Mar 13, 2019 8:27 pm
The "rational actor" is an example of this. Many people think that until recently, all economists believed that people were "rational", had perfect information, and always made correct decisions. In reality almost none did. These economists weren’t blind or dumb.

The characterization is a broad generalization, an oversimplification, and an untruth all at the same time. An investigation into the history of economic thought debunks this quickly and thoroughly.

Yet we all seemed to have come away from our college courses with this notion. Looking back, it shows a pretty sad state of the education provided on this subject.
I think the issue here is that most people who take economics courses, do so at an introductory level. Just as someone beginning an education in physics might learn about frictionless surfaces, rigid bodies, incompressible gases, Newtonian gravity, and the like, which are all useful models to begin to understand how physics works but are not complete descriptions of the full complexities of the universe, so too economics students begin with simplified models before delving into deeper complexities.
+1. To my knowledge, basic economics assumes people are rational and then build simplified models. If one says economics taught people are rational, then it's like saying that physics taught surfaces are frictionless. Seems many posts here mix assumptions with conclusions.

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grayfox
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by grayfox » Thu Mar 14, 2019 7:01 am

What I remember them teaching was that there were two kinds of economies: Command Economies and Free Market Economies. The Soviet Union had a command economy. The United States had a mixed economy: part command and part free-market.

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bottlecap
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by bottlecap » Thu Mar 14, 2019 7:23 am

acegolfer wrote:
Thu Mar 14, 2019 6:51 am
DonIce wrote:
Wed Mar 13, 2019 8:43 pm
bottlecap wrote:
Wed Mar 13, 2019 8:27 pm
The "rational actor" is an example of this. Many people think that until recently, all economists believed that people were "rational", had perfect information, and always made correct decisions. In reality almost none did. These economists weren’t blind or dumb.

The characterization is a broad generalization, an oversimplification, and an untruth all at the same time. An investigation into the history of economic thought debunks this quickly and thoroughly.

Yet we all seemed to have come away from our college courses with this notion. Looking back, it shows a pretty sad state of the education provided on this subject.
I think the issue here is that most people who take economics courses, do so at an introductory level. Just as someone beginning an education in physics might learn about frictionless surfaces, rigid bodies, incompressible gases, Newtonian gravity, and the like, which are all useful models to begin to understand how physics works but are not complete descriptions of the full complexities of the universe, so too economics students begin with simplified models before delving into deeper complexities.
+1. To my knowledge, basic economics assumes people are rational and then build simplified models. If one says economics taught people are rational, then it's like saying that physics taught surfaces are frictionless. Seems many posts here mix assumptions with conclusions.
I couldn't define "basic economics" or tell you why it should use different assumptions from the remainder of economics, but it is true that "rational choice theory" makes a set of assumptions that many time do not reflect reality as a control, much like in physics.

This is different from assuming that economic actors making rational, ie. willing and purposeful, choices. I think this is where there is confusion.

People learn the former concept and assume that it is implicated in any reference in economics when the term "rational" is used.

I think this is why people believe "behavioral economics" is some sort of epiphany.

Economics has always been a study of human behavior, but if you assume that all economists from time immemorial firmly believed in rational choice theory, then behavioral economics would indeed seem novel.

JT

gtd98765
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by gtd98765 » Thu Mar 14, 2019 7:34 pm

Valuethinker wrote:
Thu Mar 14, 2019 4:03 am


https://angrybearblog.com/2009/01/backg ... -salt.html
In the field of macroeconomics there is a much deeper division between macroeconomics as practiced at universities closer to the great lakes than to an Ocean (Fresh water economics) and that practiced at universities closer to Oceans (Salt water economics).
Thanks very much for posting this piece!

Iridium
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Iridium » Thu Mar 14, 2019 8:28 pm

BJJ_GUY wrote:
Wed Mar 13, 2019 7:58 pm
HEDGEFUNDIE wrote:
Wed Mar 13, 2019 7:55 pm
bhsince87 wrote:
Wed Mar 13, 2019 7:51 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 7:48 pm
<snip>
3. I once head an economist give a speech about solving something with a negative interest rate -- and he was being somewhat creative, but also thinking he was kind of speaking about the impossible. (I'd love to hear what he had to say when it actually happened across the developed world)
Yes, on number 3, that was another one I thought of today. It was always assumed that zero was the lower bound on interest rates.

Turns out you can offer negative rates on bonds, and people will still buy them!
Not sure why this was ever in doubt.

Flight to safety is a thing, safety costs money.
Well it never had before, not with a negative nominal rate.
The assumption was that the market would simply hold cash in a vault. I remember one economist thought that paper currency would have to be replaced with electronic bills with displays the constantly counted down in order for there to be nominal negative rates. As it turns out, there are real costs to holding a Scrooge McDuck pool of cash and the nominal rates managed to go a lot lower than many (including me) expected without much evidence that the banks were building cash warehouses.

As I understand it, retail banking mostly avoided negative interest in Europe. Would have been really interesting to watch if that had happened. There have never been penalties for paying bills early, overestimating taxes, and depositing checks slowly. In a true retail negative interest environment, all of those could be easily abused to decrease the interest one pays on their cash holding. Lots of new rules would be needed on short notice.

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by catdude » Fri Mar 15, 2019 1:29 am

I remember the professor in Econ 101, back in the mid-1970's, assuring us that there would never be another Great Depression. There were just too many safeguards in place, he said, that would prevent that from happening. Of course we came pretty dang close to another Great Depression in 2007-09.
catdude | | All generalizations are false, including this one.

Valuethinker
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Valuethinker » Fri Mar 15, 2019 4:49 am

catdude wrote:
Fri Mar 15, 2019 1:29 am
I remember the professor in Econ 101, back in the mid-1970's, assuring us that there would never be another Great Depression. There were just too many safeguards in place, he said, that would prevent that from happening. Of course we came pretty dang close to another Great Depression in 2007-09.
And arguably, that the institutions put in place globally since the experience of the 1930s worked.

- There was a more or less coordinated bailout of financial institutions UK, Europe, USA (but also places like Canada provided liquidity)

- the Fed and the Bank of England took world-leading roles as lenders of last resort to financial institutions needing liquidity

- Gordon Brown, the UK PM at the time, orchestrated a global spending increase by developed world governments, at the same time the US Congress passed a major spending bill. China began what must have been the largest fiscal impulse of all time

- within each country the mechanisms of state-provided unemployment insurance, welfare and healthcare kicked in. There was not the collapse in demand that unemployment in the Depression precipitated. The so-called Automatic Stabilisers stabilised.

So we had The Great Recession rather than a re-run of The Great Depression.

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Valuethinker » Fri Mar 15, 2019 5:20 am

gtd98765 wrote:
Thu Mar 14, 2019 7:34 pm
Valuethinker wrote:
Thu Mar 14, 2019 4:03 am


https://angrybearblog.com/2009/01/backg ... -salt.html
In the field of macroeconomics there is a much deeper division between macroeconomics as practiced at universities closer to the great lakes than to an Ocean (Fresh water economics) and that practiced at universities closer to Oceans (Salt water economics).
Thanks very much for posting this piece!
It is old, and the writer has a partisan position, but nonetheless I think it is a good summary of the situation.

It's easy to understate the impact of Rational Expectations Hypothesis and the move towards "rigorous microfoundations" in macro studies. That's what gets you through PhD comps & to a PhD in economic grad school - a lot of very heavy math.

Keynesians are a marginal fringe among macroeconomics. Even Neo-Keynesians are not mainstream.

By contrast, in the study of International Economics, one does see ideas & analyses that are almost Keynesian. Paul Krugman in particular points to a number of examples.

(that, at least, from a non specialist, non academic perspective is my understanding of the state of play)

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by sean.mcgrath » Fri Mar 15, 2019 5:45 am

catdude wrote:
Fri Mar 15, 2019 1:29 am
I remember the professor in Econ 101, back in the mid-1970's, assuring us that there would never be another Great Depression. There were just too many safeguards in place, he said, that would prevent that from happening. Of course we came pretty dang close to another Great Depression in 2007-09.
So it sounds like he was right.

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Jeff Albertson » Fri Mar 15, 2019 5:35 pm

Apparently the tech industry is reshaping the role of economists:
In the past few years, Amazon has hired more than 150 PhD economists, making it probably the largest employer in the field behind institutions like the Federal Reserve, which has hundreds of economists on staff. It was the only company with a recruiting booth at the American Economics Association's annual conference in January, handing out free pens and logoed stress balls.

"Amazon is the only firm that has hired a lot of economists, let alone done it successfully," Uber's chief economist, Jonathan Hall, said in a speech to the American Economics Association in January. While many companies have hired economists as public-facing spokespeople or to guide general corporate strategy, Hall explained, both he and Amazon try to integrate them as key advisers on nearly every business decision, using enormous amounts of data to replace intuition with science.
And in the meantime, Amazon is reshaping the economics field in its own image.
"The folks at Amazon and Uber are not doing the same sort of traditional chief economist's role," said Tom Beers, executive director of the National Association of Business Economics. "They're doing something completely different."
https://www.cnn.com/2019/03/13/tech/ama ... index.html

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by DB2 » Fri Mar 15, 2019 9:21 pm

My friend was a Finance major...graduated in 1992. His Econ instructor at the time said it was impossible that General Motors could ever go bankrupt.

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Phineas J. Whoopee
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Phineas J. Whoopee » Sat Mar 16, 2019 9:29 pm

DB2 wrote:
Fri Mar 15, 2019 9:21 pm
My friend was a Finance major...graduated in 1992. His Econ instructor at the time said it was impossible that General Motors could ever go bankrupt.
If the instructor said that then he was a fool, and I can say so without benefit of knowing what happened later.

PJW

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by sean.mcgrath » Sun Mar 17, 2019 10:21 am

Phineas J. Whoopee wrote:
Sat Mar 16, 2019 9:29 pm
DB2 wrote:
Fri Mar 15, 2019 9:21 pm
My friend was a Finance major...graduated in 1992. His Econ instructor at the time said it was impossible that General Motors could ever go bankrupt.
If the instructor said that then he was a fool, and I can say so without benefit of knowing what happened later.

PJW
Having lived through Michigan's double digit unemployment in the 80s, the march of Japan, Inc., the (first) Chrysler bailout, and the early rounds of GM plant closures, I doubt anyone in Michigan would have agreed with the Econ instructor....

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by DB2 » Sun Mar 17, 2019 12:33 pm

sean.mcgrath wrote:
Sun Mar 17, 2019 10:21 am
Phineas J. Whoopee wrote:
Sat Mar 16, 2019 9:29 pm
DB2 wrote:
Fri Mar 15, 2019 9:21 pm
My friend was a Finance major...graduated in 1992. His Econ instructor at the time said it was impossible that General Motors could ever go bankrupt.
If the instructor said that then he was a fool, and I can say so without benefit of knowing what happened later.

PJW
Having lived through Michigan's double digit unemployment in the 80s, the march of Japan, Inc., the (first) Chrysler bailout, and the early rounds of GM plant closures, I doubt anyone in Michigan would have agreed with the Econ instructor....
This was at a Michigan university on top of it. It just goes to show the bubble some of these instructors live in.

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by sean.mcgrath » Mon Mar 18, 2019 7:16 am

DB2 wrote:
Sun Mar 17, 2019 12:33 pm
sean.mcgrath wrote:
Sun Mar 17, 2019 10:21 am
Having lived through Michigan's double digit unemployment in the 80s, the march of Japan, Inc., the (first) Chrysler bailout, and the early rounds of GM plant closures, I doubt anyone in Michigan would have agreed with the Econ instructor....
This was at a Michigan university on top of it. It just goes to show the bubble some of these instructors live in.
:oops: :oops: :oops:

Mr.BB
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Mr.BB » Mon Mar 18, 2019 7:21 am

Not quite economic base but the reality in life is.... The more you know, the less you realize you know.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

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Phineas J. Whoopee
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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by Phineas J. Whoopee » Mon Mar 18, 2019 1:07 pm

Mr.BB wrote:
Mon Mar 18, 2019 7:21 am
Not quite economic base but the reality in life is.... The more you know, the less you realize you know.
A concept I like, which the late Stephen Jay Gould wrote about but may or may not have personally invented, is to view knowledge as volume and questions as surface area. The more the volume of knowledge grows, the bigger the surface.

Absolutely increased knowledge leads to absolutely increased uncertainty.

PJW

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Re: What theory has changed, since you last took Economics/Finance courses in college?

Post by dm200 » Mon Mar 18, 2019 1:16 pm

acegolfer wrote:
Tue Mar 12, 2019 10:28 am
I'll go first. I updated my knowledge from another BH.
Open Market Operation used "corridor" system pre-2009. Post-2009, we now use "floor" system.
Almost flunking out of college 50+ years ago, I scrambled and majored in Economics - getting off academic probation and getting a degree in four years.

I have concluded, over the decades, that there are forces influencing behavior in some or many cases that defy Economics 101. The example that jumps out at me are the various types of very high interest rate or "predatory" consumer loans, such as car title loans and payday loans.

One "situation" I recall was Milton Friedman's permanent income hypothesis. https://en.wikipedia.org/wiki/Permanent ... hypothesis

Over the decades, in my own situations, I have come to believe that my patterns of spending have been consistent with this theory.

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