"Des waerelds doen en doolen, is maar een mallemoolen,"

"Des waerelds doen en doolen, is maar een mallemoolen," engraving from Het Groote Tafereel der Dwaasheid, 1720.

"The actions and designs of the world go round as if in a mill." South Sea bubble financial crisis.

Sunday, October 30, 2011

Risky jobs

According to Carney,  the "too big to fail" debate should unite both side, up against the big banks, because they: 
have rigged the game so that they profit without creating value. In fact, they profit from activities that weaken the economy by creating instability. Today, big banks give capitalism a bad name. Believers in the free market should stop giving banks cover.
Unfortunately these story are all too often very simplistic. These lines of argument overlook the fact that today's unstable situation is the result of a long process of financial deregulation. The end of the Bretton Woods system meant companies had to cope with floating exchange rate and banks responded by providing risk management instruments. They have rigged the game because the rules have slowly changed. Some players now (high frequency traders for example) benefit from risks. In fact it has become their risky job to cope with uncertainty.  Whether or not that deters financial systems to carry on the main function they are supposed to fulfill - the efficient allocation of capital - is a question political economy. Arguing over the size of banks and trying to regulate it will be a useless debate unless we rethink the function of financial systems too.

Tuesday, October 11, 2011

New Economic Thinking

The Institute for New Economic Thinking attributed recently three grants demonstrating the linkages between finance and real economy. The interview of G. Epstein, who advanced the concept of financialization and  J. Crotty here:
They build on James Tobin's concept of functional efficiency to separate the financial sector's beneficial activities (mobilizing savings, financing investment, and reducing risk) from its socially inefficient activities (gambling, and distorting the political process).
K. Pistor's work on "law and finance" and how law is underconceptualized and W. Lazonick's on how finance might harm innovation (echoing Levenstein's study) are also recognized as fresh economic thinking. The questions these scholars ask are essential if economics is to regain its scientific added value. The fact that an institute has to name that "new thinking" - where in fact, it is just "thinking" is telling about the relationship between the dominant ideology and its critics in economics fields.

Theories and reality

A lively debate with a methodenstreit flavour about economics and its relationship with reality kicked off by John Kay's paper for Inet. Inet sent Kay's paper to some economists with the opportunity to respond. Their blog received plenty of it. The debate is timely for Christopher Sims and Thomas Sargent just won the Nobel Prize in Economics for their "empirical research on cause and effect in the macroeconomy". To put it crudely,  on how best finding macroeconomic things out ! Finding things out always implies having a map. The problem is which form this map should take.