I just came across a working paper by Daron Acemoglu, Asuman Ozdaglar, and Alireza Tahbaz-Salehi, entitled “MICROECONOMIC ORIGINS OF MACROECONOMIC TAIL RISKS”. Clearly I am a little late to the game, as this paper appeared in an earlier form in June 2013, but it reminded me of this paper, “Network Formation and Systemic Risk, Second Version” by Selman Erol and Rakesh Vohra (who cite what appears to be an earlier version of the Acemoglu et al. paper). I took a look at the latter paper recently. While I have only skimmed the Erol and Vohra paper and only read the abstract of the Acemoglu et al. paper, it seems that both are concerned with how the structure of the network connecting firms or financial institutions to each other can make the economy fragile when random shocks affect parts of it. Surely this is worth reading in more detail by folks interested in network economics, like myself, not just by macroeconomists.
Author: cogiddo
When the Finance minister is a game theorist
Events after the election in Greece, related as they are to game theory, have prompted me to revive this moribund blog. I promise I will be updating it more frequently from now on. So here is my first take on this blog of the negotiations that Greece and the Euro zone authorities are engaged in now.
Ever since the election of January 26, 2015 in Greece, an elaborate confrontation has been evolving between the new Greek government and the European Central Bank (ECB) and the International Monetary Fund. Justin Fox, writing in Bloomberg View, said that the new Greek Finance Minister, Yanis Varoufakis (here is his blog), is perhaps playing a Colonel Blotto game with the European governments, spreading the fight in many fronts. Then again, it could just be a classic Prisoner’s Dilemma, as Fox also says.
Today, the ECB released a statement that appears intended to intimidate the Greek side. But Karl Whelan is not too impressed. He points out that the ECB has not been following any clear rules in deciding what to accept as collateral for lending to banks in the Euro zone. Whelan takes this as a nudge towards more productive negotiations to start before February is out. In Whelan’s words:
The ECB is flexing its muscles, letting everyone know that are very close to pulling liquidity from Greece.
I want to point out that applying game theory in a negotiation is a tricky business. You have to assume that the sides to the negotiation have a shared mental model (which is the same as that of the analyst, you) of what the game they are playing is. So you can analyze the situation, make a prediction, have the prediction subsequently falsified by events, and yet blame the predictive failure on the many degrees of freedom in setting up the game for your analysis.
I will be sure to follow developments in this arena closely. There ought to be common ground that the sides of the negotiation can find. Whether the tactics Varoufakis and his colleagues have adopted will find the common ground and lead to a good outcome for all sides remains to be seen. I am not going on a limb to make predictions.
Acemoglu and Robinson on Piketty
Kevin Bryan posted about a new paper by Daron Acemoglu and James Robinson that is a response to Piketty’s much-ballyhooed book on Capitalism. The post is very well done and I have downloaded the paper from the link supplied there, to read when the rush to get ready for the fall semester is past.
Reacting to “Finding Equilibrium” by Till Düppe and E. Roy Weintraub
Another title for this post could be “Why people who talk about general equilibrium theory should always mention the Arrow-Debreu-McKenzie model, without omitting McKenzie”.
Prompted by a post by Joshua Gans, which I saw first on Google+, I recently bought the book Finding Equilibrium, as on the title of this post. The book contains an insightful discussion of the problem of assigning scientific credit in economics, as the book’s subtitle makes clear: Arrow, Debreu, McKenzie and the Problem of Scientific Credit. I finished the book today. It was published by Princeton University Press very recently, in 2014.
The authors continue an old project of the more senior of the two, Weintraub, that dates from the early 1980s. It has to do with why the Arrow-Debreu paper on the existence of general equilibrium gets more airtime in economic theory circles than McKenzie’s paper, even though the latter was submitted to Econometrica and published a bit earlier than the former.
I must disclose here that Lionel McKenzie was a member of my doctoral dissertation committee. I defended my dissertation at the University of Rochester in 1988 to earn my Ph.D. Furthermore, the professor responsible for my applying (and being accepted, I am sure) to the graduate program in economics at Rochester, Emmanuel Drandakis, was the second person to receive a Rochester Ph.D. in economics after McKenzie created the economics department and graduate program there in the late 1950s. Thus, I was immersed in the story of McKenzie’s unfair treatment in not receiving a Nobel Prize, unlike Arrow and Debreu. The story was “in the air” at Rochester, but I did not hear McKenzie himself talk about it, to the best of my recollection. This accords with my memory of McKenzie as a perfect gentleman; in the book I am talking about here, he is described as “classy” by one of the economists quoted there.
I enjoyed the book and read it in a couple of days, even as it came in the middle of a week that started with some worries in my personal life. It gave me the idea of writing a paper about the now ignored general equilibrium approach as it, I think, should be revived in conjunction with extensions to make it properly include collective goods and externalities (an approach that should proceed with techniques not only limited to the axiom-and-proof ones that were the hallmark of the emergence of general equilibrium in the 1950s). I have worked in this area before, myself, so I may have something new of interest to say by revisiting it. However, I did not want to wait to post here until I wrote a paper; that would mean quite a long wait!
Apart from the inclusion of some jargon from the sociology of science and (naturally) from economics, the book is very well written for a general audience. It flows well and is very instructive. The authors make the best of the fact that their topic allows them, by its very nature, to tell it as a story of people and their interactions. Readers always want stories (as we must remember every time we have to teach abstract ideas in the classroom).
As someone who is well versed in general equilibrium theory (although I’ve been neglecting it lately), I found the exposition of the theory’s inception in the book well done. Furthermore, it gave me a few perspectives and some context I did not already have. If I were to teach general equilibrium again, I would be sure to assign parts of this book to complement the rather dry and scary (for students) mathematics that dominate the theory.
Gans’s post that led me to this book concluded that, of the three main protagonists, Debreu emerges in the most unfavorable light. That is indeed my impression and it comes from documentary evidence of his behavior as a referee of McKenzie’s paper for Econometrica and also vis-a-vis his own co-author, Kenneth Arrow, from whom he kept secret his knowledge that McKenzie was already working on his own paper on pretty much the same topic. By contrast, McKenzie emerges clearly as the wronged party and Arrow as quite generous in giving credit to scholars who preceded him.
So, for the very few of you who say “Arrow-Debreu”, please do remember to say “Arrow-Debreu-McKenzie” when talking about general equilibrium theory.
[Edited 2014-09-29 to correct some infelicities in my use of English.]
RIP Gary Becker
Gary Becker, winner of the Nobel prize for economics in 1992, died on Saturday. There have appeared several obituaries and appreciations. I want to pay tribute to him by linking to three very good ones.
The first was written by Justin Wolfers in the Upshot. Wolfers explains well Becker’s influence on all the social sciences.
The second was written by Steven Levitt in the Freakonomics blog. The remarkable story of how Becker stepped in, unasked, to teach Levitt’s courses for some weeks when Levitt’s son died suddenly, stands out for me.
Finally, Kevin Bryan wrote a good appreciation of Becker’s influence in his blog, A Fine Theorem.
My own take is that, while Becker extended the homo economicus approach forcefully and with a recognition of the limitations that prevent any decision maker from being “perfectly rational”, he relied too much on methodological individualism, which may yet turn out to be the Achilles heel of the entire enterprise of economics. The way I see it, a very big step forward for economics has not yet been taken. This step would keep some aspect of methodological individualism while seriously, and tractably, incorporating the influence that people have on others’ preferences. De gustibus est disputandum. Until I make a contribution of some importance in this direction, however, I must simply tip my virtual hat to Becker’s fertile mind and his prodigious and influential output. If I ever make a contribution, then I will want to acknowledge that it was motivated, partly, by grappling with Becker’s ideas (on this, see the first link above, too).
On the 2014 Clark medal
I just want to give a quick notice to the award of the 2014 Clark medal to Matthew Gentzkow. Here is a quick mention by Tyler Cowen and a longer and very informative post on A Fine Theorem by Kevin Bryan.
Author thinks he has the key to revolutionizing economics
Blood circulation and economics?
The Economist’s latest issue has a review of Money, Blood and Revolution: How Darwin and the doctor of King Charles I could turn economics into a science, by George Cooper. The review intrigued me enough to take the morning of my last weekday of Spring Break and devote it to purchasing the Kindle version of the book and reading the crucial chapters. These are the chapters where Cooper discusses his view of economics and what ails it and then proposes a new conceptual framework for economics
I am disappointed. I spent my time investigating this book because I agree that economics needs change. I also liked that the author does not simply complain that economics needs changing, but has a proposal to make. However, the proposal was disappointingly vague. I started suspecting it would be so before I reached the proposal: the review does mention that economists would be unlikely to pay attention to it because it is not presented precisely enough, but, also, the description of economics that Cooper offers before coming to his proposal shows clearly that he does not know enough of the field he is criticizing.
To give an example of the gaps in Cooper’s knowledge, he says in section 7.3 that
The problem for mainstream economic theory is that the experimental evidence suggests that the way we choose to arrange our societies has enormous influence on how our economies actually work. However, there is simply no coherent way to integrate this observation into the neoclassical paradigm…
Really? Cooper does not seem to be aware of mechanism design theory, or its offspring that is making tremendous strides lately, market design. There is a lot riding on his usage of “coherent”, without which his ignorance of these fields would be utterly condemning of his diagnosis here.
A little later in the same section, Cooper complains that
Given the empirical evidence, it is unscientific not to at least consider whether democracy and government play a role in the promotion of economic growth.
Really? I have to exclaim again. Cooper has apparently not heard of the work of Acemoglu and Robinson, not to mention a legion of other mainstream economists who have examined exactly this question. Oh yes, and let’s throw in all of modern institutional economics, to boot. Cooper has a lot to learn, it appears.
Here is one more piece of evidence on the partial nature of Cooper’s knowledge of economics, as revealed in this book. In the entirety of section 7.5 he conflates all of mainstream economics with DSGE (dynamic stochastic general equilibrium) models. These models are indeed used in mainstream macroeconomics, but they are not the entirety of mainstream macroeconomics and of course macroeconomics is not ALL of economics.
And what about Cooper’s discussion in section 8.1 of competition, in the Darwinian sense, as opposed to individual maximization as in microeconomic theory. Methinks someone ought to show Robert Frank’s works to Cooper, not to mention the entire evolutionary game theory literature.
So, do I care for the proposal for reform that Cooper advances? I would, if he had told me how to formulate a model or two of the economy. He does not do so in this book. Instead, he gives a vague story about a flow that resembles (at least in Cooper’s mind) the circulation of blood in a body (hence the title of the book and the heading of this post). This flow is created by the social mobility that democracy enables, Cooper says. Yet, it is not clear what flows here, although I suspect it is money. Cooper does talk about income inequality in this connection. I suspect more serious thinkers, concerned with income inequality and the nature of contemporary economists (as am I), may be able yet to build on the vague suggestions of Cooper. Maybe Thomas Piketty, now that he has finished the labor of his upcoming (in English) magnum opus (which I am eager to read when it arrives in my Kindle in a few days). Maybe an economist well-versed in political economy, Acemoglu-style, can bring Cooper’s project to fruition. Maybe someone else. It seems certain to me, though, that, by giving us nothing precise to build on, Cooper has not advanced his self-professed goal to make economics more scientific.
Cooper is diagnosing the sickness of economics without having examined all parts of the patient, and it’s as though he’s showing us a bottle of colored liquid that supposedly has the needed medicine, but he does not explain the medicine’s formulation or how it is going to improve what he thinks is the entirety of the economic theory patient. If the medicine is ever made and administered and gets to improve some part of economics, I will be glad. But it would take someone with the theoretical chops needed to do the job that Cooper has only started. And the medicine may prove to be sugared water.
Improving scientific software
For open-source software used heavily in the sciences, there is a problem with giving the proper incentives and recognition to developers. A recent article in SIAM News called Quo Vadis, Scientific Software correctly points out the main problem with current practice.
Current practice involves researchers who use scientific software reinventing the wheel very frequently. As the authors of the article point out, if you try to publish a paper in a journal of mathematics and claim some theorems in your paper, you will not be allowed to omit the proofs. Yet, we often see such things as a paper that uses some mathematical software but does not include the code written for the calculations included in the paper.
I have always insisted that the graduate students whom I advise include any simulation code they wrote and used in the appendix of their dissertations. More people need to do this.
From the problem of not sharing code readily in scientific work there also follows the problem of researchers reinventing the wheel. You may know of a paper that did a simulation you would like to do but don’t know the code for the simulation, so you have to write your own to do something very similar. The article points out some efforts to build open-source libraries of code already written by practicing scientists who use computation in their work but also mentions a related problem: there is no established system for contributors to such libraries to receive professional credit. This problem reduces the incentive for a young scholar to contribute good code to a library that could benefit the entire scientific community.
It seems to me there is a strong argument in favor of solving the credit-giving problem and stopping the current inefficient practice surrounding scientific software. The linked article concludes with some eminently sensible proposed solutions. I highly recommend it.
On the useful work many economists do
Noah Smith has a good article on the useful parts of economics, mostly microeconomics and its offshoots. He highlights specifically the usefulness of expertise in game theory, statistics, financial economics, and policy analysis based on microeconomic analysis.
As I am gearing up to teach an intermediate microeconomics course for the first time in several years, it caught my attention and I will be sharing it with my students before the first class. The article is at the link below:
http://theweek.com/article/index/255013/why-economics-gets-a-bad-rap
Test post for the new integration with Google+
WordPress released JetPack 2.7 today, which lets WordPress blogs auto-publish to Google+ profiles and pages (finally). This is a test post. Expect more posts from this, my long underused economics-focused blog, to show up on my Google+ stream soon.
The curious incident of DD on the Web 