Youtube Collection Vol. 2

Fragments from some of my favourite movies...

Chungking Express
'On every flight, there's a stewardess you want to seduce. This time last year, at 25000 feet, I seduced one.'




Swallowtail Butterfly
'Once upon a time, when the Yen was the most powerful force in the world...the city overflowed with immigrants, like a gold rush boom town.'





Lost in Translation
'The more you know who you are and what you want, the less you let things upset you.'





Hot Fuzz
'Seen any murderings, Nicholarse?'





Hana and Alice
'What's your philosophy at 15?'




Infernal Affairs
'Sorry...I'm a cop.'

Defence is the Last Thing the Dismal Science Needs Right Now

After publishing a parade of articles branding economics as useless for most practical purposes, the Economist finally got a rebuttal out of Robert Lucas. I think he took the hint that the complaint was mainly aimed at Chicago macro rather than macro proper (although the difference between the two can be more or less clear-cut, depending on where you are taught). Lucas said:

One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September. This is nothing new. It has been known for more than 40 years and is one of the main implications of Eugene Fama’s “efficient-market hypothesis” (EMH), which states that the price of a financial asset reflects all relevant, generally available information. If an economist had a formula that could reliably forecast crises a week in advance, say, then that formula would become part of generally available information and prices would fall a week earlier...

The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.

Now that conclusion sounds pretty dark, even for a dark age. I still struggle to understand the argument though. Prof Lucas's contention is that if there exists a tool that can correctly forecast recession/crisis, then there cannot be a crisis in the first place (the price would have fallen earlier). Hence, proof by contradiction...the fact that Lehman does happen and will happen again, must imply that such a tool cannot exist, ever.

There lies the Achilles heal of the argument. Must Lehman happen again? If there was a tool predicting its calamity, its price would have dropped before Sep 2008. Foreseeing this, Lehman probably would have avoided buying toxic securities. The originators seeing no profit, would have been more careful making subprime loans. And the crisis would never happen. The EMH, conditional on the economists delivering a good set of tool in detecting the eventual crisis, would imply no crisis. And that's what we want!

Whilst private businesses are very good at making money for themselves, they are not too preoccupied with the bigger picture of how their interactions could lead to systemic demise for everyone. After all, that is the job of the economists! To concede that if the market doesn't see it, it is hopeless for economists to work on it, is irresponsible and would indeed push the profession deeper into the dark territory.

Economists' Raison D'etre

At a November visit to the LSE the Queen asked Luis Garicano, an LSE expert on economics and management: “Why did no one see it [the crisis] coming?”

All the Fellows of British Academy who were economists felt compelled to reply. Tim Besley and others thus wrote a letter to the Queen, the essence of which said

Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well. The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction. This, combined with the psychology of herding and the mantra of financial and policy gurus, lead to a dangerous recipe. Individual risks may rightly have been viewed as small, but the risk to the system as a whole was vast.

So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

Failure of collective imagination! ... lucky for us all the engineers don't have the same problem, or we'll end up with lots of beautiful nuts and bolts that don't quite fit each other.

Samuel Brittan, who's among the FBAs that signed the letter, observed...

It is fruitful to enquire who economists are and what they actually do. This was attempted by the Royal Economic Society in a survey summarised by Ruth Towse and Mark Blaug in an Economic Journal article in March 1990. They came up against the problem that, in contrast to, say, engineers or accountants, “there is no precise way to define the economics profession”. They settled for “someone with at least a second degree in economics” (which thankfully lets me off the hook). Only 8 per cent of economics undergraduates went on to higher degrees but “this has never been allowed to undermine the perception of most academic teachers” that “all their pupils must be trained as if they were going to be professional economists”.

On this definition they estimated that in the UK there were then 3,500 practising economists of whom 2,500 were academics, 600 in private business and 400 in the government. The high salaries paid to some City economists were “atypical”. My own observation is that their repute declined so much after events such as the UK’s forced departure from the exchange rate mechanism in 1992 that some practitioners redefined themselves as “strategists”.

For original articles, check out

• 'What is the point of economics?' @ FT
• Tim Besley's letter to the Queen also @FT