12 Articles Every Aspiring Economist Should Read | Steven Horwitz

Here are 12 important articles to help you understand sound economics, ideally before you head off to grad school in economics.

Note: Coase, Hayek, McCloskey, Alchian, Buchanan, Friedman, Lucas

Source: 12 Articles Every Aspiring Economist Should Read | Steven Horwitz

HW Assignment, due October 6, 2015

Please turn in, by email, answers to the following questions in Pointers No. 8:

Ch. 12: Nos. 1, 2, 4, 5, and 6.

Ch. 14 on Austrian economics.

Epilogue: No. 2

In addition, please answer briefly the question: What have I personally learned from EC 12?

EC 12. Pointers No. 8

FAQs on Chs. 10-14, and Epilogue of Backhouse

Ch. 10:

1. What is Keynesian economics?

2. What is the role of ‘animal spirits’ in Keynesian economics? [Try to research what Robert Shiller has written about animal spirits.]

3. Who put forward the idea that would later be called the Keynesian multiplier? Explain this idea.
4. Before Keynes came along, what were the most prominent theories of the business cycle?

5. How did Irving Fisher think of the interest rate?

Ch. 11:

1. What are the most important ideas in general equilibrium theory? What’s wrong with it?

2. What is game theory? Is it a good alternative to general equilibrium theory? Why or why not?

3. How is equilibrium defined in game theory? What is a Nash equilibrium?

Ch. 12:

1. What is “welfare economics”?

2. What is Pareto optimality?

3. What is Kenneth Arrow’s “Impossibility Theorem”?

4. How did Backhouse assess the contribution of welfare economics to economic thought?

5. What is “market failure”?

6. Explain the Coase Theorem.

Ch. 13:

1. What is the main difference between the ideas in Keynesian economics and the so-called New Classical Macroeconomics?

2. What are the main theories of economic growth in ‘development economics’? What is the ‘Washington Consensus’? Would the Washington Consensus be applicable or relevant to the Philippines? Why or why not?

3. What did Hyman Minsky contribute to economics? (extra credit: not in Backhouse)

Ch. 14:

What is Austrian economics? Summarize the ideas of Austrian economics. Who are the main figures of Austrian economics? Is Austrian economics useful for understanding the Philippine economy?

Other topics (not in Backhouse):

What is the Tragedy of the Commons? Explain.

Epilogue:

1. What is the so-called “neoclassical synthesis”?
2. Discuss and compare the two different ideas of competition in economics? (The first is the competition as imagined and written about by Adam Smith and Friedrich Hayek; the other is competition in the sense of perfect competition in neoclassical economics.)

EC12. Pointers No. 7

FAQs on Chs. 8-9 of Backhouse – History and Theory in Europe, American Economics to 1939

1. How does Schumpeter’s view of the business cycle differ from that of Marx? Extra credit (the answer is not in Backhouse): Can either view be used to predict or forecast the business cycle?

2. Explain Schumpeter’s idea of “creative destruction.” [Hint: Try a source other than Backhouse.]

3. Explain Walras’ idea of tatonnement.

4. Carl Menger proposed two doctrines that eventually became the foundations of Austrian economics. What are these doctrines?

5. What is the foundation of Marshall’s economics? Discuss the time periods he applied to market transactions.

6. State the theory of income distribution proposed by John Bates Clark?

7. How did Clark view the effect of technological innovation on an economy?

8. What term did Veblen use for “habits of thought”?

9. Who coined the term “neoclassical”? What does it mean?

10. Who contributed the theory of monopolistic competition? What does this theory say?

11. Schumpeter disagreed with Karl Marx on how capitalism would break down. How did these two economists differ? [Note: Refer to the chapter on classical political economy for Marx’s views on capitalism.]

EC 12. Pointers No. 6

FAQ on Backhouse, Ch. 7 – Classical Political Economy

1. Backhouse states that Adam Smith’s work was essentially “moral philosophy,” and not economics as the modern textbooks would have it. How did Backhouse define moral philosophy?

2. Backhouse characterized political economy as having a “scientific” character. What did he mean by the “scientific character”?

3. Backhouse states that Thomas Malthus and the followers of Jeremy Bentham were Whigs. Who or what were the Whigs? What did they stand for? (Note: The answer is in standard dictionaries).

4. In Malthus’s theory of population, what are the three events that could contain or limit the growth of population? Which of these three is the most important, and why? Relate this issue to present-day problems of the Philippines.

5. What was the defining theme of Ricardian economics?

6. What are the two key propositions of Ricardian economics? On what three basic arguments or “pillars” did David Ricardo rely?

7. What is the Iron Law of Wages that is attributed to David Ricardo?

8. Say’s Law states that supply creates demand. Explain.

9. How did J. S. Mill distinguish socialism from communism?

10. List at least three situations wherein, in Mill’s view, the doctrine of laissez-faire will not work. Why would laissez-faire not work?

11. How did Marx explain the “low” wages of workers?

12. What did Marx see as the main driving force that produces the business cycle of expansion-crisis-recession?

What is PPP?

It’s not purchasing power parity, a theory used to explain exchange rates.  But PPP was once called the BOT scheme.  So says the Philippine News Agency:

MANILA, Sept. 13 (PNA) — President Benigno Aquino III has issued an executive order reorganizing the Build-Operate-Transfer Center in fresh efforts to accelerate the financing, construction and operation of key government infrastructure projects through public-private partnership.

In issuing Executive Order No. 8, the President renamed the Build-Operate-Transfer (BOT) Center to Public-Private Partnership (PPP) Center of the Philippines, whose functions will now be supervised by the National Economic and Development Authority. The BOT Center was previously under the wings of the Department of Trade and Industry.

“There is a need to fast-track the implementation of the Public-Private Partnership programs and projects as a cornerstone strategy of the national development to accelerate the infrastructure development of the country and sustain economic growth,” President Aquino said in his State of the Nation Address last July.

But this looks very much like “industrial policy,” code for government taking a role in choosing potential “winners.” The Austrian School would say, as did some sober thinking economists, that we cannot really know beforehand which industries or sectors will be winners.  Who will pay the price for mistakes?

Of course, if you don’t like who’s in power, you would call it “cronyism.”  So, which is it?

Perhaps it’s neither industrial policy nor cronyism.  Perhaps it’s just another form of trickle-down economics except that big business wants to “play it safe.”  This is an insight from cartoon characters, Frank and Ernest.

UPDATE:

Here’s an explanation of PPPs by Cielito Habito.  His solution to the potential rent-seeking problems: “Let’s make sure all PPP projects are transparent and properly evaluated…” How do you do that?  For starters, we should have a working Freedom of Information process, as I suggest in the comments thread.  All PPPs should be required to have websites where they promise to give the public information to which they are entitled, even if the Freedom of Information bill has not yet been enacted into law.

After all, partners under the law are entitled to equal access to information relevant to the business.  And if government is a partner, it acts as an agent of the people, who should likewise have access to information.

The Holy Grail of investments – Part 2

In an earlier post, I outlined the conventional wisdom on what drives the business cycle, and how stock and bond markets react to the cycle.

What if the stock market can by itself induce the business cycle?  In this case, the conventional wisdom no longer holds.  The business cycle now depends on stock market sentiment, and the stock markets will have lives of their own.  Stock markets could be spooked by the same animal spirits that Keynes claimed would drive the business cycle.