Thursday, August 6, 2009

A few thoughts from Animal Spirits

After completing the Animal Spirits book I have a few thoughts that I think deserve some discussion. I sustain that the book does not provide a way to model the Animal Spirits as defined by the authors. It does provide a list of topics and questions that macro guys should address soon if it wants to contribute to decisions among policy makers.

There are some interesting examples of how generalization in markets analysis may not be the right path to think of their behavior. The book includes an interesting and revealing example from Keynes.
It goes like this: Assume there is a beauty contest where judges are rewarded if they price contestants as the majority of judges does. With this simple assumption, it is farly straight to conclude that every judge chooses what he thinks every other judge will choose -maybe- instead of his true first preference. The latter illustrates perfectly how the stock market works.

I agree with a statement of Akerlof and Shiller: it is hard to believe that every single day there is an explanation for the recent stock market movements. I think that being a stock market columnist must require a vast stock of creativity, specially in days of many fluctuations.

Another example of "special" markets is a common one in Mexico. Physicians are rarely choose from the yellow pages. They get most of their patients because a satisfied patient recommends his services. Literature books are read not only because of their publicity, but because of some recommendation. So these two markets -physicians and books'- have in common that information is a strong determinant in decisions. This is not new, what is interesting is that prices may not reflect all information there is needed to make a "good choice".

The utility provided by a book -or a physician- can be explained by tastes, but the great supply makes it necessary to ask for a recommendation before making a transaction. So stock markets -books and physicians- may need a different framework to be analyzed.

Another part of the reading that kept me thinking is the efficiency wages theory and its implications in rigidities, it is indeed natural to conclude that this theory explains reality of rich countries. In poor countries the same effect of costly layoffs can be largely explained by unions.

There is another reality that can not be drawn out of the analysis: that is the skills and fairness issues in the problem of determining wages.
The latter is very important in recent tax design literature, and create a major problem arguing in favor of the non-negative slope Phillips curve.

We economist must always have in mind the important difference between normative and positive economics. The former must be the target, but the latter is our reality and must be understood too. If economist can diagnose what is wrong -using normative economics- we should also know how to deal with actual problems -with positive economics.

The book tries to take away the profession from a normative to a positive fashion, but both are essential, Skidelsky goes even further asking for a change in universities' economics programs adding a philosophical background and letting math aside.

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