Fellow economists, we’re mostly to blame for this mess

Brexit, Trump. We built the world that let extremism thrive
This is on us

This is on us

Dear world, on behalf of economists I offer an apology. More than anything or anyone else, we are responsible for the clusterfuck that has been 2016.

Since the 1980s we said that inequality didn’t matter. That working and middle class people would be fine if their incomes didn’t worsen even as those in the top 10% (and especially 1%) saw their own income and wealth skyrocket to levels not seen since the Gilded Age. We did not see that people did not view their lot in absolute but in relative terms. We expected them to accept our logic, and acted dumbfounded when they didn’t express gratitude for the few tiny drops of prosperity that trickled down. We never imagined that they’d be rightfully pissed. Then we blamed them for living beyond their means to catch up with the Joneses, for being irresponsible for maxing their credit cards and taking out mortgages on houses they couldn’t afford. We never saw inequality as a psychological problem as much as an economic one.

We called anyone who disagreed a socialist.

Around that same time, we said that free markets were a panacea for growth. True, many countries did benefit heavily from globalization and certainly those countries that did not follow certain basic rules of market logic have fared terribly (Venezuela being a case in point). But globalization was not a panacea for the working and middle classes of the developed world. In our smugness, we said that the lost jobs either to China, Mexico, or technology were a necessary evil for continued productivity growth. We acted like it was their fault that they did not have the skills needed for the new economy, and that it was nobody’s responsibility to find them those skills either. In the dog eat dog world of neoliberal economics there are losers, and we could afford not to be those losers becomes economists are still not being outsourced to India or replaced by robots so we had little empathy for those who were less lucky. We applauded that unemployment fell and didn’t care that it was because people lost stable, salaried jobs and became self-employed with zero benefits. We cared more about the Dow Jones than the Gini index.

We called anyone who disagreed a socialist.

We also assumed that everyone was rational. We even had a name for this species of humanity that always took decisions based on all available information, weighed all options, and picked the one that maximized their utility: homo economicus. Since we thought psychology, sociology, and all the other social sciences were inferior disciplines because they could not prove their hypotheses with econometrics, so we never bothered to accept their insights into human behavior. The result is that we thought markets were self-correcting, industries were self-regulated, and markets punished those who took decisions against the public interest. We saw the “irrational exuberance” of the dot-com bubble and then did nothing when a bigger bubble, the subprime housing bubble, sprung up almost immediately after the first one popped.

We called anyone who disagreed a socialist.

And finally, we assumed we had all the answers. We took the view of Noble laureate Robert Lucas that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades”. This was just five years before the global financial crisis. We also poisoned the minds of politicians, who adopted our elegant yet simplistic neoclassical view of how the world worked. We flooded bookstores with titles like Freakonomics and The Economic Naturalist: How Economics Explains Everything to educate the masses on why we knew better. We were conceited, arrogant, and frankly, fucking annoying.

We called anyone who disagreed a socialist.

Then on June 23rd we wondered how the British could be so stupid as to want to leave the EU. On November 8th we were even more perplexed on how Americans could be dumb enough to vote for someone like Trump. From our little intellectual ivory towers, the framework in which we understood the world was perfectly fine. We didn’t get that we didn’t get it.

And now with the twin shocks of a global crisis in 2008-09 and a political crisis in 2016, our world has been shattered. Probably irremediably. But we don’t know it yet. This will still be blamed on people (deplorable as they may be), rather than the structures that conditioned them to be that way. And we’ll be scratching our heads into oblivion by failing to understand why a laid off steelworker from Pennsylvania or miner from Yorkshire won’t be voting with rapturous joy for the man or woman who promises free trade agreements, minority rights, and open immigration in place of the only thing that really matters to them: dignity.

(The author wishes to note that he has stood against everything that has been criticized in this piece since his days as an undergrad. And if you think he is a socialist, well, you’re pretty much the type of person he wrote this for)

The economics of Mad Max

All societies need an economy, even post-apocalyptic ones
There are markets, even in the Wasteland

There are markets, even in the Wasteland

I am not exaggerating when I say that Mad Max: Fury Road is possibly one of the best movies I have seen in my adult life. The high-octane adrenaline-fueled frenzy of non-stop car chase action would be spectacular in itself; that it is also makes emotional, political and philosophical statements in its two amazing hours absolutely shatters the idea that action movies are necessarily mindless and superficial. Its overt feminist undertones have been well documented, and like all the previous Mad Max movies delivers a powerful message about humanity and redemption. What more can you ask for in a summer blockbuster?

Could Mad Max also be a sublime statement on economics? One of the key elements of any dystopian/post-apocalyptic film is that it has to be somewhat believable, and for this to be achieved, there needs to be a realistic depiction of the way society arranges its economic exchanges. After watching Fury Road and then re-watching the original trilogy, it has struck me that each film has a progressively complex economic structure that could well be a coincidence. But with George Miller coincidences rarely exist and perhaps the old man has put even deeper meaning into the franchise that most people have thought.

Here’s an analysis of the economics of each Mad Max film. Continue reading

2014: The year it sucked to be a right-wing economist

Still think inequality is a good thing in the post-Piketty world?
Comment ça se dit, "slap in the face"?

Comment ça se dit, “slap in the face”?

Are you believer in the free market fundamentalist school of economic theory? If you are, then 2014 must have been a crap year. The main reason was the publication in English on what has now turned to be one of the seminal works of economics of our generation: Thomas Piketty’s Capital in the Twenty-First Century. Let’s understand the magnitude of this. A French economist, yes French, wrote a 700-page monolith of a tome in one of the most mind-numbingly boring subjects known to humankind and turned it into a New York Times bestseller. Presumably many of the thousands of people who bought Piketty’s book probably have never bought, much less read, an economics book in their lifetime. Maybe they didn’t even read it from start to finish (this blogger must confess, he has neither bought it nor read it) but, hey, it’s the thought that counts.

L’enfant terrible of economics

I cannot emphasize enough the he’s French bit. If there’s any country whose economic intelligentsia has been vilified by the Ivy League-bred doges of the economics profession, it is France. Yes, there’s a handful of world-renowned French economists like former IMF chief economist Oliver Blanchard and this year’s Nobel Laureate Jean Tirole, but for the most part these have comfortably fit into the “system”, and only challenged it at the margins, if at all. Certainty none of them has launched the kind of broadside that Piketty did in Capital, a book which uncovers free market capitalism’s ugly face: that of a system which naturally gravitates towards the accumulation of wealth by the owners of capital. Rather than see the two most recent periods of massive rises in global inequality (the so-called “guilded ages” before the 1929 and 2008 crashes) as oddities, Piketty has painted them as the baseline: the social-democratic golden age in the post-WW2 decades is in fact, a one-off, in which the trauma of war forced Western governments to redistribute wealth to a degree that had never been done before or since. Continue reading

The madness of Black Friday

It's not an Americanism. It's the inequality, stupid
UK or US? Can't tell the difference

Could be either side of the Atlantic

There are few things as ‘Merican than apple pie… and the mayhem known as Black Friday. On this day, which just happens to be the day after families are reunited for a homely turkey dinner during the celebration known as Thanksgiving, we see the spirit of kindness and sharing break down into an orgiastic shopping fury for the bargain of the year. Time after time we see the videos showing a complete breakdown of society as soon as the doors to Walmart and Best Buy open at the stroke of midnight, in what could easily be filmed as a sequence for The Walking Dead or some other zombie apocalypse movie. Decent Americans hang their head in shame at the sight of this insanity being showcased to the rest of the world, while foreigners look with a sense of smug relief: hey, we may not be a global superpower, but at least we’re not that pathetic!

Well, except Britain.

Replace Walmart with Tesco or ASDA, replace the name of any mid-western hick town for any chavy London suburb and you pretty much have an exact replica of the US’s singularly most awful cultural peculiarity. Don’t believe me? Just watch this. There were screams. There was tussling. There were fistfights. There were arrests. If there was a final exam for aspiring to US statehood, Britain passed it last week with flying colors (err, colours). Continue reading

A foreigner’s view on Scottish independence

Not that anyone in Scotland should give a damn about it...

I’m not British so in theory there is no reason why I should be bothering giving an opinion on whether a foreign country splits into two or not. To my benefit, I am completely unbiased and ambivalent about the matter, not least because my own country (Mexico) thankfully does not have a simmering secessionist movement. On one hand, I sympathize with the desire of many Scots to see their country independent; they are, after all a distinct ethnicity and some of them (particularly the Glaswegian sort) speak in a language that at least to these Mexican ears sounds completely unlike English. On the other hand, I truly wonder whether the differences between Scots and Englishmen are truly irreconcilable, and that separation is the only solution to this 300 year Union which, to be fair, has mostly worked out quite well for both sides: England has benefited enormously from Scottish ingenuity and industriousness while Scotland has profited from its attachment to a former imperial power, which to this day remains one of the world’s largest, richest and most sophisticated economies.

I don’t have a particularly structured idea of how to proceed with this piece so I’ll just dish out some of my thoughts on the matter at random.

Passport checks at Hadrian's Wall?

Passport checks at Hadrian’s Wall?

The economic argument is pure fearmongering. The No campaign is fundamentally based on the economic arguments and these in turn, are based on fear. Fear that a newly independent Scotland will collapse like a deck of cards amid all the unanswered questions over its economic viability. What currency will it adopt? Will it turn into a fiscal disaster? How ill oil revenues be shared? How many companies will end up relocating? These are not questions to be taken lightly. But although Scotland’s economic problems are real, they are not at all insurmountable. Certainly the economic argument has not stopped any other recently independent country from taking the plunge, despite most of these countries having a fraction of the government efficiency and institutional strength that Scotland would boast. I mean seriously, if East Timor and Kosovo can pull it off, it is absolutely ludicrous to think that Scotland can’t, especially considering that this is a country with no shortage of capable economists, bureaucrats and thinkers. These people invented modern economics, for fuck’s sake. Continue reading

Freedom from dogmas

Economics needs to throw some ideas into the dustbin of history
Time to read a different textbook

Time to read a different textbook

I have already ranted before about how I feel the meaning of democracy has been lost in the modern era but I feel even more needs to get off my chest. For the past three decades we have lived in a world that has essentially bastardized the idea that government is “for the people” and that it involves the “rule of the many”. Much of it has to do with the economization of politics; in other words, policies that result in economically efficient outcomes or that promote freedom of choice are necessarily those that deepen democracy. Even at the height of the financial crisis in 2008, George W. Bush summarized this belief best: “If you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free market system is the way to go.” How deep this belief was ingrained in mainstream thought that one of his advisers and also one of the most cited economists of our day, Gregory Mankiw, echoed these sentiments almost to the letter: “Free markets remain the best way to promote growth, create good jobs, and ensure rising living standards”.

For those of us who fortunately did not get brainwashed by free market fundamentalism, the unraveling of the Reagan-Thatcher consensus after the 2008-09 crisis has become an intellectual vindication served on a silver platter. Unfortunately, despite the overwhelming evidence that macroeconomic policymaking since the 1980s has been counterproductive to growth, we’re still far away from obtaining a consensus in believing that it has also fundamentally destroyed the way that democratic societies function. Why? Because too much of the population and too much of academia still believes in certain nonsense dogmas that have been passed on through generations of teachers and students, mentors and apprentices. Like a religion, there is an overwhelming sense of guilt at abandoning these dogmas; not least because in a society that frowns upon error (especially in academia), admitting you’ve been wrong all along is a one-way ticket to professional disgrace. Continue reading

Bursting the bubble: the math behind the housing crisis solution

I said bursting the bubble would be easier than it looks, it looks like it is
It's a bird, no it's a plane, no it's the price

It’s a bird, no it’s a plane, no it’s the price

In the last post I promised a more rigorous mathematical analysis of my housing market solution for the UK. After some serious Excel number crunching (what better proof of my economics geekiness that I find this an enjoyable exercise in my free time), I have come up with the following model which can be tweaked to demonstrate how certain scenarios can play out. Now, as I mentioned in my previous post, this solution is highly theoretical and in fact, my assumptions may prove to be unworkable in practice. However, I think that despite its simplicity, the fundamental logic behind the model is sound, not least because it demonstrates just how easy the fix would be and by extension, just how the present housing crisis is a political construction with no other objective than to make a certain home-owning class wealthy(er) at the expense of the taxpayer.

The model is an attempt to calculate how many houses can be built per year up to 2030 depending on certain criteria, such as the percentage of GDP that the government can spend on housing, the extra revenues from increasing the top rates of council taxes, and the savings obtained through a reduction of housing benefits (yes, I know, this has now been scrapped in favor of a universal credit, but a proportion of this will still be dedicated to housing so it’s still a de facto cost). The theory behind this all is in the previous post. Additionally, the share of private construction relative to GDP can also be tweaked, as can the estimated cost of a single house which I have put as £125,000 as a baseline for 2012 and adjusted on the basis of consumer inflation up to 2013 (and pre-dated as well so we can crudely estimate the share of GDP spent on housebuilding). On this basis, I have developed a pair of potential scenarios to show how the solution would work out in practice. Continue reading

Bursting the bubble: a structural rule for housing

A simple plan for bringing UK housing prices to sustainable levels
Not for the feint of heart, or shallow pocket

Not for the feint of heart, or shallow pocket

The unstoppable rise in house prices over the past decade or two has been, along with stagnant real incomes, the most important contributor to the decline in prosperity and well-being among the middle classes in Western countries. The sheer level of absurdity of house prices in cities like London and New York simply beggars belief, and has forced residents to either dish out a larger share of their incomes on rents and mortgage payments, or accept compromises such as shared accommodation, distance, or simply bad quality housing. Worse still is that the housing markets in some of these global cities appear to defy economic logic, rising even when their national economies stagnate. And it’s not just the big “alpha cities” that are feeling the pinch: cities in Canada, Australia and Brazil among many other cities in both the developed and the emerging world have also seen meteoric rises in prices over the last two decades.

Understanding London’s urban crisis

London is perhaps the most representative city of the modern housing bubble for various reasons. It is one of the few unquestionable alpha cities, as well as being the economic and political center of the nation. This alone has created tremendous demand for housing that in recent years has been most strongly felt from abroad (particularly for more high-end real estate). Despite this, the city is constrained in its capacity to build high and afar: in the former case, due to height-restrictions in many central parts of the city and in the latter case, by the Green Belt which sets an outer limit for the extent of urban sprawl. Lastly, the city is unique among those of its size in the sheer amount of single-family housing available in its central area. In contrast to cities like New York or Paris, where most living space in the central area is composed of multi-family apartment blocks or high-rises, entire neighborhoods in Central London are formed of neat terraced houses that give the city its unique Victorian and Georgian flair. Continue reading

The Efficient Market Hypothesis and its toxic fallout

The framework for understanding financial markets has always been flawed

The Economics Nobel has always been somewhat of an oddity compared to its more illustrious (or should I say, less dismal) counterparts in the natural sciences, literature and peace. First and foremost, it really isn’t a true Nobel Prize: it is awarded by the Swedish Central Bank in memory of Albert Nobel, for Mr Nobel himself didn’t see the need to give an economist such grand an accolade. But more curiously, it is the one prize in which two people can be awarded the prize for saying the exact opposite thing since economics, by its virtue of a social science, is essentially never right (and as more than one economist would like to think, never wrong either). This happened early in the prize’s history when Gunnar Myrdal, one of the foremost social-democratic thinkers of his time, shared it in 1974 with none other than F. A. von Hayek, the intellectual godfather of the Austrian school of free-market loving economists. Fast forward to 2013 and history has repeated itself, this time even more blatantly by giving it to Eugene Fama who authored the Efficient Market Hypothesis, and Robert J. Shiller who has spent his academic career destroying it.

Eugene Fama created a monster, and got the Nobel in return

Eugene Fama created a monster, and got the Nobel in return

Perhaps all that the Nobel Committee wanted was to stir some controversy. It has after all, given the Nobel Peace Prize to President Barack Obama because he wasn’t George W. Bush, even if he ended up conducting an even more intense drone strike campaign than Dubya himself. It also gave it to the European Union for not annihilating itself, since that has been the norm in Europe since the collapse of the Roman Empire. This year’s dubious recipient seemed to be yet again the Peace Prize, awarded the Organization for the Prohibition of Chemical Weapons, probably because giving it to Vladimir Putin directly would have been even too appalling for the fellows in Oslo. Yet in my view, giving Eugene Fama the Economics Nobel came nearly as bad. I will certainly not deny that the Efficient Markets Hypothesis has been one of the basic frameworks upon which financial economics has rested since Fama’s seminal 1970’s paper that formalized it. Yet at the same time, it may well have been one of the biggest intellectual frauds ever imposed on (and by) the economics profession. Continue reading

How Ronald Coase can get you laid

Transaction costs may be the reason you're striking out with the opposite sex

Economics has much to teach us, as it is a discipline that transcends the boundaries of its traditional domains, offering its dazzling insights to people of vastly different professions. At least that’s what I used to tell girls. Ronald Coase, the Nobel-prize winning economist who recently passed away at the tender age of 102, may well have been a hit with the ladies during his day if he had applied his new institutionalist theories to the art of seduction. Believe it or not, there is much scope for adapting his intellectual legacies into answering the most important question of a young red-blooded man’s life: why do I keep failing miserably when I hit on girls in a night club?

Economist. Ladies man.

Economist. Nobel laureate. Ladies man.

Transaction costs explained

Coase may not have come up with the idea of transaction costs, but he was the first to offer a rigorous framework for its understanding. A transaction cost is essentially the cost of undertaking an economic exchange, one that is necessary to correct any market imperfection arising from that exchange. Bottled water is a fine example of this. How do you know that the water you are drinking actually comes from some natural spring in the Swiss Alps or is actually nothing but recycled toilet water? Most of us do not have a personal chemistry lab in our basement to test the purity of the water we consume; we must simply assume that the contents of the bottle are what the producer says they are. And the producer has all the incentive to cut down his costs by lying to us. Of course, consumers are smart enough to doubt the producer’s claims and will therefore not buy the bottle of water at all, thereby making such a market impossible to sustain. Continue reading