In the field of the sciences, research and achievements at the cutting edge is often poorly understood by High School (or Junior College) students. Take for example this year’s Nobel Prize for Physics; it was given to physicist Charles Kao, “for groundbreaking achievements concerning the transmission of light in fibers for optical communication” and two other physicist “for the invention of an imaging semiconductor circuit – the CCD sensor”.
Not many of us actually concern ourselves with the workings of the CCD sensor (it’s something found in digital cameras) nor optical communications and I’m sure pre-college education focuses on none of that. Students who are really interested in Physics might not be able to directly draw links between the inventions and discoveries made by the Nobel Laureates and the stuff he reads or study about. The maturity of a subject like Physics almost definitely ensures that stuff studied at the forefront is highly specialized and in some sense, narrow.
On the other hand, economics is more accessible than it appears to be. The Nobel Prize for Economics this year was awarded to economists (Oliver E. Williamson) “for his analysis of economic governance, especially the boundaries of the firm”; and (Elinor Ostrom) “for her analysis of economic governance, especially the commons”. It is interesting to note that both of these economists are studying workings of important economic agencies (or agents) outside the workings of the traditional market mechanisms.
The prize rightly demonstrates a heightened appreciation of economics as a subject to study cost-benefits and incentives rather than one that scrutinizes money. Posner neatly summarizes Williamson’s work and its implications in his entry while Becker discuss the inherent difficulties in real world organizations on Becker-Posner Blog. It should be easy for a JC student with background in economics to realize the link between Williamson’s work and the stuff he/she is studying after reading Posner’s entry. It is the ability to draw this link that reflects how much of a science the study of economics actually is – the basic principles of incentives, cost-benefits analysis all applies even when there might not be the perfect information or perfect rationality in the real world.
The Straits Times caught my attention again the week before with a particular article by Robert Skidelsky, which was a contribution to Project Syndicate. In Keynes versus the Classics: Round 2, Skidelsky highlighted the problem with today’s Keynesians being unwilling to work out the implications of irreducible uncertainty for economic theory. The article was essentially a response to the two economist, Krugman (his article) and Cochrane (his response here and here) who are engaging in an academic quarrel of sorts.
Krugman started out criticising the love for elegant economic theories of classical (implicitly speaking, Chicago school) economists. And Cochrane shot back, arguing that to attribute excessive fluctuations in the market to ‘irrationality’ is theoretical nihilism. And we all know that all that buying and selling has got motivations behind them even if these were results of false information, pure emotional preferences. I like Skidelsky’s analogy about the theater on fire (which might have been used previously by other economists as well):
It’s like what happens in a crowded theater if someone shouts “Fire!” Everyone rushes to get out. This is not “irrational” behavior. It is reasonable behavior in the face of uncertainty.
I’m not sure if Robert Skidelsky is a Post-Keynesian like Hyman Minsky but his extensive research into John M Keynes has brought him to write several volumes about this economist once touted as a saviour of capitalism. In any case, I believe Keynes simply sprinkled some important ideas that are pertinent to our study of the economy and there is definitely a need for further studies into the insights of Keynes about our modern capitalist economy and possible save it from itself once again.
The economy doesn’t (always) tend towards equilibrium as classical economics textbooks suggests. But things are worst when things tend towards an equilibrium that doesn’t benefit the society in general, many social phenomena that I’ve described in a previous post. The social/market forces are pushing the situation towards something no one wants; without an authority mandating stuff, no one have the incentive to help reach the collectively beneficial outcome.
In a recent article by James Surowiecki in The New Yorker, he discusses how success of big banks builds upon success and bring about the mega big banks that results in a concentrated banking system. It is thus possible that we allowed banks to grow big and stay so because the market naturally tends towards that and we have problems assessing the welfare gains from increasing bank sizes, as suggested by Surowiecki:
The trouble is that the “market” for banking is so distorted—by switching costs, by government subsidies and guarantees, and by the banks’ market power—that it’s hard to know whether big banks are adding value or are simply exploiting their oligopolistic positions.
The only problem that we know with the concentrated banking system is that they increase financial risk. That being said, regulations will have to start moving towards managing the risk that is contained in the financial system and if this really do result in policies that have to limit the size of banks then so be it. The government is the only one who can act as a dam holding up the floodwaters of market forces.
I’ll like to take the chance to introduce Knowledge@Wharton, which offers high quality content as well as podcast on economics and business issues of the day. You might like to listen about questions posed on Net Neutrality.
Intellectual Property is becoming an important area of contention that needs to be closely studied by lawyers, economists and governments around the world. Every IP case have deep implications for the general welfare of the society (for important innovations and inventions), the meaning of property and the ways laws can protect them. From Free Exchange Blog at The Economist, I learnt the story of Ralph Anspach’s battle against Parker Brothers, the owners of the world famous Monopoly game.
Professor Ralph invented Anti-Monopoly, a game much like the Monopoly with its principles somewhat reversed where in its original version, players start off with monopolies and try to get to the free market state. In the latest version of the game, players get to choose to be either free-marketters or monopolist. In any case, he spent a lifetime battling Parker Brothers and researching the origins of the true, original Monopoly game (and how the capitalists were indeed true to the principles of the game).
Governments have to engage in design of laws that allows for Intellectual Property rights to be enforced but in a way that allows further innovation so that there are incentives to make improvements to existing innovations or discover mash-ups that utilizes stuff under IP protection. Economists have to consider the balancing of these incentives and how different ways of enforcing IP laws would alter the innovation patterns of the environments governed. Joseph Stiglitz happened to pen some of his musings on this issue on Project Syndicate.
It is interesting to note, as the Free Exchange Blog entry mentioned, that board games are countercyclical products. This is true for comfort foods as well, ranging from chocolates, candies to lollipops and other treats for those with a sweet tooth as mentioned in the recent Fortune Magazine.
Just a couple of updates the field of practical science, Albert Mihranyan from Sweden built a thin lightweight battery from cellulose that holds 1 volt of electricity. It is interesting to note that the battery would then be essentially like a piece of paper and The Economist concludes suggesting how the invention “would represent a neat reversal of the idea that technology will lead inevitably to the paperless office”.
The news of artificial black holes reported both on Popular Science and New Scientist reflects how different the 2 sites/magazines are. While Popular Sciencecovered briefly the scientific aspects of the invention and the potential applications, New Scientist offers details of the theory behind this artificial black holes and the developments building up to this invention.
In the area of environment, I always thought that Global Warming is going to cause more extreme weathers and thus stronger winds but things turned out to be a little different from what was expected.
Anyways, just as an after note for students studying for the A Levels, having enough sleep does contribute to your studies.
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