Marginal Revolution

New MR book club - Keynes's *General Theory*

Greg Mankiw wrote:

If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront.

I will go through the book, chapter by chapter, with an eye toward a deeper understanding of what Keynes wrote and why it is, as Greg says, so important.  I'm not yet sure what kind of pace I can maintain but order your copy here, now.  The Kindle version is only $3.96.  We'll do chapters 1 and 2 by next Monday, eight days from now.

The Cassandra Hunt

Kevin Drum comments, here is Brad DeLong, and Matt Yglesias, and Arnold Kling; they make good points all around.  There aren't nearly as many Cassandras as you think, once you require more of a person than "having called" the housing bubble.  A simple question is what financial stocks a person had shorted as of, say, November 2007, or for that matter July 2007, and no "my wife wouldn't let me" is not an adequate comeback.  And if you're afraid of an unhedged position or margin call just buy some puts.

I plead fully guilty to not having been a Cassandra.  Oddly, I published an entire book in the late 1990s -- Risk and Business Cycles(cheaper on Kindle)  -- on how excess risk and correlated errors could cause an economy to explode; I'll tell you more about that soon.   But if anything when it came to running commentary (on this blog, most of all) I was an anti-Cassandra.  First, I was too influenced by the relatively mild housing bubble collapse of the late 1980s.  Second, I did not understand how much fragility the extant degree of leverage implied.

Cassandra's gift was in fact the source of continual pain and frustration.  That's one reason why not so many people are Cassandras.

Fischer Black insisted in the mid-90s that the law of large numbers did not apply to individual economic forecasts of sectoral shifts and thus such errors could not be expected to "cancel out" in the aggregate.  Not so many people believed him and in retrospect the failure of people to take Black seriously on this point is further evidence that the point is indeed correct in many situations.

Addendum: The end of this Kevin Drum post nails it.

Law and Literature reading list, Spring 2009

The Five Books of Moses, edited and translated by Robert Alter.

Billy Budd and Other Tales, by Hermann Melville.

The Metamorphosis, In the Penal Colony, and Other Stories, by Franz Kafka.

Smilla’s Sense of Snow, by Peter Hoeg.

The Art of Political Murder: Who Killed the Bishop? By Francisco Goldman.

In the Belly of the Beast, by Jack Henry Abbott.

Borges and the Eternal Orangutans, by Fernando Verrissimo.

Glaspell’s Trifles, available on-line.

Great Short Works of Leo Tolstoy, by Leo Tolstoy.

Sherlock Holmes, The Complete Novels and Stories, Sir Arthur Conan Doyle, volume 1.

Out: A Novel, by Natsuo Kirino.

I, Robot, by Isaac Asimov.

Moby Dick, by Hermann Melville, excerpts, chapters 89 and 90.

Year’s Best SF 9, edited by David G. Hartwell and Kathryn Cramer.

Pale Fire, Vladimir Nabokov.

Blindness, by Jose Saramago.

We also will view a small number of movies -- most of all Sia -- and perhaps I will add a Henning Mankell novel as well.

Market Design blog

It's new and it's being run by the Nobel-worthy Al Roth of Harvard.  Visit it here.

The need for reliable information

I very much agree with this sentiment of Mark Thoma's:

There has been much debate about whether the financial crisis is driven by lack of liquidity or from fears about lack of adequate capital and solvency, but I'm starting to think a third component is important as well, the complete breakdown of traditional information flows, and a loss of confidence in the models used to evaluate that information. Markets need information to work properly, and the information financial markets need is not available.

Here is more.  I do not wish to suggest that we abolish currency and T-Bills, but the deeper (and less stable) the private demand for these assets the harder it is to generate socially useful information from the trade in other assets.  Maybe today we're in a world where the 1980 Grossman-Stiglitz paradox of information partly holds.  It's not that the status quo price is already efficient, but rather no one gathering information feels they could benefit from swapping with the noise traders and so in turn not enough information is gathered.

Fiscal policy poll

What are the times in history -- whether in the U.S. or elsewhere -- when a large-scale application of expansionary fiscal policy has been effective in raising a country out of a recession or depression?

I've already discussed World War II and the United States, so whether or not you agree with me there is no need to mention that episode again.  I'm not (yet) looking for a debate rather I am conducting an opinion poll.  Over the next few weeks or months I hope to investigate some of the cases you mention and see what is the verdict of history.

Assorted links

1. Good French meals: not in France

2. Color pies of movies

3. Markets in everything: a tunnel complex in central London

4. Video of giant squid

5. Paul Krugman: What to Do

6. Amity Shlaes on the Depression

No way would I go bungee jumping

Peter, a loyal MR reader, ran text from this blog through some kind of on-line Myers-Briggs contraption and came up with the following (under the fold)...

INTJ - The Scientists

The long-range thinking and individualistic type. They are especially good at looking at almost anything and figuring out a way of improving it - often with a highly creative and imaginative touch. They are intellectually curious and daring, but might be physically hesitant to try new things.

The Scientists enjoy theoretical work that allows them to use their strong minds and bold creativity. Since they tend to be so abstract and theoretical in their communication they often have a problem communicating their visions to other people and need to learn patience and use concrete examples. Since they are extremely good at concentrating they often have no trouble working alone.

Analysis
This show what parts of the brain that were dominant during writing.

The analyzer is here.

One very bad economic indicator

A Wal-Mart employee in suburban New York died after he was trampled by a crush of shoppers who tore down the front doors and thronged into the store early Friday morning, turning the annual rite of post-Thanksgiving bargain hunting into a Hobbesian frenzy.

Here is the story.

Questions that are rarely asked

Richard Green writes to me:

If the likes of Hitchcock and others could turn works that were mediocre in literature into great films, I wonder what mediocre films could have been great literature.

The point is not to come up with a list (though some of you will) but rather to ponder what we can learn about literature as a medium.  He continues:

...literature adapted from films is almost (and this is a hedge because my experience says invariably) hack work, rushed and held in the lowest regard...Is it because literature is the elder medium, and has a higher status which would prevent condescension to recognising a prior from another medium? Is it because creation is more personal to a individual writer than the inevitable collaboration of film, and so they are loath to allow others' work in?

Movies need (at least) a plot and a script and that can be taken from a book, with results of varying quality of course.  But I do not have an equal understanding of which factor of production is scarce to writing a good novel.  Do professional writers benefit more from showing originality in creating a world and also creating a language?  There is plenty of fan fiction based on Star Trek and the like but few professional writers take this same tack.

A simple default hypothesis is that movies are more powerful and more real than books.  So a movie based on a book won't necessarily be overwhelmed by its source but a book based on a movie will be.  Of course there are many books adapted from oral tales so maybe it is the addition of the pictures that is so overwhelming.  I know only a few books adapted from paintings, most notably Gert Hofmann's excellent Der Blindensturz.