- Links for 08-05-15
- 'Sarcasm and Science'
- 'The US Financial Sector in the Long-Run: Where are the Economies of Scale?'
Posted: 05 Aug 2015 12:06 AM PDT
Posted: 04 Aug 2015 10:20 AM PDT
On the road again, so just a couple of quick posts. This is Paul Krugman:
Sarcasm and Science: Paul Romer continues his discussion of the wrong turn of freshwater economics, responding in part to my own entry, and makes a surprising suggestion — that Lucas and his followers were driven into their adversarial style by Robert Solow's sarcasm...
Now, it's true that people can get remarkably bent out of shape at the suggestion that they're being silly and foolish. ...
But Romer's account of the great wrong turn still sounds much too contingent to me...
At least as I perceived it then — and remember, I was a grad student as much of this was going on — there were two other big factors.
First, there was a political component. Equilibrium business cycle theory denied that fiscal or monetary policy could play a useful role in managing the economy, and this was a very appealing conclusion on one side of the political spectrum. This surely was a big reason the freshwater school immediately declared total victory over Keynes well before its approach had been properly vetted, and why it could not back down when the vetting actually took place and the doctrine was found wanting.
Second — and this may be less apparent to non-economists — there was the toolkit factor. Lucas-type models introduced a new set of modeling and mathematical tools — tools that required a significant investment of time and effort to learn, but which, once learned, let you impress everyone with your technical proficiency. For those who had made that investment, there was a real incentive to insist that models using those tools, and only models using those tools, were the way to go in all future research. ...
And of course at this point all of these factors have been greatly reinforced by the law of diminishing disciples: Lucas's intellectual grandchildren are utterly unable to consider the possibility that they might be on the wrong track.
Posted: 04 Aug 2015 10:20 AM PDT
And one more before heading out the door. From Tim Taylor:
The US Financial Sector in the Long-Run: Where are the Economies of Scale?: A larger financial sector is clearly correlated with economic development, in the sense that high-income countries around the world have on average larger markets for banks, credit cards, stock and bond markets, and so on compared with lower-income countries. But there are also concerns that the financial sector in high-income countries can grow in ways that end up creating economic instability (as I've discussed here, here, and here). Thomas Philippon provides some basic evidence on the growth of the US financial sector over the past 130 years in "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," publishes in the April 2015 issue of the American Economic Review (105:4, pp. 1408–1438). The AER is not freely available online, but many readers can obtain access through a library subscription.
The orange line measured on the right axis is "intermediated assets," which measures the size of the financial sector as the sum of all debt and equity issued by nonfinancial firms, together with the sum of all household debt, and some other smaller categories. Back in the late 19th century, the US financial sector was roughly equal in size to GDP. By just before the Great Depression, it had risen to almost three times GDP, before sinking back to about 1.5 times GDP. More recently, you can see the financial sector spiking with the boom in real estate markets and stock markets in the mid-2000s at more than 4 times GDP, before dropping slightly. The overall trend is clearly up, but it's also clearly a bumpy ride.
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