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Divine intuitions in economics September 5, 2007

Posted by Sharath Rao in economics, intellectual.

From a profile of Robert Barro, the most cited economist of all time, I extract this bit quite unrelated to Barro himself :

During the 1960s, belief in government’s ability to do so was at an all-time high, bolstered by what appeared to be a stable statistical relationship known as the Phillips curve. The experience of the 1960s suggested that the government could put people in jobs (reduce the unemployment rate) simply by printing more money (raising the inflation rate). In the jargon of economists, the Phillips curve seemed to imply that monetary policy could have real effects.  To conservative economists such as Milton Friedman, the Phillips curve made no sense: it seemed to suggest that a government could achieve something real—create jobs—by doing something that was fairly costless—printing money. It was as though one could make people taller merely by measuring them with a ruler marked in centimeters rather than inches.

Reminds me of answers from undergrad studies to questions like – Could you connect a motor and generator together such that motor rotates the shaft of the generator which produces electricity that runs the motor ?  Answer of course is that you can’t because there are losses in form of heat/sound and some external energy has to come in to account for those losses.

And even if you do manage to bring in that external energy, then what ?  What is the point of such an arrangement which cannot generate any energy that is not already used in generating it. 🙂  [ Elec-geek DK may want to add something to this, or correct me where I might be inaccurate.  ]


Staying on intuitive beauty of some economic explanation that apply elsewhere in life, here is something more :

It assumes that, absent mistakes and misdeeds, we might remain in a permanent paradise of powerful income and wealth growth. The reality, I think, is that the economy follows its own Catch-22: By taking prosperity for granted, people perversely subvert prosperity. The more we — business managers, investors, consumers — think that economic growth is guaranteed and that risk and uncertainty are receding, the more we act in ways that raise risk, magnify uncertainty and threaten economic growth. Prosperity destabilizes itself.  This is not a new idea. Indeed, it explains why terms such as “the business cycle” and “boom and bust” survive.

Yeah, we all know about the market leader/class topper which/who was too good for its/her/his own good.

Sometimes there are neither virtuous cycles nor vicious ones, there are just natural ones 😀 .  I don’t deny there are nuances, ifs and buts out there, but core idea does not change.




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