The 2013 Winners for the most recent Nobel Prize in Economics were three men. Two for Chicago and one from Yale. All three with an equally valid claim to one of Economics' most acclaimed prizes. Robert Shiller, Eugene Fama and Lars Peter Hansen, two of which gain significant media attention for their vastly contradicting views on how markets work. One an advocate for efficient markets, Fama, and one strongly against, all the while leaving Lars Peter Hansen behind.
Born 1952, Hansen is the David Rockerfeller Distinguished Service Professor at the University of Chicago, and was awarded his prize for his Generalized Method of Moments (GMM) and is in truth a journalists worst nightmare, with even the great John Cassidy, former editor for the Sunday Times, saying 'Hansen's...contributions are above my pay grade'. But nevertheless I am going to soldier on and attempt to provide my own analysis of his work. Hansen's work revolves around dealing with imperfect and incomplete data, so one can do something without having everything, after all it's impossible to create a perfectly complete and coherent model for an economy or a market, which is why Hansen's GMM is so use full. His method allows and economist to study elements and connections both in and between market, in a statistically valid way withn few assumptions, which economists like, and so too it seems other disciplines, which too use the GMM, showing the true applications of Hansen's groundbreaking GMM.
Hopefully, despite not being very deep, nor through, your understanding of Hansen's complicated, yet vital GMM has increased so you now possess at least a basic understanding of what this great man contributed to economics.
Thursday 13 February 2014
Saturday 25 January 2014
What Caused The Great Depression?
With most of the financial world talking of the 2008 recession, some forget that but 100 years previous there was one equally, if not more devastating, than the one we have just witnessed. In this article I hope to share with you just some of the things that caused The Great Depression, to see who was at fault for such a disastrous period of history.
The first and in my opinion most important cause of The Great Depression was the 1929 Stock Market Crash. Fuelled by speculation and the promise of untold riches for any and all, everyone had to have a slice of the insanely high profits being racked up by Wall Street traders, so people began buying left, right and centre and why shouldn't they, World War I was over and wealth was spreading around the country, people were happy. Stock prices rocketed and almost overnight the whole nation had become experts in trading, backed up by the assurance, from economist Irving Fisher, that the economy had reached 'a permanently high plateau'. Proof of this universal expertise, came when Bernard Baruch, 'The Lone Wolf of Wall Street' was having his shoes' shined and one of the shiners gave him a stock market tip. Immediately he went to his broker and told him to sell out, as when shoeshiners are giving stock market tips things have gone too far, he was right. 23rd October 1929, the first waves of panicky selling came and the market plunged, with $10 billion wiped out in but two hours of trading and except for a slight rebound due to a large investment from a group of bankers it kept falling. 29th October 1929, Black Tuesday, 16 million shares were traded, a record not beaten until 1969, 40 years on. People simply wanted out, causing the prices to fall, causing more to want out, causing prices to fall further still, sending the market into somewhat of a bottomless free-fall. Life savings gone in a day. People were broke, spreading dismay and fear across the country. The first sign of the horrors to come.
The second reason for such a disaster was, similar to the recent recession, was a failure of banks, but unlike the 2008 recession, people lost everything including deposits in their accounts, but as you might expect this wasn't the only negative effect from the failure of the banking system, it also lead to the surviving banks be more apprehensive about leading, somewhat similar to the 2008 recession.
The final and equally important reason for The Great Depression was the USA's economic policy to reduce imports with high taxes, which in my opinion anyway, is ludicrous. Who will it benefit? Some producers maybe, but the average American? Definitely not! What really needed to happen was to reduce tax on imports, making goods for the average consumer cheaper, leaving them with more money left over to save or spend on other things, rather than making them pay more for 'home grown goods'
The first and in my opinion most important cause of The Great Depression was the 1929 Stock Market Crash. Fuelled by speculation and the promise of untold riches for any and all, everyone had to have a slice of the insanely high profits being racked up by Wall Street traders, so people began buying left, right and centre and why shouldn't they, World War I was over and wealth was spreading around the country, people were happy. Stock prices rocketed and almost overnight the whole nation had become experts in trading, backed up by the assurance, from economist Irving Fisher, that the economy had reached 'a permanently high plateau'. Proof of this universal expertise, came when Bernard Baruch, 'The Lone Wolf of Wall Street' was having his shoes' shined and one of the shiners gave him a stock market tip. Immediately he went to his broker and told him to sell out, as when shoeshiners are giving stock market tips things have gone too far, he was right. 23rd October 1929, the first waves of panicky selling came and the market plunged, with $10 billion wiped out in but two hours of trading and except for a slight rebound due to a large investment from a group of bankers it kept falling. 29th October 1929, Black Tuesday, 16 million shares were traded, a record not beaten until 1969, 40 years on. People simply wanted out, causing the prices to fall, causing more to want out, causing prices to fall further still, sending the market into somewhat of a bottomless free-fall. Life savings gone in a day. People were broke, spreading dismay and fear across the country. The first sign of the horrors to come.
The second reason for such a disaster was, similar to the recent recession, was a failure of banks, but unlike the 2008 recession, people lost everything including deposits in their accounts, but as you might expect this wasn't the only negative effect from the failure of the banking system, it also lead to the surviving banks be more apprehensive about leading, somewhat similar to the 2008 recession.
The final and equally important reason for The Great Depression was the USA's economic policy to reduce imports with high taxes, which in my opinion anyway, is ludicrous. Who will it benefit? Some producers maybe, but the average American? Definitely not! What really needed to happen was to reduce tax on imports, making goods for the average consumer cheaper, leaving them with more money left over to save or spend on other things, rather than making them pay more for 'home grown goods'
Sunday 12 January 2014
The Undercover Economist
First of all, I would like to apologise to those of you who were wanting the next instalment of 'The Undercover Economist' chapter by chapter series. This apology comes because I became so ingrossed in the book that I read it in the next sitting. However, today I am going to review the entire book, and give you my final read or no read verdict.
The Undercover Economist attempts and succeeds in making the subject of economics accessible to the masses, by explaining rather complex matters in but a couple of chapters. However, when reading The Undercover Economist, I found the first few chapters a bit hard to 'get into' and to be honest, slightly dull and basic, but this might just be me cocky and thinking I know everything. Yet once you get past the basics of supply and demand, you are quickly whisked away into a bubble of easy to understand, acutually difficult economics, without even realising it by using anecdotes left, right and centre to ease concepts into your brain. An example of this is Game Theory, which is in reality a very hard, very large branch of economics, yet Harford is somehow able to feed it to you in such a way that is neither tedious nor boring, but still leaves you wanting to find out more, from what was an impecable introduction of the basics of Game Theory.
Overall The Undercover Economist is to any budding new economists a must read, explorer many new concepts, which will give you a strong grounding to begin your economics journey.
The Undercover Economist attempts and succeeds in making the subject of economics accessible to the masses, by explaining rather complex matters in but a couple of chapters. However, when reading The Undercover Economist, I found the first few chapters a bit hard to 'get into' and to be honest, slightly dull and basic, but this might just be me cocky and thinking I know everything. Yet once you get past the basics of supply and demand, you are quickly whisked away into a bubble of easy to understand, acutually difficult economics, without even realising it by using anecdotes left, right and centre to ease concepts into your brain. An example of this is Game Theory, which is in reality a very hard, very large branch of economics, yet Harford is somehow able to feed it to you in such a way that is neither tedious nor boring, but still leaves you wanting to find out more, from what was an impecable introduction of the basics of Game Theory.
Overall The Undercover Economist is to any budding new economists a must read, explorer many new concepts, which will give you a strong grounding to begin your economics journey.
Monday 30 December 2013
The Undercover Economist - Part 1, Who Pays for Your Coffee?
The Undercover Economist is a book by Tim Harford explaining to people the basic economic forces behind our everyday activities and actions. However, today is not the day that I shall be reviewing and giving an overview on the book as a whole. Instead, today, and in the coming few weeks I am going to look at each individual chapter and look at what it has to offer us as budding economists.
Who Pays For Your Coffee?
The first chapter of a book is, in my opinion, the most important. It is the one that first draws the reader in an pushes them to read on, further and deeper. 'Who Pays For Your Coffee?' does this perfectly, giving us a great insight into a the typical economists everyday thoughts and mindset and covers the basic economics needed to understand what this book is about.
The first economic idea introduced to us is that of scarcity and how he who is in possession of a scarce resource is in power. This idea is portrayed to us by the use of an economist's favourite device, a model. The model used comes from a multimillionaire stockbroker turned economist, David Ricardo, and is one of farmers, land and landowners, which develops from the farmer having the scarce resource of his money, to a situation of the landowners owning the scarce resource, the land. This simple model explaining the economic principle of scarcity allows Harford, somewhat seamlessly, to move the reader on to a second important economic principle, margins, thus covering two major economic points quickly and written in a way so that even for non-economists it is understandable.
Next Harford, reverts the topic back to coffee shops showing how these economic principles can be related to real life situations and the fact that Harford was able to do this so easily expresses to the reader a convenient truth, the power of economics. He quickly reveals to the reader how what they have just read about how scarcity and margins relate to coffee shops comes from a model from 1817, showing us how economics really is everywhere.
Who Pays For Your Coffee?
The first chapter of a book is, in my opinion, the most important. It is the one that first draws the reader in an pushes them to read on, further and deeper. 'Who Pays For Your Coffee?' does this perfectly, giving us a great insight into a the typical economists everyday thoughts and mindset and covers the basic economics needed to understand what this book is about.
The first economic idea introduced to us is that of scarcity and how he who is in possession of a scarce resource is in power. This idea is portrayed to us by the use of an economist's favourite device, a model. The model used comes from a multimillionaire stockbroker turned economist, David Ricardo, and is one of farmers, land and landowners, which develops from the farmer having the scarce resource of his money, to a situation of the landowners owning the scarce resource, the land. This simple model explaining the economic principle of scarcity allows Harford, somewhat seamlessly, to move the reader on to a second important economic principle, margins, thus covering two major economic points quickly and written in a way so that even for non-economists it is understandable.
Next Harford, reverts the topic back to coffee shops showing how these economic principles can be related to real life situations and the fact that Harford was able to do this so easily expresses to the reader a convenient truth, the power of economics. He quickly reveals to the reader how what they have just read about how scarcity and margins relate to coffee shops comes from a model from 1817, showing us how economics really is everywhere.
Friday 27 December 2013
Freakonomics
Just read Freakonomics by Steven Levitt and Stephen Dubner. Wow. What a book, it really opens your mind about connections in life and how to not just assume the obvious.
Levitt, an accomplished economist, graduating from both Harvard and MIT, and Dubner, a journalist, who has previously worked at places such as The New York Times Magazine, explore the riddles of everyday life that seem to be overlooked by the 'common man', such as 'which is more dangerous, a gun or a swimming pool?' , coming up with explanations that are completely logical, yet seem to leave you turning conventional wisdom on its head.
My favourite explanation comes from almost the very start of the book, why did crime rates in Chicago suddenly drop at the start of the 1990s, when almost everyone was predicting them to go incompletely the opposite direction? Well from Levitt and Dubner's impeccable logic, they explain to us how it was not the commonly thought idea of an unbelievably good police department, instead it was due to the fact that abortion had been made legal a couple of decades earlier, a conclusion neither myself or I suspect many other would reach.
In conclusion, Freakonomics is a book not just for economists and economic students, but anyone wanting a good read to open their mind to abstract thinking and to the old economic principle of how incentives work.
Levitt, an accomplished economist, graduating from both Harvard and MIT, and Dubner, a journalist, who has previously worked at places such as The New York Times Magazine, explore the riddles of everyday life that seem to be overlooked by the 'common man', such as 'which is more dangerous, a gun or a swimming pool?' , coming up with explanations that are completely logical, yet seem to leave you turning conventional wisdom on its head.
My favourite explanation comes from almost the very start of the book, why did crime rates in Chicago suddenly drop at the start of the 1990s, when almost everyone was predicting them to go incompletely the opposite direction? Well from Levitt and Dubner's impeccable logic, they explain to us how it was not the commonly thought idea of an unbelievably good police department, instead it was due to the fact that abortion had been made legal a couple of decades earlier, a conclusion neither myself or I suspect many other would reach.
In conclusion, Freakonomics is a book not just for economists and economic students, but anyone wanting a good read to open their mind to abstract thinking and to the old economic principle of how incentives work.
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