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April 27, 2014

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From Arse To Elbow

Or, to put it another way, the current problem of economics is political, not technical.

ed

I'm confused by this.

Isn't it valuable to allow someone who has built a business to sell it? This is true even if the new owners ("shareholders") don't add any value themselves.

chris

@ Ed - yes. I suspect a big virtue of the stock market is that it incentivizes entrepreneurship by offering owners a way of selling their business, often at an inflated price.

Metatone

One subtlety at work here is investment criteria for pension funds, insurance companies etc.

This has meant that there are classes of assets where prices and returns are linked to demography as much as anything else.

Demography of the post-WW2 era was a growing (working age) population and so asset classes that fit the criteria grew. (e.g. FTSE?)

Perhaps along the way we got to a point that for firms that are in the right asset class are not finance constrained?

rogerh

Diminishing returns? The world is stuffed with big TV sets, washing machines, Ipads etc. They are all very good and pretty cheap, anyone who wants one and lives in a semi-capable country can buy one. The rich consumers seem sated and harder to sell to so less profits. So the question is to make even flashier products (and have them copied in a trice) or sell into new markets (and face barriers and lower profits) hence diminishing returns.

Perhaps the idea that the entire world can lounge around developing 'apps' whilst sipping skinny lattes will not come true after all.

Ben

Sorry for hijacking but I guess this would be a good place to ask for help. I enjoy reading blogs like these and have read some applied economics on the recent crisis such as Stiglitz, Krugman etc. However, I am ready to tackle some more technical economics and would appreciate some advice.

Is Keynes/Marx/neoclassical a reasonable triad that forms the basis of the field? Or would I be better reading original texts from these people and Smith/Ricardo. etc

Christiaan Hofman

In a sense, economics is always about scarcity. In this case its just not resources but rather scarcity of investment opportunities, or scarcity of demand. So the core question is not whether it's scarcity, but what is scarce at the moment. The answer to that question should also determine what type of policy is needed, and what type of model should be used. Because when different things are scarce, different mechanisms become important and others become irrelevant, and this must be reflected in the models (because models can never be complex enough to cover all cases.) Essentially, the model should be driven by whatever is scarce, not by what's abundant. That's also why Keynesian models are more relevant today and during the Great Depression. And that's why the free market models fail, because they are driven by what's abundant today. Oh, and I could and a lot about your subversion of justice.

Thornton Hall

You wrote:
"Most interesting facts in the social sciences are local and particular."

If this is true, and I think it is, why (to this untrained eye) would anyone think that mathematical models would be useful in a social science?

There have been debates in the econoblogosphere about the value of models, but to the untrained eye these debates resemble nothing so much as continental philosophy, i.e., brilliant abstract reasoning that had no reference to the corporeal world.

Kaleberg

We've been awash in capital since the 1970s. Surely I'm not the only one to remember all the inflation back then. Every one had all sorts of money to invest. The resolution to the crisis was to take the money from the smaller investors and give it to the larger ones. This led to a declining return on investment overall and stagnant living standards.

From Arse To Elbow

@Thornton Hall, because abstraction to the plane of pure maths allows policy-makers to ignore the social ramifications of policy.

Just as the most pervasive ideology is the one that thinks it is "common sense", so the most pernicious politics is the strain that considers itself to be apolitical.

joe

As an engineering educated businessman I find it strange that business strategy decisions are classed as having much to do with economics. We have to deal with reality. There may be economics input but there will be dozens of other inputs with competing and complex issues.

rogerh has nailed it. Since increased globalisation and computerisation there has been a rapid reduction in things that are viable to invest in. Undercutting, patent law costs, lack of consumer spend, counterfeiting, in-out EU, Scotland leaving, mafia states who don't pay for goods and services etc etc.

The irony of UK stuffed with "vital" investment banks who will not invest a penny in a new idea but willingly lend $B's to failing states who will struggle to pay the interest let alone the original loan.
UK having to go to China to fund a single but highly needed nuclear power plant that had such a poor investment case that the payback had to be Government guaranteed and inflated over 2 decades.

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