On the never-ending journey that leads to sound personal convictions

Malcolm Gladwell is often remembered for one key idea: the 10,000 hour rule (as mentioned in his 2008 non-fiction book Outliers).

Gladwell insists on the validity behind the idea, that to become an expert, in basically anything, one must (taking into account some "x" level of aptitude) put in 10,000 hours of practice...which roughly equals 10 years time. The interesting premise here is that, to become an expert, one does not necessarily have to be a genius.

In reading up on Gunner Myrdal, and Friedrich von Hayek, the 1974 Nobel Prize in Economic winners I have yet to profile, I realized: these men obviously exceeded the ten year quota required to excel in their field. Their professional careers in academia, politics, and as part of their country's intelligentsia community translated into far more than 10,000 hours of dedication to the economic research, application and theory-building needed for the breakthroughs that led to their nobel prize wins. Their work was a product for a lifetime, having built on other economist's own 10,000 hours.

The common (yet very extraordinary) denominator between these Nobel Prize winners (and their equally gifted contemporaries) is the clarity in their ideas, convictions and beliefs. 

The winners' prize lectures archived in the nobelprize.org website denote an acute understanding of the world, as if these winners knew exactly what their place on earth meant, and what their work needed to reflect, so as to be valued as truly model citizens. It's baffling to read such clear ideas and strong feelings. It's overwhelming at times, and very exciting to know what their findings meant to them, before their ideas and applications began to mean so much more to the societies, institutions, governments, economies and businesses that benefited indirectly and directly from the work derived therefrom. 

I sometimes mention what this blog is supposed to do, and what it's supposed to mean, but the reality is that both those things are in a constant state of flux. What does persist, though, is the never-ending search for a deeper truth; one related towards making sense of the way the world functions, and how to strive that same functioning towards continual improvement. 

What's beautiful about concentrating on how economists came about it, is that, economists don't just limit themselves to the established ideas in their field: economists pick and take what works in other realms (psychology, philosophy, sociology, mathematics, politics, etc...) and apply it to the problems that we faced yesterday, face today and will face tomorrow.

All this makes for sound convictions. Naturally.

This man clearly had strong convictions.

From The Economist: Techs-Mex

Slowly, but surely, Mexico is catching up with the rest of the world's start-up scene.

I wish I could fast-forward my nobel prize in economics series to start learning about the origins of entrepreneurial economics, and the men/women that shaped this school of thought.

I've recently read up on Schumpeter, specifically about the term and concept he coined, that has become synonymous with innovation: creative destruction.

A quick and inspired Google search (keywords: entrepreneurism in Mexico) led to an interesting result: 

Read: "Mexico's growth will come from entrepreneurship..."

I believe Mexico's and other similar countries' growth will come from entrepreneurship.

Better yet, to have this growth be a product of the virtuous circle that results from inclusive political (checks on power from those that govern) and economic (freedom to compete in a fairer market) institutions would be most momentous.

Sustainable growth. 

Just as is the case with other countries, we have yet to catch up.

We (us) must do it right.

This is what this blog has been meant to pursue: the search for an interesting, objective formula that leads to sustainable economic growth.

The Economist - Mexico's new movers and shakers

Sound the trumpets, the activists are coming.

Source: The Economist

Blogs do make a difference! Brace yourself, Piketty.

The age of blogs and open communication has helped everyone have a potential voice. Barriers to entry are low. Amateur and not so amateur Journalists, filmmakers, entrepreneurs, and economists now abound. 

Case in point:

MIT PhD student (Matt Rognlie) takes on Piketty.

He superbly points out 3 mistakes - read on. 

To Matt my fellow MIT alums, I say:

Paul Krugman and his appreciation for macroeconomic analysis

It seems that digging up previous economic theoretical/analytical breakthroughs via Nobel Prize in Economic profiles isn't all for naught:

My John Hicks/Kenneth Arrow executive summary profile was particularly instructional for me. Turns out that this is also the case for others. Their brilliant work was recently referenced by Mr. Paul Krugman.

Say that again?

As recently as two days ago, Paul Krugman made a macroeconomic analysis (John Hicks take ) reference in his New York Times blog.

Krugman cited Hick's take on the general equilibrium theory (specifically - discussing the way Hicks transformed the theory into a practical tool - and how his take on it plays into measuring an equilibrium between a national economy's commodity-based supply and demand...given, let's say - interest rate fluctuations and other dynamic variables that can be thrown into the mix...as neatly presented via Hicks' IS-LM model).

The more I learn about past influential economists like Hicks, the more I understand how valuable economists' take on how economies function really is. 

Economists have been shedding light on how the world works, in very different ways: financially, sociologically, behaviorally, even philosophically.

An economist isn't responsible for having things work out a certain way. There's always too much at stake, and the outcome tied to random, non-linear variables is not only difficult to measure, but also impossible to predict. 

Still, economists help us understand the economic ghost in the machine that makes this complex world function.

For now, macroeconomic analysis has turned out to be pretty spot on.

Hear, hear!

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1973

Source

1973 Nobel Prize in Economics winner Wassily Leontief - a brilliant mind who linked a profound cause-and-effect theory to a broader economic context, achieving practical value and extending useful economic research and theoretical work academics and public/private enterprise have greatly profited from, all the while keeping it simple. 

His development of the input-output method and analysis led to impactful economic theory applications throughout the the 20th century. His work provided a clearer way of determining the interrelationships between the theoretical "y" inputs required to provide a desired/required "x" output. Meaning, linking the interdependence between inputs required to oil the machinery behind industrial sectors to produce a particular output, which, itself is an input to another industry (ex: how commodities are used to produce other commodities, and so forth). In a broader context, this analysis also naturally applies to local/regional/national/international economies and their respective sectors.

So, what lies behind the economic machine or system?

This is what perplexed and fascinated Leontief. 

As explained and very aptly redacted by MIT professor and prominent input-output economics  Karen Polenske, in the collection of reflections and perspectives on input-output economics "Wassily Leontief and Input-Output Economics" (edited by Dietzenbacher and Lahr), Leontief gravitated towards combining empirical and theoretical analysis to address economic issues. 

Having identified the possible pitfalls with depending solely on theory (confirmation bias, or, zeroing in on the input-output model itself, maybe more profound issues with the mechanical approximations derived from depending on fixed coefficients) and empirical approaches, Leontief insisted on theory going through the required testing grounds of empirical observation, and having empirical observations themselves necessarily tied down to theory. It is important to remember that Leontief was part of a generation of economists where this back and forth between theory and empirical approaches was a contentious issue. Still, what issue isn't contentious in economics?

So, how does the real world work?

This question forces the researcher to understand that theorizing and waxing lyrical about the economic machine's cogs and sprockets, and focusing on what tinkering with these moving parts could or could not churn out, was not solely determined through advanced mathematical modeling (taking the second half of the 20th century's economics scene by storm) but by working on data interpretation techniques that emulated real-world functioning. Leontief himself had, in previous decades, been requiring his students to apply mathematical rigor to build better models, but was wary, nonetheless, of having that quantitative approach detach him from more meaningful applications. The input-output model took into account this theory/empirical balance Leontief touted about.

After Leontief's contributions to the input-output technique, questions regarding the economic impact now had answers: scrutiny via simple matrices (very elegantly explained in Leontief's nobel prize lecture) provided them.

Light research on this subject made me realize how Leontief's work was a distant cousin (or some incestuous form of it) to Arrow's own work. Both their work, was somehow fathered, or related to Leon Walras' theories. Walras's focus on reaching equilibrium through the supply-demand relationship, price, preference, and restricting excess demand to 0 (to achieve equilibrium - in theory having fulfilled the required prices levels to have done so) served as a useful backdrop to Leontief's own findings.

Having approached this turned out to be good fun. In all my pseudoeconomist splendor, I hold a strong interest in matrix-led interrelationships and their optimization. My 2012 Master's thesis used the design structure matrix model and tool to describe the linkages between the different phases of a real estate development process. While not exactly, an input-output model, it nonetheless links different factors that pares up inputs and outputs, with the possibility of optimizing results via changes in specific factors.

Simplicity is remarkable when it produces thoughtful results. 

The following video shows and example of the input-output model in action.

Follow-up on "Why nations fail"

So, halfway done with the book "Why nations fail". 

The premise is simple: extractive institutions limit a nation's growth and benefits a few at the expense of many, while inclusive institutions cause the opposite: they foster competition and level the playing field, promoting a meritocracy that results in more a more prosperous nation.

Guns, germs and steel author Jared Diamond and other scientists/economists/academics argue that while authors Acemoglu and Robinson have a point, they're being overtly simplistic and are thus excluding other important factors (like geography, culture, etc).

David Levine, an American economist, and two of his colleagues wrote an interesting review of the book, questioning Acemoglu and Robinson's theories directly: their review presents Germany as a special case - a country that fared both well and badly under extractive (National Socialism during the 30's and 40's) and inclusive (the Weimar Republic) institutions. It turns out that Germany fared particularly well under the Nazi regime, having almost conquered most of Europe during the Third Reich, dominating their neighbors easily via their military force and industrial/economics prowess. 

At the time, it turns out, Germany was also neck-and-neck with other countries in terms of advances in technology, something that contradicts one of Acemoglu and Robinson's hypotheses: that extractive institutions ultimately fail because they don't advance technologically. And no one can deny that Hitler's government was anything but extractive. 

Veering towards an inclusive institution - before Nazi Germany, and after Imperial Germany came the Weimar Republic. Germany's transition to a more democratic state during the early 20th century turned out to be a disaster. Hard to believe, but Germany went through hyperinflation during that time. 

Inclusive institutions, thus, do not automatically provoke its agents to summarily choose or decide to take on the best economic and political policies. 

Meaning: inclusive institutions do not guarantee prosperity.

Extractive institutions, it seems, can advance in the realm of technology, and not necessarily meet an unavoidable dead end. 

Meaning: extractive institutions are not necessarily doomed to fail.

Both inclusive and extractive institutions can thus be good and bad for their nations.

To be fair regarding the Germany Case Study as profiled by Levine et co: the review authors might do well to study Russia and their extractive institutions during the Cold War years. Acemoglu and Robinson do mention how the Russians were advancing at an accelerated rate, during the Soviet era, but point out how that came to an end because of technology. And how even economist Paul Samuelson predicted that the USSR would (or could) overtake the US in economic terms. 

Amidst such contradictions, doubt now pervades in my mind. 

While simplicity, they say, is the seal of truth - in attempting to prove and answer whether inclusive institutions are all a country need to prosper, I'd go with the stereotypical consultant's response: it depends.

But, like so many other theories and hypotheses, it does not necessarily matter, if in the end, the research that led up to the original premise provides thought-provoking theory that effectuates change. 

Change could come from mere consciousness. 

I have found Acemoglu and Robinson's hypotheses about institutions to be a useful base to start from, particularly when thinking about my current perception about what goes (and has gone) on in Mexico. 

James Robinson wrote an apt account about Mexico, under the "Why nations fail" guise. True or not, having described in detail how Mexico's current and past political institutions have shaped the country, and how specific perverse incentives, have led to certain consequences, resonated with me.  

The wise adage holds that those who do not learn from history are bound to repeat it. At the very least, I think that somehow the authors are asking us to do the same (regardless of whether their theories hold water, or hold 100% of the water, as it were).