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:
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 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:
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!
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.
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).
After a longer-than-expected break, Pseudoeconomics' Nobel Prize in Economics series is back. Article preparation for this series has been a difficult task. The straightforward predetermined path that leads to a proper series post could invariably involve a mix of copy-pasting, sloppy appropriation and smart paraphrasing. I'll do my best to avoid this easier path. I am not beyond falling prey to regurgitating online information, there is no academic authority revising my work after all, but following that path would be somewhat wasteful. And boring. Not to mention painstakingly unoriginal. The series' purpose is to promote research and a general background about how the nobel prizes in question came to be. Attempting to understand the nuts and bolts behind major breakthrough theories and advances in the realm of economics, albeit conceptually, is of tremendous value to an amateur economist. And as such, posts like these belong in a website dedicated to an opinion-based take on economics and related subjects. Having cleared that up, let us begin:
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1972 was awarded jointly to John R. Hicks and Kenneth J. Arrow "for their pioneering contributions to general economic equilibrium theory and welfare theory" To appreciate what John Hicks and Kenneth Arrow were celebrated for, it became fundamental to first brush up on the general economic equilibrium theory. A first glance at the theory quickly leads to Leon Walras, who first pioneered the concept. A pattern emerges amongst those who came to pioneer (Walras) and then revolutionize (Hicks and Arrow) the theory: they were all mathematicians first, economists second. Walras was influenced by his father, Auguste Walras, who pushed him to apply mathematics to economic theories. Leon Walras' subsequent findings, were a product of beauty, as complemented by Antoine Augustin Cournot, French mathematician and Auguste Walras' teacher (possibly mentor) who laid the early foundations for econometrics and published influential work on monopolies and duopolies. John Hicks touched on what the general equilibrium theory had not built on, mainly additional assumptions regarding consumers (demand) and producers (supply) behavior. More than complementing the theory, what Hicks did was to fortify it. He nurtured it by "spreading the word" via his book Value and Capital, with fellow contemporary economists, giving the theory a new audience, who, by then (1930's - 1940's) were developing alternate theories that would fit in nicely with his. Hicks also formalized comparative statics in the book, which has become second nature to any Economics student. Ceteris paribus notwithstanding, comparative statics is a nifty tool that helps understand how endogenous or exogenous factors affect an equilibrium. On that same line, it comes as no surprise that most of Hicks' work opened up the possibility for others to take what had previously been put forth (by, for example, school-of-thought defining economists like Keynes) and tinker with the different formulas, provoking thought and new questions. Application became primordial. It was as if a non-digestible ultra-nutritional food was suddenly synthesized to an easy to eat meal. Not only that, as time went by, good taste would become part of the deal too. The general economic equilibrium theory can get complex, in terms of the dynamism it takes on when taking into account how a supply-and-demand equilibrium can be affected by price (most notably), time, consumer choices, the production function, facing simultaneously the complications that arise from marginalism, and other factors. Hick's nobel prize lecture sheds light on what he had been thinking when he approached the general equilibrium theory, and the factors that distort it. The production function, he says, is affected by invention. Of course! Isn't that obvious? Not in the least. But, going back to the most primary part of the general equilibrium theory - it is widely understood that good's prices, above all, affect other good's prices, and so forth, until an equilibrium, via normal economic activity, is produced. Part of what has not been mentioned regarding Hicks' and Arrow's prize is the advancement in welfare theory, which itself was shapen by a Walras and Cournot colleague, Vilifredo Pareto. Much like his peers, Pareto was passionate about veering towards economics as a more scientific discipline, gently leaning away from the more moral philosophical side of things. Still, every Economist mentioned in this post was a philosopher, except for Hicks and Arrow. That fact is understandable: as Economics progressed, so did the interests of those that advanced it. Mathematical and scientific inquiry was now a must - and if anything, other disciplines would now have to be such that these would comfortably take on issues like behavior. Psychology in economic theory has now become important, and behavioral economics has been given equal footing as well. Continuing the report on what Hicks prepared for others - If we throw in wages, savings, investment, (Hicks was also responsible for the IS-LM model) growth, and business cycles in the mix, the concocted potion becomes more potent. Hicks references John Stuart Mill and also shakes Adam Smith's invisible hand all throughout his research. It's great to see how giants rest on the shoulders of other giants. Continually. While Hicks did much for general equilibrium theory, it was Arrow, through the Arrow-Debreu model who rigorously developed a model that proved the existence of general equilibria in any given economy. Per his additional work, Arrow's endogenous growth theory caused an interesting conversation to get going, given that not long before Arrow's time, it was generally believed that mostly exogenous factors caused technological change (and thus advancement). Still, what Arrow did, in my opinion, was not only to theorize, but to focus on the positive aspects a first world country, that invests in research and development, education and forward-thinking social programs might produce in terms of growth. In a similar way, Arrow sets forth an interesting take on political theory through his impossibility theorem. Technological change, much like politics are practically impossible to observe closely and measure, but are aspects of Economics that merit academia's attention nonetheless. Other economist's growth & social models and theories have benefited and followed suit. Both Economists were visionaries in their own right - Arrow still is. He is the youngest Economics Nobel Prize Winner to date, which makes it no surprise that he is still amongst the living. To conclude, something Arrow wrote, that encapsulates the past and future of the general equilibrium theory. Very well put: '“From the time of Adam Smith’s Wealth of Nations in 1776, one recurrent theme of economic analysis has been the remarkable degree of coherence among the vast numbers of individual and seemingly separate decisions about the buying and selling of commodities. In everyday, normal experience, there is something of a balance between the amounts of goods and services that some individuals want to supply and the amounts that other, different individuals want to sell. Would-be buyers ordinarily count correctly on being able to carry out their intentions, and would-be sellers do not ordinarily find themselves producing great amounts of goods that they cannot sell. This experience of balance indeed so widespread that it raises no intellectual disquiet among laymen; they take it so much for granted that they are not supposed to understand the mechanism by which it occurs.”' For an excellent and technical take on the general equilibrium theory, read Stanford Economist's Jonathan Levin's 2006 paper "General equilibrium".
