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economics | Contriving

Tag Archives: economics

I’ll take 300 cents, please. Or, people’s brains are broken.

The New York Times points to research demonstrating the effect of big numbers on people’s ability to reason.

You would probably never sell out your friend for $5. But 500 cents? Now you’re talking!

No, the economic downturn doesn’t prove you right

In a post entitled “The Relevance of the Great Depression“, David Friedman states:

One can imagine a future in which President Obama, supported by Democratic majorities in both houses, engages in massive interventions in the economy following the massive interventions already under way and the result is a serious economic downturn prolonged for years, perhaps for two terms. If that happens many people–most obviously, the same people who insist that the collapse of Fannie Mae and the associated difficulties are the fault of laissez-faire and deregulation–will conclude that only massive intervention preserved us from a still worse outcome.

He is absolutely correct and beat me to a blog post about it. As soon as I heard people blaming the free market, it rung as a false claim to me. Or, perhaps not false, but a conclusion not justified by the evidence at hand.

Whether or not free markets are “bad”, the current crisis says little about them. Economic markets are already heavily regulated, but whether or not we need more, different, or less regulations is by no means clear.

The news

I’m constantly learning about new ways to look at things when reading one of my favorite sites, Overcoming Bias.

A recent post has me thinking a lot about what the stock market actually is.

Speculators were blamed for rising oil prices a few months back, but not for recent falling oil prices. Short-selling speculators were recently blamed for falling stock prices, and actually banned for a few weeks, but no one proposed banning buying speculators two years ago when stocks were rising. Now Steven Pearlstein of the Post wants to close financial markets for a week:

The author of this post, Robin Hanson, goes on to describe the stock market as a new outlet in which stock prices, and the market as whole, merely informs us about the future prospects of companies.

Aside from times when firms issue stock or buy it back, stock trades do not change a firm’s total capital; they just gives us news about its future prospects. Sure some of of these stock “reporters” can have incentives to mislead us, but newspaper reporters can also have incentives to mislead us. Systems for detecting and punishing misleading reporters are far stronger and more effective in financial markets than in newspapers.