The Economic Man

Macroeconomists are constantly looking for micro-foundations in their models. However, there is always a debate on how far the Economic Man should go. Here are two quite different views:

Paul Krugman said, "The question, however, is how far to push it. Keynes didn't make an all-out assault on Economic Man, but he often resorted to plausible psychological theorizing rather than careful analysis of what a rational decision-maker would do. Business decisions were driven by "animal spirits," consumer decisions by a psychological tendency to spend some but not all of any increase in income, wage settlements by a sense of fairness, and so on."

Yet, Thomas Sargent countered, "One of the first reviews of Keynes' book was written by an economist named Wassily Leontief. He deplored the fact that Keynes was departing from the older tradition of attributing rationality and optimality to people. Ever since then there's been a persistent call to put microeconomic foundations underneath macroeconomics. And if you try to build micro foundations, you're going to get back to the elements of classical economics.

These elements give us a set of methods for trying to study how people behave basically using Optimization Theory. Optimization Theory was something that was created by mathematicians, and that constitutes our main tool. The simplest example of a micro model is the supply and demand model for determining the price and quantity of a commodity produced, where demand is a reflection of preferences of people for various goods in their income level and supply is a reflection of the costs of production and the technology".

I believe the New Keynesian school has somehow reconciled the difference between the two sides. In fact, I suspect they should be the flip side of each other. Suppose there was a planet populated with some aliens that do not maximize their own utility. The aggregate economic behavior on that planet would be very different from Keynes' macroeconomics, though they might have gone into extinction a long time ago (or have become our god already?).

(Picture: Economic Sophisms)

My house is burning down

I had to proctor the final exam with other TAs because the professor was away. Well into the exam, a student came in and asked for the professor's whereabout. He didn't look very disappointed when he learned that the professor was not in. When he said he wanted to do TA evaluation, I had to stop him and ask him whether he had taken or is planning to take the makeup exam since he was not sitting there writing. He said to me, "My house is burning down." I said, "Oh, did you tell the department and make an arrangement for the makeup?" After learning the arrangement, I tried to close the conversation by saying, "If you want to do the eval, you will have to talk to the department."

"My house is burning down," he said it again with tears welling up in his eyes. Right at the moment, I realized what a cold-hearted bitch I had just become. I rushed to ask him, "Are you alright?" He seemed to be physically OK, but not emotionally.

What'd happened to me? The only reason I can come up with is that I am fed up with excuses. Students have all sorts of excuses when the homework is due or when he/she argues for exam points. My house is burning down? Dude, you just broke the excuse record! That must have come to my mind at the conversation. Why can 't they just be adults and suck it up if they just don't have time for homeworks or exams? These spoiled kids. They want to have fun in college and also good grades. Haven't they learned trade-offs in life?

Just when I thought I understand the psychology of college kids and begin to lose any sympathy for them, this guy with a burned down house reminds me again that "innocent before proven guilty" applies to college kids, too.

(Picture: treehugger.com)

Math intense

Just when I decided to do more math-intense research, I bumped into this profile of a highly talented woman. The story of Franziska Michor is actually quite inspiring. Don't miss it.

(Picture: Esquire.com)

A secret society?

I have a habit of browsing job market candidates from other economics program. I do that because I want to know how I compare with those people in the top programs. One thing I don't understand about their c.v. is that people love to put the membership of AEA on it. Don't you become a member just by paying fees? How is that an achievement? For me, that membership means less on c.v. than saying you have subscribed to The Wall Street Journal. Of course, you don't tell people about your newspaper subscription on the resume.

Or there is something I don't know about AEA membership? AEA is a secret society maybe?

We're always on the losing side

The Wall Street Journal today has the interview with director Ang Lee. His words probably explain why many Taiwanese have the defeatist mentality. Here are some excerpts:

Mr. Lee tells me that growing up in Taiwan influenced his career in other ways as well. He says that in his films, he always takes "the losing side." ("Somebody dies, somebody loses, well, gay cowboys -- they're not going to win," he explains.)

You might be wondering what all this has to do with Taiwan. "I grew up in Taiwan, we always lose," Mr. Lee says. He laughs good-naturedly. "Nobody wins anything, that's just how I grew up. We're always on the losing side. My parents get beat by the communists, they escape to Taiwan. Taiwan's a small island, hardly anybody pays attention. Up until the late '80s I still get this: I come here, 'Where are you from?' I say, 'Taiwan.' People say, 'Oh, I love Thai food!'"

Taiwan, of course, also has more serious dilemmas. "You live in fear that communists will take over . . . China's so big and Taiwan is a small island . . . . We look at America as the big brother, the protector, the good guys. So after the Vietnam War it's very frightening, [America's] . . . in trouble and you feel very insecure. So I think Taiwan needs Americans to be the good guys."

It is no surprise that we Taiwanese are more likely to succeed in gray areas where nationality matters the least. In science and business (arts to a lesser degree), Taiwanese have more share in the world stage than the size of population indicates. It also reminds me of why many of my classmates want to be Chinese or Indian economists while all I can be is a good economist.

(Picture: wsj.com)