Saturday, 22 December 2012

How to get a Nobel Prize in economics, or at least become a household name economist.

First: don’t under any circumstances say anything original. The problem with saying something original is this. Only about 0.1% of the human race produce original ideas, and only about 1% recognise an original idea when it stares them in the face.
Thus if you set out an original idea and send it in to some journal, there is only about a 1% chance of it being published.
Second: far better is to take some utterly banal idea, and present it in a slightly novel format, and add some maths to make it look scientific. Here are some examples.
The Phillips Curve. It’s stark staring bollocking obvious that there is some sort of relationship between inflation and unemployment all else equal. That was known to anyone with more than three brain cells long before Phillips took the idea and drew a graph to represent the idea. David Hume (who had far more than three brain cells) pointed to the relationship between inflation and unemployment about 200 years ago. But that didn’t stop Phillips becoming a household name for his graph.
NAIRU. Well NAIRU is just a trivial alteration to the Phillips curve. “Non Accelerating Inflation Rate of Unemployment” just adds the idea that instead of inflation rising to some fixed level when unemployment gets too low, it ACCELERATES.  Yawn yawn.
The Laffer curve. For details on the history of this, see Mike Norman here.
Or am I being too cycnical? 


P.S. (26th Dec. 2012). The much heralded “Diamond-Dybvig” banking model is another example.  Essentially all this model says is that “borrow short and lend long”, which is what banks do, is risky. Only problem is that that’s pretty much a statement of the obvious. Bagehot pointed to the dangers of borrow short and lend long about 150 years ago. He said in reference to the banking system, “But in exact proportion to the power of the system is its delicacy, I should hardly say too much if I said its danger. . . . . Of the many millions on Lombard Street, infinitely the greater proportion is held by bankers or others on short notice or on demand; that is to say, the owners could ask for it all  any day they please: in a panic some of the do as for some of it. If any large fraction of that money really was demanded, our banking system and our industrial system too would be in great danger.” (p.8 of “Lombard Street”).
And for comparison, here are the first few sentences of the explanation of the DD model as set out by Wiki.
“The Diamond–Dybvig model is an influential model of bank runs and related financial crises. The model shows how banks' mix of illiquid assets (such as business or mortgage loans) and liquid liabilities (deposits which may be withdrawn at any time) may give rise to self-fulfilling panics among depositors. The model, published in 1983 by Douglas W. Diamond of the University of Chicago and Philip H. Dybvig, then of Yale University and now of Washington University in St. Louis, provides a mathematical statement of the idea that an institution with long-maturity assets and short-maturity liabilities may be unstable.
Presumably if someone set out a mathematical statement to the effect that daffodils flower in spring time, they'd be credited with discovering that daffodils flower in spring time.

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