Posts Tagged ‘Paul Romer’

efficient financial markets?

Sunday, August 23rd, 2015

Economists cannot agree on whether asset markets are efficient or not. This has very important policy implications. Freelance writer Anna Louie Sussman interviews New York University economist Paul Romer for a WSJ blog.

Sussman: Are there any areas where research or refinements in methodology have brought us closer to understanding the economy?

Romer: There was an interesting [2013] Nobel prize in [economics], where they gave the prize to people who generally came to very different conclusions about how financial markets work. Gene Fama at University of Chicago got it for the efficient markets hypothesis. Robert Shiller from Yale got it for this view that these markets are not efficient and subject to too much noise. ….

It was striking because usually when you give a prize, it’s because in the sciences, you’ve converged to a consensus. And it was kind of a prize to economics saying, “You know, you can’t really agree what’s going on in asset markets, but we’ll give a prize anyway.”

Anna Louie Sussman, “Q&A: Paul Romer on ‘Mathiness’ and the State of Economics“, Real Time Economics, Wall Street Journal blog, 17 August 2015.

Most of the interview is about the rise of “mathiness” in economic growth theory. In my opinion, this interview of Paul Romer (born 1955) is of general interest, and should be published in the Wall Street Journal.

HT Mark Thoma.

mathiness in economic growth theory

Monday, June 8th, 2015

Truthiness” was coined a decade ago by television satirist Stephen Colbert. A Wikipedia article (retrieved 7 June 2015) defines it as

a quality characterizing a “truth” that a person making an argument or assertion claims to know intuitively “from the gut” or because it “feels right” without regard to evidence, logic, intellectual examination, or facts.

NYU economist Paul Romer recently coined a related term, “mathiness”:

The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.

Paul M. Romer, “Mathiness in the Theory of Economic Growth“, American Economic Review 105:5 (May 2015), pp. 89-93.

Professor Romer thinks that “mathiness” explains the lack of progress toward a consensus in growth theory over the past two decades. His article is brief (5 pages) and ungated. I recommend that you read the entire essay, but here are two key extracts from the beginning (p. 89) and another from the end (p. 93) of the article:

Politics does not lead to a broadly shared consensus. It has to yield a decision, whether or not a consensus prevails. As a result, political institutions create incentives for participants to exaggerate disagreements between factions. Words that are evocative and ambiguous better serve factional interests than words that are analytical and precise.

Science is a process that does lead to a broadly shared consensus. It is arguably the only social process that does. Consensus forms around theoretical and empirical statements that are true. Tight links between words from natural language and symbols from the formal language of mathematicsencourage the use of words that are analytical and precise.

[…]

[With mathiness] empirical work is science; theory is entertainment. Presenting a model is like doing a card trick. Everybody knows that there will be some sleight of hand. There is no intent to deceive because no one takes it seriously. Perhaps our norms will soon be like those in professional magic; it will be impolite, perhaps even an ethical breach, to reveal how someone’s trick works.

Paul Romer (born 1955) is a well-known proponent of endogenous growth theory, the view that investment in human capital, innovation, and knowledge play a key role in economic growth.

Guantanamo Bay as a Charter City?

Monday, July 12th, 2010

Journalist Sebastian Mallaby has written a lengthy profile of economist Paul Romer, focusing on Romer’s obsessive promotion of “Charter Cities”. Paul Romer has solid academic credentials. He ‘invented’ endogenous growth theory in the late 1980s after earning a BS in physics (1977) and a PhD in economics (1983), both from the University of Chicago. These portions of Mallaby’s article caught my eye.

Romer is not just arguing for enclaves; he is arguing for enclaves that are run by foreign governments. To Romer, the fact that Hong Kong was a colonial experiment, imposed upon a humiliated China by means of a treaty signed aboard a British warship, is not just an embarrassing detail. On the contrary, British rule was central to the city’s success in persuading capitalists of all stripes to flock to it. Romer sometimes illustrates this point by citing another Communist country: modern-day Cuba. Cuba’s rulers have tried to induce foreign corporations to set up shop in special export zones, and have been greeted with understandable caution. But if Raúl Castro convinced a foreign government—ideally a rich democracy such as Canada—to assume sovereignty over a start-up city in Cuba, the prospect of a mini Canada in the sun might attract a flood of investment.

It must have occurred to Castro, Romer says, that his island could do with its own version of Hong Kong; and perhaps that the Guantánamo Bay zone, over which Cuba has already ceded sovereignty to the United States, would be a good place to build one. “Castro goes to the prime minister of Canada and says, ‘Look, the Yankees have a terrible PR problem. They want to get out. Why don’t you, Canada, take over? Run a special administrative zone. Allow a new city to be built up there,’” Romer muses, channeling a statesmanlike version of Raúl Castro that Cuba-watchers might not recognize. “Some of my citizens will move into that city,” Romer-as-Castro continues. “Others will hold back. But this will be the gateway that will connect the modern economy and the modern world to my country.” ….

Throughout our conversations, Romer maintained a steady confidence that poor countries will eventually welcome charter cities. ….

But the largest obstacle Romer faces, by his own admission, still remains: he has to find countries willing to play the role of Britain in Hong Kong. …. How would a rich government contend with the shantytowns that might spring up around the borders of a charter city? Would it deport the inhabitants, and be accused of human-rights abuses? Or tolerate them and allow its oasis to be overrun with people who don’t respect its city charter? And what would the foreign trustee do if its host tried to nullify the lease? Would it defend its development experiment with an expeditionary army, as Margaret Thatcher defended the Falklands? A top official at one of Europe’s aid agencies told me, “Since we are responsible for our remaining overseas territories, I can tell you there is much grief in running these things. I would be surprised if Romer gets any takers.”

Sebastian Mallaby, “The Politically Incorrect Guide to Ending Poverty”, The Atlantic, July/August 2010.

For more on Charter Cities, visit http://www.chartercities.org.

HT David Warsh.

institutions and economic growth

Tuesday, December 1st, 2009

MIT economist Daron Acemoglu argues that differences in institutions are the reason residents of countries like Canada and Japan enjoy incomes that are much higher than those in countries like North Korea or Ethiopia.

How do we know that institutions are so central to the wealth and poverty of nations? Start in Nogales, a city cut in half by the Mexican-American border fence. There is no difference in geography between the two halves of Nogales. The weather is the same. The winds are the same, as are the soils. The types of diseases prevalent in the area given its geography and climate are the same, as is the ethnic, cultural, and linguistic background of the residents. By logic, both sides of the city should be identical economically.

And yet they are far from the same.

On one side of the border fence, in Santa Cruz County, Arizona, the median household income is $30,000. A few feet away, it’s $10,000. On one side, most of the teenagers are in public high school, and the majority of the adults are high school graduates. On the other side, few of the residents have gone to high school, let alone college. Those in Arizona enjoy relatively good health and Medicare for those over sixty-five, not to mention an efficient road network, electricity, telephone service, and a dependable sewage and public-health system. None of those things are a given across the border. There, the roads are bad, the infant-mortality rate high, electricity and phone service expensive and spotty.

The key difference is that those on the north side of the border enjoy law and order and dependable government services — they can go about their daily activities and jobs without fear for their life or safety or property rights. On the other side, the inhabitants have institutions that perpetuate crime, graft, and insecurity.

Daron Acemoglu, “What Makes a Nation Rich? One Economist’s Big Answer”, Esquire, 18 November 2009.

This reasoning is appealing. But institutionalists like Acemoglu, it seems to me, attempt to explain too much. The definition of ‘institutions’ tends to encompass everything – even schooling and health. The problem is that numerous variables vary by degree of development. Suppose, for example, that I believe that schooling is the key to development. Then, I might argue that income differences between Nogales, Arizona and Nogales, Mexico are due solely – or at least primarily – to differences in educational levels. We could test this hypothesis, by bringing the schooling of all residents of Nogales, Mexico, up to the levels of Nogales, Arizona. But such experiments are not feasible in the social sciences. We would like to explain one variable – per capita income – but we have a wealth of potential explanatory variables. In statistical terms, the model is ‘overdetermined’: there are more explanatory variables than there are unknowns, and the explanatory variables themselves are correlated.

Bill Easterly argues that the only honest answer to the question “What makes a nation rich?” is “We don’t know”. I agree.

Thanks to Paul Romer for the pointer.

more praise for Elinor Ostrom

Wednesday, October 14th, 2009

When I started studying economics in graduate school, the standard operating procedure was to … assume a particular set of rules and technologies, as though they descended from the sky ….

A typical conclusion was that rules that assign property rights and rules that let people trade lead to good outcomes. … Why would they respect the property rights of someone else? We had no idea. ….

Elinor’s fieldwork, followed up by her experimental work, pointed us in exactly the right direction. ….

Economists … who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry. If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today – how to improve the quality of bad rules that cause needless waste, harm, and suffering.

Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.

Paul Romer, “Skyhooks versus Cranes: The Nobel Prize for Elinor Ostrom”, Charter Cities, 12 October 2009.

Stanford economist Paul Romer ‘invented’ endogenous growth theory.  He earned a BS in physics (1977) and a PhD in economics (1983), both from the University of Chicago, which makes his praise of Elinor Ostrom’s work all the more surprising, and more noble. This brief essay is outstanding, worth reading in its entirety. Highly recommended.