First Nobel Prize in Economic Sciences (1969)

“Deep in the human nature, there is an almost irresistible tendency to concentrate physical and mental energy on attempts at solving problems that seem to be unsolvable. Indeed, for some kinds of active people, only the seemingly unsolvable problems can arouse their interest.” - Ragnar Frisch

It was in the year 1969 when The Sveriges Riksbank decided to commemorate Economists for their contribution in Economics science with a Noble Prize. The Economics science was increasingly influenced by mathematics and statistics which helped to substantiate the ideas and theories of Economist. The economic theories represented in the form of mathematical equations helped a layman to understand the complex economic processes such as cyclical fluctuations, economic growth, and reallocations of economic resources.

It was the success of statistical analysis of time series, which helped to quantify the economic problem, that motivated the Bank of Sweden to award Prize in Economic Science dedicated to the memory of Alfred Nobel to the pioneers of ECONOMETRICS field, Ragnar Frisch and Jan Tinbergen. The major contribution of these two economist was the construction of theories for stabilisation of policies and long-term economic planning.

Ragnar Frisch:

Ragnar Frisch was born in Oslo, March 3, 1895 to a gold and silversmith Anton Frisch. He was destined to follow gold and silver family tradition, but it was his mother who motivated him to take up university study. He went ahead and got a university degree in Economics in Oslo in 1919. Ragnar traveled abroad to study Economics and Mathematics for a year and later completed his Ph.D in Mathematical Statistical subject in Oslo University in 1926. He was subsequently appointed as full Professor in Oslo in 1931 and there after he was Director of Research of the newly-established Economic Institute in the Oslo University.

Ragnar’s major contribution is in the field of Econometrics. His pioneer work in the early thirties involved a dynamic formulation of the theory of economic cycles. He demonstrated how a dynamic system with difference and differential equations for investments and consumption expenditure, with certain monetary restrictions, produced a damped wave moment with wavelengths of 4 and 8 years. By exposing the system to random disruptions, he also demonstrated how these wave movements became permanent and uneven in a rather realistic manner.

Ragnar Frisch is also credited for founding Econometrica Journal. In Rangar’s very first paper in economics in 1926 the term “Econometrics” (in French) was introduced for the first time. In the same passage he formulated the first epigraph for econometrics as a science:

“Intermediate between mathematics, statistics, and economics, we find a new discipline which for lack of a better name, may be called Econometrics. Econometrics has as its aim to subject abstract laws of theoretical political economy or ‘pure’ economics to experimental and numerical verification, and thus to turn pure economics, as far as possible, into a science in the strict sense of the word”

Jan Tinbergen:

Jan Tinbergen was born in The Hague, The Netherlands, in 1903, as the first of five children to Dirk Tinbergen, a schoolmaster teaching Dutch language and Jeannette who was also a teacher. His brother Nikolaas Tinbergen, an ethologist, in Physiology and Medicine also won a Noble Prize in 1973. He studied at the University of Leiden, where he earned a doctoral degree in physics. In 1929 he joined the Central Bureau of Statistics, the economic planning unit of Dutch government, where he was a business-cycle research expert for the League of Nations. Jan later joined as a professor at the Netherlands School of Economics, Rotterdam, and pursued academic career for the rest of his life.

Jan gained acclamation with his pioneering efforts to build mathematical models of how whole economies work, more specifically, how shocks like harvest failures or stock market crashes rebound through an economy to influence output, inflation and employment. His greatest work was to study cyclical fluctuations in United States. Jan built up an econometric system involving some 50 equations, and determined reaction coefficients and “leads and lags” with the help of statistical analysis. 

References:

http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1969/press.html

http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1969/frisch-facts.html

http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1969/frisch-bio.html

http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1969/tinbergen-facts.html

http://www.tinbergen.nl/professor-jan-tinbergen/

http://www.encyclopedia.com/topic/Jan_Tinbergen.aspx

http://www.jstor.org/stable/2171799?seq=1#page_scan_tab_contents

No more totalitarianism

Is history repeating itself?

“A new breeze is blowing, and a world refreshed by freedom seems reborn; for in man's heart, if not in fact, the day of the dictator is over. The totalitarian era is passing, its old ideas blown away like leaves from an ancient, lifeless tree.” said George H. W. Bush in his presidential inaugural speech in 1989. This was an era during which the majority of the world was grappling with democracy, an era in which people were proud of their freedom. The president spoke about the end of the Vietnam War, which lasted for more than 19 years, emphasizing the end of communism and autocracy.

Francis Fukuyama, an American political scientist, announced the “end of history” and inevitable triumph of liberal capitalist democracy. His argument was simple: Democracy would win out over all other forms of government because the natural desire for peace and well-being set nations on a path to progress from which it was impossible to divert. If a state—even a Communist one—wished to enjoy the greatest prosperity possible, it would have to embrace some measure of capitalism. World peace seemed to be a reality.

Today, after a quarter of a century, world peace has become whimsical. Israel and Palestine are in conflict since 2006, Russia and Ukraine are fighting for Crimea, and the Arab world is under turmoil with the raise of war for soul of Islam between Shittes and Sunnies. The cause of concern is that these wars or conflicts are not for freedom, but for power or for totalitarianism.

In Nineteen Eighty Four (1984), George Orwell creates a dystopian world to describe the political situation during the mid-twentieth century. The author astutely describes the ravenousness for freedom through the protagonist Winston Smith, and oppressive rule by Big Brother and the party. Orwell supported war because he believed it is a choice of evil. For example, he would support USSR (Union of Soviet Socialist Republics) against Germany because of his view that the USSR cannot altogether escape its past and retain enough of the original ideas of revolution to make it a more hopeful phenomenon than Nazi Germany.

Are the current wars a lesser evil? The total military spending across the world has reached its cold war level, with a few nations, such as, the United States, actually retainin  their spending. As reported by Stockholm International Peace Research Institute (SIPRI), the global spending on military was around $1.7 trillion in 2013. These military supports are enough to destroy the world. What we saw in the Gaza massacre and Malaysia Airline MH17 plane crash at Ukraine-Russia border can be said to be a lesser evil or a trailer of a big picture.

Scotland, a part of United Kingdom since last 307 years, is struggling for independence. Scotland has based its grounds for separation on culture, ideology, politics, and economics. It is not only Scotland who is seeking to withdraw national boundaries. There are independence movements in many parts of the world; 39 new states have joined the United Nations since 1980s. Many more aspirants are waiting in the wings for independence.

So, is history is repeating itself? We would say that there is lot more to see. We don’t know when these wars will end, and how many more are at an edge of upsurge. All we can say is that it’s still not the end of history.

Stepping back, and looking forward

“If science fiction is the mythology of modern technology, then its myth is tragic” – Ursula Guin

In 1962-63, Hanna-Barbera (producers) aired The Jetsons, an American Comic Science Fiction sitcom. The Jetsons lived in the year 2062, in a futuristic utopia of elaborate robotic contraptions, aliens, holograms, and whimsical inventions. The  technology reflected in The Jetsons - belt conveyors, sliding doors, LCD televisions, vending machines, food robots, and video calling - has become a reality less than five decades later.

Progressively, writers and scientists are prophesying science fiction converting into reality. Since the1950s,  proponents of Artificial Intelligence (AI) have maintained that machines thinking like people lie just a couple of decades in the future. We are approaching an age in which computers or machines will be more powerful than the human brain. A machine will be able to do complex calculations within seconds, for which a human will take hours.

The question is what skills humans need to develop in order to deal with technological advancement. As we have seen in the past, with the advent of new technologies the demand for labor decreases, leading to a fall in wages and increase in unemployment. During the industrial revolution, between 1811 and 1817, a group of English textile workers opposed the automation of looms, as machines had become a threat to their employment. This movement progressed under the leadership of Ned Ludd, who went as far as attacking mills and machinery before being subjugated by the British government.

That was how the term “Luddite movement” came about, describing the situation in which large-scale automation affects people’s wages and employment. Economists and other scholars predicts such Luddite movement with the progress of technology. The Chauffeur project led by Google engineer Sebastian Thrun has been successful in driving a car through the roads of San Francisco without a human driver. Soon we will see such cars more often on the roads, thereby replacing the human drivers

In “The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies”, Eric Brynjolfsson and Andrew McAfee warn future generations about the speed of technological developments, and suggest that humans should learn to work with these technologies rather than compete with them. The authors describe the Industrial revolution as the ‘First Machine Age’, during which the graph of Human Development Index and Population took a ninety-degree turn. The authors are skeptical about the direction in which this graph will tilt in the ‘Second Machine Age’ of computers and other digital advances.

Companies such as IBM and Honda are trying to develop robots that can interact with humans through AI. IBM’s supercomputer Watson, designed specially to play the television game show Jeopardy! (Knowledge game), has been successful in defeating Ken Jennings and Brad Rutter,  the long standing winners of the game. Honda’s ASIMO (a humanoid robot), after failing in the 2006 demo presentation, is still grapping to replicate human movements. These examples show that machines are able to do intelligent calculations and play games like chess, but are not yet physically flexible like humans.

As the cognitive scientist Steven Pinker puts it, “The main lesson of thirty-five years of AI research is that the hard problems are easy and the easy problems are hard. . . . As the new generation of intelligent devices appears, it will be the stock analysts and petrochemical engineers and parole board members who are in danger of being replaced by machines. The gardeners, receptionists, and cooks are secure in their jobs for decades to come.”

To conclude, we cannot hinder the development of technologies, but we should learn how to adjust with the change in the economic environment due to technological progress. And we should learn to work with robots to get the better of two worlds (metal ability and physical ability).

So, if in the future one falls in love with an operating system, the way Theodore Twombly did in the movie ‘HER’ by Spike Jonze, don’t be surprised. Computers are and will be an indispensible part of our society.

Darwin & Economics

Book review- The Darwin Economy: Liberty, Competition, and the Common Good.

“It is not the strongest or the most intelligent who will survive but those who can best manage change.”

–    Charles Darwin

My first reaction after reading the title of the book was to ask myself how the theories of Charles Darwin, the famous naturalist, are relevant in economics? The Cornell University professor and The New York Times columnist, Robert H. Frank, begins the book by justifying Darwin’s importance in the subject of economics. The author argues that 100 years from now, Darwin will be recognized as the father of Economics, that is to say the greatest contributor to the modern theory of Economics, and Adam Smith, currently considered the intellectual founder of Economics, will be its great grandfather. Frank says:

“I base my prediction on a subtle but extremely important distinction between Darwin's view of the competitive process and Smith's. Today Smith is best remembered for his invisible-hand theory, which, according to some of his modern disciples, holds that impersonal market forces channel the behavior of greedy individuals to produce the greatest good for all. It's fair to say that the invisible-hand theory's optimistic portrayal of unregulated market outcomes has become the bedrock of the antigovernment activists' worldview. They believe regulation is unnecessary because they believe unbridled market forces can take care of things quite nicely on their own.

Darwin's view of the competitive process was fundamentally different. His observations persuaded him that the interests of individual animals were often profoundly in conflict with the broader interests of their own species. In time, I predict, the invisible hand will come to be seen as a special case of Darwin's more general theory. Many of the libertarians' most cherished beliefs, which are perfectly plausible within Smith's framework, don't survive at all in Darwin's. (p. 17).”

Adam Smith’s theory of the invisible hand states that the collective individual interest will allocate resources in the most effective way to maximize economic welfare. In Smith’s words, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.“ Frank challenges this theory saying that there is a requirement of public intervention in the competitive markets, as what is good for the individual might not be beneficial for society as a whole. Instead of creating a perfect world, economic competition often leads to “arms races,” encouraging behaviors that not only cause enormous harm to the group but also provide no lasting advantages for individuals, since any gains tend to be relative and mutually offsetting.

The author notes that it is all about getting an edge over others. In the natural world, Darwin argued that individual incentives and interests are often at odds with the wider interests of the group. Frank takes a similar example in economics, where a factory worker may be incentivized to choose a higher pay at the cost of safety regulations in order to gain a competitive advantage over his colleagues. But the choice will not make any difference for the worker because his colleagues too would be ready to take risks for a higher pay. Here, the whole group is relatively no better off and far less safe.

The author then talks about positional and non-positional goods. He says that people will be more likely to spend more money on positional goods, such as larger homes, and less money on non-positional goods, such as safety, savings or insurance. As a biological analogy, Frank suggests the difference between running speed and antler size. A faster gazelle is better equipped to outrun a cheetah, and so, he writes, "being faster conferred advantages for both the individual and the species." Antlers, on the other hand, are used for fighting with other males.  

Throughout the book, Frank argues that returning to laissez-faire economics will not solve our economic woes. He suggests that the best method to tame the Darwin economy is not to prohibit harmful behaviors, but to tax them. By doing so, we could make the economic pie larger, eliminate government debt, and provide better public services, all without requiring painful sacrifices from anyone.

This viewpoint will, however, increase opposition from libertarians, who describes that the government should not interfere with individual liberty by compelling citizens to pay more taxes or buy safety insurance via taxation. As mentioned above, without government intervention people are more likely to invest in positional goods rather than non-positional goods. Frank asserts that the recent ‘Great Recession’ could have been avoided though heavy taxation of the ultra rich and tighter monetary policy.

The book inspires readers to look at economics from a different perspective, discussing challenges to conventional economic theory on the basis of evolutionary theory. 

Beyond Democracy

Book Review: The Fourth Revolution, The Global Race to reinvent the State by John Micklethwait & Adrian Wooldridge.

“What happens to a dream deferred?

Does it dry up like a raisin in the Sun?

Or fester like a sore—

And then run?

Maybe it just sags like a heavy load.

Or does it explode?” – Langston Hughes

The famous poem of Langston Hughes, once became a refrain of the US civil rights movement is typifying the current situation of Israel. The Palestine dream shown by Prime Minister Binyamin Netanyahu to win the latest election has dried up like a raisin. Netanyahu has also renounced any possibility under his government for a two-state solution to the Israeli-Palestinian conflict.

The assassination of the Russian politician Boris Nemtsov in Moscow, reminds us the fall of the Berlin Wall. Russian President Vladimir Putin’s action towards Ukraine depicts the tragedy of Russia that it poses as great a threat to itself as it does to its neighbors. Venezuela’s crisis characterized by wasteful government spending, rampant corruption, growing authoritarianism, relentless human-rights violations, and economic collapse has become a threat to the national security and foreign policy of the United States.

These geopolitics or the conflict between the states shows that we still don’t know what is good governance or what ideology a state should adopt in order to bring peace and prosperity in the society. In the book, The Fourth Revolution by the Editor-in-chief of The Economist John Micklethwait and Schumpeter columnist & Management Editor Adrian Wooldridge, the authors attempts to raise a need for a revolution for how the states are run in this global village of rapidly changing technology.

The book starts with introduction of the leadership camp China Executive Leadership Academy in Pudong. The camp has become the critical training center for the future leaders of the potential world power country. It is no longer western countries such as United States(US) who are leading the world, the emerging countries like China has not only gained economic power, but has also gained a substantial power in the world institutions like World Bank, IMF, G-7, and G-20.

The falling power of US shows that there is an immense need to refurbish the policies and ideologies of how the states are run. It is no longer liberal Democracy that defines the success of a state. Benign Authoritarian rule in Singapore by Lee Kuan Yew, and Communist rule in China has reaped par excellence benefits. The authors are not suggesting that a state should adopt authoritarian or communist rule over democracy, but they are suggesting that there is a scope of improvement in how the democratic governments are run.

The authors have tried to divide the history of state revolution for last 500 years into three and half parts as per the rights the society has gained. The first revolution occurred during the 17^th Century when the great philosopher Thomas Hobbes came up with the book Leviathan, which gave birth to the modern concept of the nation-state. Many 18^th and 19^th century thinker through the liberty of individual caused the second revolution; here the contribution of John Stuart Mill deserves a special mention.

Beatrice Webb, a believer in constitution, described her self as “The cleverest member of one of the cleverest families of the cleverest class of the cleverest nation.”, was the pioneer of the third revolution of welfare state, and personified the top-down social reforms. Towards the end of the first part of book the authors gave credit to the prime minister of Britain Margaret Thatcher, and the president of USA Ronald Regan for there contribution to uphold states, improving economic conditions, and sailing through the domestic civil crisis. This defined an unfinished half revolution where the states where run with a partial authoritarian ideology.

In the second part, the authors does a detailed study of California government, they comes up with seven deadly sins, which have hampered the growth of the government.  With the help of these sins the authors narrates the loopholes of Democratic government at a micro level. The aging population of the country has became a matter of concern for the United States, the government has accumulated a huge burden of social security and is likely to fail to fulfill the fiscal deficit. The Democracy has lost its charm, in the words of Nicolas Berggruen and Nathan Gardels “Democracy is a vote for the past because it is a vote for the vested interests of the present.”

Followed by the deadly sins was other ruling or governance options the authors are looking. They see Asian Alternative as the suitable option for chaining the democratic ideology. The founding father of Asian Alternative Lee Kuan Yew, took inspiration from George Washington, Thomas Jefferson, and James Madison to make Singapore a world-class country. But he has friendly authoritarian attitude, rather than the democratic attitude where the people run the state.

The authors do not imply that The Asian Alternative is the only solution but it is one of the ways. In the last part the authors identifies the key problem with how the west governs its countries, and try to give a fix with some suggestions. They are very skeptical about how the governments who have made huge promises of social security will meet their obligations. Many governments have come up with solutions for reducing their burden, like many countries in Europe have increased the retirement age to sixty-seven. The authors also talks about increasing efficiency of health care institutions, they accolades Dr. Devi Shetty for his low cost heart surgery hospital Narayan Hrudalaya, which provides global standard medical facilities at an astonishing low cost.

To conclude, we don’t know when this geopolitical turmoil will end, but we for sure know that there is a revolution the states across the world are undergoing. A multi polar world with no more western dominance is waiting and it is a prime time for them to look beyond DEMOCRACY.

References:

THE FOURTH REVOLUTION: The Global Race to Reinvent the State by John Micklethwait and Adrian Wooldridge

http://www.wsj.com/articles/book-review-the-fourth-revolution-by-john-micklethwait-and-adrian-wooldridge-1401405100

http://www.nytimes.com/2014/06/29/books/review/the-fourth-revolution-by-john-micklethwait-and-adrian-wooldridge.html?_r=0

https://www.project-syndicate.org