thoughts on academics

Life in academics is both stressful and exciting. I constantly feel the excitement of the possibility of constantly learning , and yet feel stressed that there is simply so much to learn, so much to read and so much to write about.

True Legacy of Nobel Prize--Dynamite

I have always wondered why Nobel include Peace as part of the Nobel Prize. For me, it is like a joke, one needs nothing more than standing in the right side to win this prize, regardless of intentions and consequences. Unlike Physics, one does not need real talent and real break-through to win this restigious prize. I later heard that Nobel include peace prize because he want to compensate for the invention of Dynamite. That explains it all.
Dynamite is a great invention, but it is a double-edged sword. Used properly, it is extremely helpful in saving labor and just doing great things. However, used in the hands of the untrustworthy, this could be very destructive. I believe the Nobel Peace prize is exactly like dynamite. Used well, it can promote peach, used improperly, for example to serve the political interest of some nations and people, it could be more destructive than A-bomb, in that it could bring instability to countries.
In general, I do not trust human beings. Human beings are capable of doing great things, but more often than not, that capacity is overshadowed by selfishness, irrationality, stupidity, and biasedness. After all, we can witness rhetoric dominating over reason everyday.
I heard a Chinese won Nobel peace prize. I am not impressed. Frankly, I do not give a shit. After all, what really would matter is something more concrete. Winning awards in Physics, medicine , economics and so on might count. Bring a country to develop economically rapidly for 30 years might count.

on happiness and Philips curve

I have been on the top of the world, and it felt great. But every time, it was transient. It will be followed by a sudden downfall. I ask myself, can such happiness ever be lasting? The answer is no.
I do not mean that people cannot be happy. Given certain life path, some people are always happy and others not. This as I would call it using an analogy from economics, a natural level of happiness. It is determined by people's attitude towards life, their gratitude versus greed, and their characters.
This description is all about smooth path in life. However, when life present you with a success or something very pleasant, one feels happier than his normal state of happiness. However, this kind of happiness is transient--when that surprise fades or ends, one feels the contrast and feel down--lower than his normal state. One might well postulate, that what if one is always successful, does that make him the happiest person in the world? The answer is no. The key lies in the adaptiveness of our mind, our mind adapts to that frequency of good things, and is no longer "surprised" by success. Just like the Fed can improve the economy by surprising the market with its manipulation of interest rate, but it can not systematically surprise the market. There is a short-term correlation between inflation on the growth rate, but as the market adapt to the higher inflation rate, the growth rate declines to the original level with the higher inflation rate. When the inflation rate declines to its original level, the market enters "depression". Just like high inflation does not place a country on a high-growth path, neither does success or wealth place one on a higher level of happiness.
The question is, in economics, we will not manipulate the inflation to stimulate the economy during normal times, do we then want good surprises in our life?

Politician or economist?

I vividly remember going to Prof. Rolleigh's office one day and asked tentatively : What is the criteria that we used to define whether a country's currency is overvalued or undervalued? With his usual sense of sarcasm, Prof. Rolleigh retorted:Waht do you mean by "we", politicians or economists? Assuming you are asking about economists, there is no consensus as far as I know.
I respect Krugman's trade model in explaining the new trade pattern after WWII, and feels he is truly an expert on trade stuff (but not currency), but after reading his writing on new york times, I cannot help wondering has he switched to a politician?
Paul Krugman's writing has revealed many assumptions he has made very implicitly and they are hard to defend. Prof. Love had it right, whenever we reach a conclusion, we were using a model implicitly, and without specification, our model can be so crude as to be inconsistent and flawed with stupid assumptions. For one thing, there has not yet been a model that can establish convincingly that any country should have no trade surplus whatsoever. This is not only counter-factual but also unsupported by theories. This might be a plausible conclusion to reach if all countries are identical, or there are all representative countries, an assumptions economists make all the time, however wrong it is.
Another serious problem is his use of China's central bank buying US assets as evidence is simply wrong. There are many sources of accumulation foreign exchange reserve. One is of course CA account--trade surplus, but the other, more relevant here is hot money and FDI. They are a big source of increase in reserve.
I am by no means denying the existence of trade surplus. It is huge, there is one thing that politicians always fail to grasp, when we look at the trade surplus to GDP ratio, maybe not so big. I am a boring person, and I love playing with economic data. One day, I did this for all economiess whose data is availabe. I get a time series data for their trade-surplus ratio from 1994 to 2008. I averaged them, and get rid of the ones with negative ratio. Then I get rid of any economy who had a trade deficit from 2000 to 2008, when there has not been a widespread currency crisis as in 1997. I ranked all the economies from highest to lowest. Mainland China is 19th! I will not conceal the fact that some economies are oil-exporters. But not all. Singapore(18/1000), Hong Kong (8.6/1000), Malaysia (7.7/1000 including the crisis in 1997). and MANY developed European countries are with much higher ratio than China(4/1000).
Finally, I need to poiint that China need to accumulate some net foreign reserve (foreign reserve-foreign liability) because of its poor fiscal stance. By poor fiscal stance , I mean consolidated debt ratio to GDP, which is two times higher than that of US, a country notorious for high debt ratio.

trade surplus to GDP ratio

Data speak louder than politicians.


countries
trade-surplus GDP trade/surplus/GDP (‰)
Kuwait
48.039 148,024 0.324535211
Saudi Arabia
95.762 369,179 0.259391786
Algeria
30.6 140,577 0.217674299

Singapore

39.157 182,232 0.214874446

Iran

70.797 331,015 0.213878525

Norway

59.983 381,766 0.157119806

Malaysia

29.181 191,601 0.152300875

United Arab Emirates

39.113 261,348 0.149658693
Hong Kong
28.038 215,355 0.13019433

Sweden

38.797 406,072 0.09554217

Republic of China (Taiwan)

32.979 379,000 0.087015831
Netherlands
52.522 792,128 0.066304941
Russia
76.163 1,230,726 0.061884611
People's Republic of China
296.2 4,909,280
0.060334713
Switzerland
28.776 500,260 0.057522089
Germany
109.7 3346702 0.032778538
Japan
131.2 5067526 0.025890346

some thoughts on the growth theory

I have outlined some specific crtique of the growth theory in a previous blog. In this entry, I cannot give any thoughts on modeling, but merely talk about something that the new models should strive to explain, because it has been generally lacking in the literature.
First, I guess the most obvious absence concerns corporations. The models have not given a uitable role for corporations, given our obsession of national corporations. I think one core issue that needs to be addressed before a good model can be developed is that whether the nationality of the corporation has any influence over the decision of location, employment and managerial stuff. I think the answer is absolutely positive given the cost of information and existence of transaction, cost of monitoring, and other forms of friction imposed by language and culture. What is needed here is to quantify these effects, and I expect them to be heterogeneous among countries and regions. My hunch is that these friction cost will be smaller inamong European countries than among other regions. I feel teh absolute value of this friction will have some important implications for the growth model. This primitive model might explain the
Second, the distribution of wealth.
Third, the role of financial market and things like exchange rate regime

a rational view of superstition

I. A baseline model of superstition
superstition, that is common,. for example, people in China do not want to write will, because they fear that the fact that they write will may cause death. In other words, superstition is a belief that action A will cause event B (event B is an undesirable thing). This causality need not be absolute. More formally, let's suppose the probability that B will take place is f(x,y), where x is a vector denoting all other relevant aspects of life, while y takes on value about action A. y can take on only two values 0 and 1 (1 means making action A, and 0 not) in this case. and for any x0, f(x0,0)II.Extension of the model
This is the basic model of superstition, however it is incomplete and naive in that it assumes no dynamics and adaptation or expectation. People's belief does evolve. People is not always 100% sure about the superstition. From now on, I will only look at the continuous case, and the result can be easily generalized to discrete case. There two possibilities--1) superstition is true. 2) superstition is false. There are different probabilities involved. Here I take Baysian view of probability. People adapt this belief with the actual data.
III. A complete model of choice under the influence of superstition
1. action A-->event B (desirable)
to be added (key:cost of A)
2. action A-->event B(undesirable)
to be added
IV.Example and explanation (to be revised)
Suppose that superstition goes that action A leads to event B (undesirable). If that superstition is rampant in that region, then it is likely that people will have a a priori distribution favoring the superstition is true. Because people is risk-averse, people are not likely to make action A. Thus there will be few data and people with this superstition cannot update their belief. thus that superstition may continue. Even in the presence of data, incomplete information (non-dissemination, distortion) and wrong interpretation ( guilt of association, causality vs. association) may fail to dispute the superstition.
(why superstition are prevalent?)
V. Afterword
This is just a small game with behavioral economics. I love economics, maths and so forth not because I like the manipulation of numbers and functions, but rather, they leads to a nice way of looking at the world. It is fun and that is all that matters.