Friday, November 23, 2007

From this week's finance and macroeco classes

1) Libertarians with knowledge of the financial markets, it's question time. I'm guessing you know what circular trading is. Explain a ban on circular trading from the first principles of coercion and/or fraud. And if you do not support the ban, explain how you propose to solve the inefficiency in the markets resultant from circular trading.

2) It is fashionable among a lot of theorists to assert that if you are philosophically on the wrong footing, no amount of mathematics will help you out. The example of P C Mahalanobis is given to substantiate this point. Now this assertion has typically been a little difficult to digest, expecially since I am given to romantically believe that mathematics is the only true philosophy. Turns out that in the case of India's five year plans and P C Mahalanobis, I may not have been very off the mark.

You see, the Indian government, pre-liberalization, was an almost entirely fiscal policy focussed administration. The guiding principle of our macroeconomic policy was apparently the IS/LM model. This is, in very general terms, a series of dynamic equilibriums of real national income with real interest rates. But, the interest rates were administered. We had neutered one of the two axes of the mathematical model that we used and yet we hoped to be correct. For decades, we were doing one of the mathematically stupidest things possible.

Resultant aphorism - faults of philosophy will manifest themselves as mathematical idiocies. One only needs to try harder.


kunaal said...

no comments.

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tanuj solanki said...

i was trying to read all of ur blog

this post stands out as being stupid....among the other intelligent ones

typical historian flaw...

taking a view to be true--> seeking history for proof--> finding it by compression of good two decades in a swoosh--> fitting it with the view--> Saying 'Eureka' pompously!

ur romanticism with mathematics is not irritating at all... ur proofs of it through compression of indian history are!

it took u one paragraph to prove tat mahan...watever was bullshitting with wrong maths! for 20 yrs...i am sure a lot of other things happened all around...

btw i romanticize about the inability of history to provide any philosophical insight...but tats just me