Wednesday, 14 June 2017

Positive v's normative economics

This is a distinction every economics student knows. But where did it originate?

A clear distinction between positive and normative economics goes back at least as far as John Neville Keynes (father of Maynard). Keynes wrote,
"[a]s the terms are here used, a positive science may be defined as a body of systematized knowledge concerning what is ; a normative or regulative science as a body of systematized knowledge relating to criteria of what ought to be, and concerned therefore with the ideal as distinguished from the actual ; an art as a system of rules for the attainment of a given end. The object of a positive science is the establishment of uniformities, of a normative science the determination of ideals, of an art the formulation of precepts" (Keynes 1917: 34-5).
Carl Menger also saw a difference, with regard to ethical considerations, between theoretical economics (positive economics) and economic policy (normative economics). In Menger (1883: 235) Menger criticises what he calls the "ethical orientation" of the German historical school. He writes with regard to theoretical economics that
"[w]hat we should like to stress here particularly is the fact that we cannot rationally speak of an ethical orientation of theoretical economics either in respect to the exact orientation of theoretical research or to the empirical-realistic orientation". But normative consideration do enter into economic policy: ``Economic policy, the science of the basic principles for suitable advancement (appropriate to conditions) of ``national economy" on the part of the public authorities" (Menger 1883: 211).
The important word here is suitable. You can not determine what is suitable without value judgements.

John Stuart Mill makes a similar distinction when he differentiates between science and art.
"These two ideas [science and art] differ from one another as the understanding differs from the will, or as the indicative mood in grammar differs from the imperative. The one deals in facts, the other in precepts. Science is a collection of truths ; art, a body of rules, or directions for conduct. The language of science is, This is, or, This is not ; This does, or does not, happen. The language of art is, Do this ; Avoid that. Science takes cognizance of a phenomenon, and endeavours to discover its law ; art proposes to itself an end, and looks out for means to effect it" (Mill 1844: 124).
So 1844 is as far back as I've found the distinction going, so far.

  • Keynes, John Neville (1917). The Scope and Method of Political Economy 4th edition, New York: Augustus M. Kelley Publishers, 1986.
  • Menger, Carl (1883). Investigations into the Method of the Social Sciences with Special Reference to Economics, formerly published under the title: Problems of Economics and Sociology (Untersuchungen uber die Methode der Socialwissenschaften und der Politischen Oekonomie insbesondere), with a new introduction by Lawrence H. White, edited by Louis Schneider, translated by Francis J. Nock, New York: New York University Press, 1985.
  • Mill, John Stuart (1844). Essays on Some Unsettled Questions of Political Economy, London: John W. Parker.

Sunday, 14 May 2017

The emergence of the corporate form

An interesting new article from the Journal of Law, Economics and Organisation -- Volume 33, Issue 2 May 2017: 193-236.
The Emergence of the Corporate Form
Giuseppe Dari-Mattiacci; Oscar Gelderblom; Joost Jonker; Enrico C. Perotti
We describe how, during the 17th century, the business corporation gradually emerged in response to the need to lock in long-term capital to profit from trade opportunities with Asia. Since contractual commitments to lock in capital were not fully enforceable in partnerships, this evolution required a legal innovation, essentially granting the corporation a property right over capital. Locked-in capital exposed investors to a significant loss of control, and could only emerge where and when political institutions limited the risk of expropriation. The Dutch East India Company (VOC, chartered in 1602) benefited from the restrained executive power of the Dutch Republic and was the first business corporation with permanent capital. The English East India Company (EIC, chartered in 1600) kept the traditional cycle of liquidation and refinancing until, in 1657, the English Civil War put the crown under strong parliamentary control. We show how the time advantage in the organizational form had a profound effect on the ability of the two companies to make long-term investments and consequently on their relative performance, ensuring a Dutch head start in Asian trade that persisted for two centuries. We also show how other features of the corporate form emerged progressively once the capital became permanent. (JEL: G30, K22, N24).

Friday, 12 May 2017

Daniel Griswold on the basics of trade

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Daniel Griswold on the Basics of Trade.
Daniel Griswold is a Mercatus Center Senior Research Fellow and Co-Director of the Program on the American Economy and Globalization at the Mercatus Center at George Mason University. He joins the show to discuss the theory of trade, dating back to Adam Smith, and his work on current US trade policy. Daniel and David discuss some of the misconceptions surrounding trade and why Americans should embrace free trade instead of protectionism.

Tuesday, 9 May 2017

How to make trouble

These guys really know how to make trouble .........

Replicating Anomalies
Kewei Hou, Chen Xue, Lu Zhang
NBER Working Paper No. 23394
Issued in May 2017
The anomalies literature is infested with widespread p-hacking. We replicate the entire anomalies literature in finance and accounting by compiling a largest-to-date data library that contains 447 anomaly variables. With microcaps alleviated via New York Stock Exchange breakpoints and value-weighted returns, 286 anomalies (64%) including 95 out of 102 liquidity variables (93%) are insignificant at the conventional 5% level. Imposing the cutoff t-value of three raises the number of insignificance to 380 (85%). Even for the 161 significant anomalies, their magnitudes are often much lower than originally reported. Out of the 161, the q-factor model leaves 115 alphas insignificant (150 with t < 3). In all, capital markets are more efficient than previously recognized.
The behaviourists will not be happy!

Wednesday, 3 May 2017

Oliver Hart, incomplete contracts and control

From the 2017 Royal Economic Society Conference comes this video of the talk by Oliver Hart, the Winner of the 2016 Nobel Prize in Economics, which is an extended version of his Prize Lecture.

Watch it and actually learn something worth learning!! An usual thing in economics these days. And no, not a regression anywhere.