How Should A Student Start Their Economics Library?

Books are often the products of the economics field.  Our field is also one that consistently builds upon its previous work.  I like to think of this feature as a long game of telephone with citations being the links between generations work.  There are many, but Eugene Fama is a good example of this.  He wrote a famous paper declaring that firm ownership is irrelevant, "Agency Problems and the Theory of the Firm."  He cites earlier work by Armen Alchian and Harold Demsetz, "Production, Information Costs, and Economic Organization," and Ronald Coase's landmark, "The Nature of the Firm" (amongst others).  So previous work can be considered an indispensable part of an economist's tool belt.  These are all academic articles, but even more so, books form the foundation of our economic academic knowledge.  With that in mind, which books should a student begin building his library with?

(photo: BBC)

Which books form the core of economics?  This question is probably as fraught with variation as economics itself.  Because much is still somewhat in debate, the books we have often inform those positions end up displaying those positions as well.  Here is my first attempt at a short list for students and beginners to the field:


The Basics of Economics:

An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith
The Principles of Political Economy and Taxation, David Ricardo
Value and Capital, J. R. Hicks
The General Theory of Employment Interest and Money, John Maynard Keynes
Principles of Economics, Alfred Marshall
Foundations of Economic Analysis, Paul Samuelson
Elements of Pure Economics, Leon Walras

Miscellaneous Economics:

Social Choice and Individual Values, Kenneth Arrow
The Calculus of Consent, James Buchanan & Gordon Tullock
The Theory of Interest, Irving Fisher
Monetary History of the United States, Milton Friedman & Anna Schwartz
Price Theory, Milton Friedman
Prices and Production, Friedrich Hayek
A Theory of Economic History, J. R. Hicks
Essays in Persuasion, John Maynard Keynes
Risk Uncertainty and Profit, Frank Knight
The Economics of Welfare, A.C. Pigou
Economic Analysis of Law, Richard Posner
Capitalism, Socialism, and Democracy, Joseph Schumpeter
Interest and Prices, Knut Wicksell
Natural Value, Friedrich von Wieser

Politics:

Capitalism and Freedom, Milton Friedman
The Road to Serfdom, Friedrich Hayek
Human Action, Ludwig von Mises

Philosophy:

A Treatise of Human Nature, David Hume
Second Treatise on Government, John Locke
The Virtue of Selfishness, Ayn Rand


These are just some recommendations for starting points.  Many of these books have seen their theories updated in more recent articles and being familiar with the following articles is also important.  Also, if an individual decides to specialize, for example in Monetary Economics, a larger range of books such as Inflation Targeting by Ben Bernanke, et al become essential works.  I've likely missed many and there are many jump off points in that list, so please feel free to add books in the comments section!

Most of these books are out of print and even somewhat rare, so finding them going from store to store might be a nightmare of a process.  Most book stores don't have dedicated economics sections and if they do they are usually lumped in with books on business so you'll have to sort through mountains of books by the likes of Jim Cramer and Suze Ormann to find one or two books (often these will be pop economics books rather than actual academic economics books).  There are some book websites that cater to used book buyers.  Alibris is one of these sites, but some of these books are quite rare so be prepared to spend a substantial amount of money (Elements of Pure Economics by Leon Walras being an example of a book that is quite essential and quite rare).

Building a library is also an academic discovery process so everyone's library will vary quite a bit, but this list is designed to give a basic understanding of what might make a good economics library.  My hope is that this can help be a small guide on that process.  I know as I've been on this process, I've looked for resources like this.  If I can be a small help to someone else, than this has worked.

What to do When You're in a Liquidity Trap?

These are trying times in macroeconomy.  There have been several ways of dealing with severe drops in output.  The first is to lower interest rates, which creates the potential for a liquidity trap after they're lowered to zero.  At that point, we enter the liquidity trap and our knowledge of monetary economics becomes wholly incomplete.  There have been several ways that have been proposed to deal with this problem, and all of them deserve review.

A liquidity trap is defined specifically as the point when bonds and cash become perfect substitutes and traditional monetary policy is no longer effective.  The metaphor that economists use for this situation is that central bankers are "pushing on a string."  These are the situations that cause catastrophic recessions.



 The chart above shows the liquidity trap situation in an IS-LM chart.  Important things to note are that at the point of equilibrium, the LM's slope is flat (indicating the issues surrounding the lower boundary) and equilibrium is to the left of 'full employment' level GDP.

The liquidity trap is a phenomenon of monetary policy.  While the liquidity trap is a somewhat rare situation, it has become a major problem in the past few years for several major economies including the United States.  There has been quite a bit written about this phenomenom in the past ten years starting with essays confronting Japan's economic malaise.

Japan was one of the countries that people described as an 'economic miracle' much like Germany in the same era or China and India in the 2000's.  In the early 1990's, they began having a prolonged economic downturn that never returned to robust growth (yet).  The chart above includes Japan's annual growth rate.  It mostly describes growth around 0-1% with several downturns in 1994, 1998, 2002, and a particularly severe one in 2009.

This chart shows the base borrowing rate that the Bank of Japan uses to affect the economy.  It has been very low for a very long time.  During 2002 and 2009, we can observe liquidity trap, or near liquidity trap conditions.  In 2001, the Bank of Japan pursued a novel alternative monetary policy called Quantitative Easing."  The purpose of this program was to quickly inject more money into the economy under the zero limit boundary conditions.  Current Governor of the Bank of Japan, Masaaki Shirakawa writes about the experience in a working paper, "One Year Under Quantitative Easing."  Some issues that he brings up in the paper are that hoisting up asset prices becomes an act of fiscal policy rather than monetary policy, and that this lends itself to the debate on whether fiscal policy is helpful at all in stimulating an economy.

In the 2008 financial crisis and 2009 global recession, many countries were confronted with a similar situation.  Pronounced contractions while central bank interest rates are already low.  Many countries quickly found themselves in liquidity trap situations.  The ways that they addressed these issues varied.  Lars Svennson was deputy governor of the Riksbank in Sweden, and had already written extensively on such a scenario.  He was most famous for being a proponent of inflation targeting, but also for "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap."

Svennson advocated announcing upward sloping short term price levels coupled with small long term inflation targets.  Then announcing that the currency would be devalued and that the exchange rate would be pegged.  The Central Bank would make a commitment to buy and sell as much currency as they need to maintain the peg.  Once that short term price level target is reached, then the peg is abandoned.

When Sweden found itself in a liquidity trap, Svennson did something that most monetary economists said was impossible.  The Sveriges Riksbank became the first central bank to announce negative interest rates.

There have not been any academic papers about the Swedish experience yet, but it can be said that Sweden had the most growth (nearing 8% one quarter) of any European country coming out of the recession in 2010.  At first glance, it is was successful policy.

The chart above shows that the United States has had several episodes of near zero interest rates.  During the "Great Depression" of the 1930's, interest rates were very low.  These were also the times that John Maynard Keynes originally advocated for activist monetary policies, and even fiscal policies when those were ineffective.  He did not use the term liquidity trap, but The General Theory of Employment, Interest, and Money is basically written from that perspective.

In 1961, the Federal Reserve adopted "Operation Twist" during a period of low interest rates (not zero), as an alternative monetary policy to stimulate the economy.  Now, we have been confronted with near zero interest rates since 2009.  The general economy has recovered to modest growth, but unemployment has remained high due to structural changes in our economy.

This high rate of unemployment has led to a general sentiment that even though we are technically not in a recession, it still feels like recession-like conditions.  It harks back to the old expression that a recession is when your neighbor loses his job and a depression is when you lose yours.  Jobs play a critical part in any economy, and the current jobless recovery has left many Americans dissatisfied with economic policymakers' results.  Above shows that drastic uptick in unemployment, accompanied with relative price stability.  It shows that we did have a period of pronounced deflation despite the fact that the Federal Reserve cut rates, and pursued several rounds of Quantitative Easing.  The United States also engaged in fiscal stimulus.

 CONCLUSION

We still do not have a great idea of how to tackle the liquidity trap.  The typical policies of fiscal stimulus, and alternative monetary policies have (for the most part) been lackluster.  The liquidity trap is one of the most difficult and vexing situations in economics and deserves much more study.  Another issue that confronts policy makers is a large part of economics blames monetary policy for the problem in the first place and are wholly dissatisfied with the remedies.  One fact that they point to is the enormous growth in the monetary base and central bank assets.  They point to this as a sign of coming hyperinflation.  This makes it difficult for policy makers to pursuade the public that the inflation that they are pursuing is managable and desirable, rather than a prelude to hyperinflation.  There is also the problem of the lower boundary.  Bennett McCallum predicts that this might not be zero, but it likely still does exist, so there are still issues there even if it is not quite zero.

It is very possible that Europe may be facing this situation very soon, and perhaps other countries such as the United States would follow in that case.  For that reason, this will remain a critical issue to study in 2012.


REFERENCES:

Krugman, Paul.  "IS-LMentary"  The New York Times.  10-9-11.  Web.

Krugman, Paul, Kenneth Rogoff, and Kathryn Dominquez.  "It's Baaack: Japan's Slump and the return of the Liquidity Trap." 
     Washington DC: Brookings Papers on Economic Activity.  Vol. ? No. 2.  1998.  Journal.
McCallum, Bennett.  "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates."  Boston: NBER.  2000. 
     Working Paper.
Shirakawa, Masaaki.  "One Year Under 'Quantitative Easing'."  Tokyo: Bank of Japan.  No. E3.  2002.  Working Paper.
Svennson, Lars E.  "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others."  The Journal of Economic
     Perspectives.  Vol. 17, No. 4.  Journal.
The Federal Reserve System Purposes and Functions.  Washington D.C.: Board of Governors of the Federal Reserve.  2002. 
     Print.


This article is based on a presentation by Joseph Ward, Hares Fakoor, and Olivia Gonzalez for an intermediate macroeconomics course.

The Increasingly Transparent Federal Reserve

The Federal Reserve has become significantly more transparent in the past few years.  Amid appeals from Congress and the public to "audit the Fed," they posted to their homepage, that they get audited by the Government Accountability Office.  Chairman Bernanke has even recently started giving press conferences and this week they announced that they would release their Federal Funds Rate forecasts.  They announced it from the minutes from the December F.O.M.C. meeting.  This has been a pet project of Chairman Bernanke for some time, he gave a speech in 2010 on the subject.  To many, this might come as an obvious positive step, but I'm left scratching my head a bit.  I'm thinking... how is this going to help and how might it harm the pursuit of monetary policy?



(photo: MeDill News Service)



There are two issues in monetary policy that relate to this, and they are (as most things in monetary policy) opposing relationship to one another.  The first issue is central bank credibility.  It could be said that the Federal Reserve's reputation as a Central Bank has suffered in the past few years (rightly or wrongly) in the eyes of the general public.  In this sense their credibility has gone down.  Most monetary economists, not the Austrian school (of course), give high marks for the job that they have done.



The second issue is information asymmetry.  Not many people write about it (perhaps because it is elementary Keynesian economics, but perhaps not), but nominal price changes waxing over real price changes is a product of not much more than an enormous information asymmetry problem with regard to fiduciary media (money).  Robert Barro was (maybe) the first to write about it in his article "Rational Expectations and the Role of Monetary Policy." (gated)  I'm writing about the issue as a potential moral dilemma in "The Morality of Monetary Policy" (forthcoming).  The root of this idea is a purely Keynesian one, "Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labor whenever there is a rise in the price of wage-goods.  It is sometimes said that it would be illogical for labor to resist a reduction of money-wages, but not to resist a reduction of real wages." (Keynes, The General Theory of Employment, Interest and Money, 9) This demonstrates what has come to be known as wage rigidity, an example of sticky prices.

So, if information asymmetry is essential for nominal changes in prices to affect positive changes in output, then why is Bernanke's Fed reducing it?  I think that is because of rational expectations.  Rational expectations involve what the public thinks the future value of money will be.  Typically, expectations are formed from the average of the past few quarters price movements (inflationary or deflationary).  This is why monetary economists are interested in trend inflation, because we think that we are measuring expectations.  There can be deviations from this when the consumer has information that runs strongly counter to this.  Also, inflation can deviate from this when it begins to escalate take on a momentum of its own.

Keeping expectations within trend inflation is easy for a central bank with a good reputation, but not easy for one that does not.  Bernanke's moves towards transparency likely show that he is interested in promoting the Central Bank as credible, and promoting the effects of shrinking the money supply as soon as he can or sooner.

This is likely a good move, as long as he understands that when or if the Fed needs to expand the money supply again... they likely will need to increase information asymmetry rather than decrease it.  So if Bernanke is using this as a tool to promote Fed actions to curb inflation when inflation becomes more of a problem, I'm all for it.  If he's planning to be more transparent generally... we'll have to see how it impacts the implementation of monetary policy.

One last thing to note is the stark comparison for how the Bernanke Fed uses information to transmit monetary policy and affect behavior versus the way that every other Fed administration has.  Obviously they've been much more vocal and transparent.  One could compare if the public has been more sensitive and responsive to changes in the money supply when they are expecting it and understand the reasoning better or when it just occurs without comment.  I think this would be an good research project.

John Maynard Keynes Video!

This is a video of John Maynard Keynes speaking.  I love listening to videos on youtube of economists speaking, but until now I've never found one with Keynes.  I just had to share this geeky treasure!

I found this via Paul Krugman's blog, but I think he got it somewhere else too.  I'm looking for other interesting economist videos.  Especially if anyone has video of notable economists teaching in a classroom setting, that would be very interesting to me (especially Milton Friendman's graduate microeconomics class).

Austrian School Wins Poll

I asked my readers this question:  "Which 'School' of Economics is Closest to You?"  These were the results:

1.  Austrian (41%)

The Austrian School was founded by a generation of economists that were influenced by Carl Menger, who taught at the University of Vienna.  Notable This generation included Friedrich von Wieser and Eugen von Böhm-Bawerk.  It was Wieser that succeeded Menger at Vienna and taught the next generation which included Friedrich Hayek (left), Ludwig von Mises, and Joseph Schumpeter.  The school is still active with economists such as Peter Boettke and Israel Kirzner.

2.  Neo-Keynesian (24%)

John Maynard Keynes (left) launched this school of thought when he revolutionized the field with his groundbreaking work, The General Theory of Employment, Interest and Money.  This work had a lasting influence on other important economists such as Joan Robinson, James Tobin, and perhaps most importantly on Paul Samuelson who did much to add mathematics to the logical principles set forth by Keynes.  This school is probably best described today as New Keynesian and it includes most of the information economists such as George Akerlof and Joseph Stiglitz.  His greatest champion today is likely Paul Krugman.

3.  (other) (17%)

There are many schools that I could not mention such as Neo-Ricardian, Classical, Supply-Side, and others.  Individuals also often refuse to be categorized.

4.  New Institutional (12%)

Institutional economics also dates back to the 1930's when Ronald Coase wrote his essay, "The Theory of the Firm."  This school focuses on  laws that govern behavior and shape social norms as the primary causes of economic realities.  The term New Institutional started in the 1970's when Armen Alchian and Harold Dempsetz completely redrew mainstream economic understanding of the firm in their essay, "Production, Information Costs, and Economic Organization."  Contemporary participants in this school include Elinor Ostrom (left) and Daron Acemoğlu.

5.  Monetarist (6%)

This term is, for the most part, interchangable with the "Chicago" school of economics, which is perhaps the name that it is better known by.  This school was started at the University of Chicago by Frank Knight who invigorated the program there.  Milton Friedman (left) is the economist that is most associated with it.  It possibly has more Nobel laureates than any other school of economic thought; including Friedman, Robert Lucas, Gary Becker, George Stiglitz, Theodore Schultz, James Buchanan, and others.

6.  Marxist (0%)

Karl Marx (left) created the Marxism along with Friedrich Engels in the 19th century.  There have been many individuals including Sydney & Beatrix Webb that were influenced by Marx & Engels.  Marxism has many variations including socialism, communism and combinations with other schools economics to create distinctly Marxist variations.  Much of this has fallen out of favor as most governments that have tried to implement policies that Marx advocated in Kapital have not proven to work very well or at all.



Please vote in the new poll, "Who Should Win the Nobel Prize in Economics?"

Do Episodes of Recent Global Unrest Have Any Commonalities?

This has been a year of unusually high amounts of public unrest.  It all began last December when a man named Mohamed Bouazizi.  He lived in Tunisia, in an area of reported 30% localized unemployment.  He had his street vending wares confiscated because he did not have the proper permit.  After arguing with government officials to have his wares and occupation returned to him, he set himself on fire.  His final words before the immolation have been reported to have been, "How do you expect me to make a living?"

A young individual frustrated with government regulation and corruption has started a wave of demonstrations and even revolution in Tunisia, Egypt, and Yemen.  There is ongoing protests and civil strife in Syria and Libya.  Initially, this so-called "Arab Spring" was confined to religiously Muslim majority countries.  They are demonstrating using violent and non-violent means.  Most of them are seeking to end dictatorships.  Recently there have also been large protests and riots in Great Britain and Israel.  Do these range of protests and riots have anything in common?

Protests in Tel Aviv ('avivi)

Protesters in Israel are protesting the high cost of apartment rents in Tel Aviv.  I perused craigslist where it says that one bedroom apartments are going for an average of 5,186 Shekels ($1,465) with a high of $1,723 and a low of $988.  This was a very unscientific and small sampling of Tel Aviv rents.  I'm sure there was a wide distribution of locations, amenities, etc., but I just wanted to get an idea of what numbers I'm working with.  Comparing it to Washington D.C. (another high rent location in my estimation) using the same method of craigslist polling. I found an average of $1887 with a high of $3000 and a low of $765.  Construction is quite widespread in Washington D.C. as companies are attempting to profit on the high prices.  It is much the same in Tel Aviv.  New construction can be quite a political issue in most urban areas.  There are typically significant zoning regulations that, in effect, stifle supply and create response lags to increases in demand.



A Stand-off in Croydon (Raymond Yau)

 

Great Britain has one thing in common with Tunisia.  The riots in Tottenham (which were later followed by ones in London, Manchester, etc.) were sparked by one incident.  In Tunisia's case, a self immolation.  For Great Britain, it was the police killing a reported gang member.  They have had days of violence throughout England, but they started out as anti-police demonstrations.  It is also suggested that the coalition government's austerity measures and general economic issues were also contributing factors.  Britain has been having several large non-violent protests for months for various issues relating to recent government cuts in health care and education.

Great Britain's austerity program has been a terrific counterpoint to the United States stimulus for economic observations.  Economists have been comparing economic conditions in each country to compare effects of different reactions.  The U.S. and U.K. are not completely alike, but it is rare that similar conditions (financial panic of 2008) have caused such severe economic slowdowns at almost exactly the same time.  In October 2010, the coalition led government instituted a five year plan to reduce the U.K.'s budget deficit from 11% of G.D.P. to 1% of G.D.P.  They did this by slashing citizen benefits and public sector jobs.  The United States has just lost its AAA bond status, while the United Kingdom kept its, but at what cost?





The chart above shows the relation between "jobseeking" (y axis) and employment and support allowance (ESA) (x axis) for the different regions of Great Britain.  I've blanked out some of the names so, the larger and more recognizable ones will be seen.  The chart shows unemployment over time by regions, and one can see the impact of the recession as about a  2% increase in job seeking across the board.  Just press the play button, and it will begin moving in a time series.

In the past couple years, the David Cameron led coalition government have been promoting austerity measures.  Prime Minister Cameron has likely made sound decisions from a long-term way of thinking.  In the short term, it appears that there is an increased propensity for civil unrest.  In the United States, we have been able to avoid civil strife, despite relatively high unemployment.  Have we avoided civil strife simply because we have continued to pay unemployment benefits for unusually long periods (and other forms of welfare)?  One of the drawbacks of Keynesian economics is that the debt is often not worth the benefits in the long run from a cost-benefit analysis.  This was played down by John Maynard Keynes, "The long run is a misleading guide.  In the long run we are all dead."

Surely the American stimulus must be paid for, and it likely will not be worth it from a cost-benefit point of view.  What if these programs fail a cost-benefit analysis, but they maintain intangible, unobservable factors such as what is often called the "fabric of society"?  Nobody can really tell which factor exactly keeps the façade of civilization apparent to all of its citizens (or fabric of society), but surely that has a real benefit as well.

So what do these protests, riots, and demonstrations have in common?  Frustration with economic conditions is widely observed to be a contributing factor to all of these protests, demonstrations, and riots.  If we are to keep this "fabric of society" woven, we must have some degree of economic success.  Moreover, that success must be widespread throughout society.  As economists, we must address economic growth and equality in a way that is not a handout or a burden on future generations.  We must be serious about education both on a national and individual level, as skills disparity have been shown to be a main contributor to economic inequality.  If we are to institute programs of austerity, we must study to find a better way of promoting, establishing, and easing into them.  They will never be pain free, but simply making wholesale cuts is not the best answer either.

Last, governments around the world need to allow their citizens to be economically free.  This means that everyone must be allowed to compete.  Too often, we handcuff poor and/or low skilled individuals through various regulations and then give them various forms of welfare.  Hand outs are dehumanizing compared to jobs.  Hand outs should be reserved for individuals that have no means to produce a reasonable level of income such as the handicapped and elderly.  Every able-bodied individual should have the right to pursue their best level of productivity and the responsibility of their results.

EDIT: Dr. Nouriel Roubini wrote a similar article to this topic here.

Modern Monetary Policies... and the Rules that Govern Them

This is the final essay that I wrote for my Economics and Public Policy Synthesis.  It can be considered useful for someone looking for an introduction to central banking, monetary economics, or some of the recent plans and Fed policies.