Like the author of this post, I tend to follow Austrian Economics; let’s see
18 Days Later…
By Vedran Vuk
In the Daily Dispatch, I often discuss what’s on Bernanke’s mind. However, to a large extent, I’m simplifying his real thoughts. With Keynesian economics, it’s always easier to discuss the philosophical aspects than the very specific underpinnings.
On the one hand, I want to share more knowledge on the subject, but on the other hand, no one wants to read a math journal. However, I did think of a way to bring the point across. Most of us have never peered inside an advanced economics textbook in our lives. And yet, these textbook pages are what Ben Bernanke is thinking about.
So, today, here’s a glance at just two pages of the most mainstream macroeconomics textbook out there, Advanced Macroeconomics by David Romer. (David Romer is the husband of the now famed economist Christina Romer. Those two must have some interesting arguments over breakfast.)
The hieroglyphics above represent a model quantifying the effect of the savings rate on long-term growth. And this is just chapter 1, page 23. The book continues for another 616 pages. And yes, I’ve read it cover to cover – twice. Not only do I know a lot about Austrian economics, but I’m fairly well trained in Keynesian economics too – or, as I like to call it, the dark arts.
Romer’s Advanced Macroeconomics is assigned to almost every first-year PhD economics students in the country. At MIT, it’s an undergraduate text. Now consider that Bernanke and other lovable characters such as Paul Krugman received their doctorate degrees from the very same math-intensive MIT program.
So, when Ben Bernanke thinks about interest rates, unemployment and GDP, he isn’t thinking about it like the regular guy on the street. He’s trying to solve some ridiculous equation. These two pages are a small sample of how his mind works. His policies may seem bizarre at times, and that’s due to the use of mathematics for his decision-making process. Most of us realize that printing piles of money isn’t a particularly wise idea. However, Bernanke’s equations tell him something different.
In my opinion, utilizing mathematics to centrally plan an economy isn’t a particularly intelligent idea. It only gives the illusion of understanding complexity. Unfortunately, the economics profession has long craved the respect of the sciences. Hence, economists futilely attempt to define social phenomena through mathematical approaches. Some of the cross-over is absolutely absurd. For example, many of the earlier economic growth models were based on ballistics theory. At the end of the day, economics just isn’t physics. And those who apply ballistics theories to growth rates more often than not blow up the world – economically speaking.
So, is there a use for this mathematical gibberish? Unfortunately, yes. As long as the MIT guys are at the helm, we’re in their world. With an understanding of their formulas, one can guess the equations on their minds and the importance of certain variables. Hence, one can get a better picture of the Fed’s actions in the short term.
In my own analysis, I follow Austrian economics for my long-term views on the economy. But for the short term, it’s actually more valuable to understand the ins and outs of Keynesian economics. That’s the only way to dig into Bernanke’s mind.
Even my prediction in yesterday’s Dispatch is influenced by this approach. Will Bernanke start discussing higher rates to boost the dollar? Believe it or not, there is an economic model quantifying whether a central banker should discuss higher rates. Now, I’m not going to base my prediction on a series of equations. But it’s very useful to understand the hobgoblins that may be jumping around Bernanke’s mind.
Well, I hope this gave you some insight into the central banking process and didn’t leave you even more confused.
Idkit aka Ana