Meditations on the Politics of Limited Knowledge

Archive for the ‘Economics’ Category

The Hotelling Line: A lesson on Use and Abuse of Economic Metaphor

In Economics on April 25, 2010 at 3:02 am
Note from the editor: I am pleased to introduce our first guest blog from long-time friend and collaborator, Graham Sack. The following draws out the lessons of a bygone economic theory for a discipline in crisis. Graham’s history of the “Hotelling line” is an apt and informative follow-up to my recent lengthy post on Paul Krugman and the dangerous but seductive simplicity of reductive economic models. Another example of how insufficiently self-critical knowledge can be led astray. ~ drferris ]

In March 2009, as the markets lay in shambles and prognosticators debated the merits of the recently enacted stimulus bill, 
there quietly passed the eightieth
 birthday
 of
 the
 ‘Hotelling
 line,’
 an
 influential
 microeconomic
 model
 first
 proposed
 by
 Stanford
 professor
 Harold
 Hotelling
 in
 his
 article
 “Stability
 in
 Competition” (PDF).
 The paper
 launched
 two
 new
 sub‐disciplines
 within
 economics—the
 study
 of
 spatial
 competition
 and
 product
 differentiation—and
 is
 required
 reading
 for
 graduate
 students
 and
 aspiring
 microeconomists.
 Along
 with
 Edgeworth’s
 box and
 Nash’s
 equilibrium,
 it
 is
 one
 of
 the
 foundational
 metaphors 
of the
 discipline,
 arresting
 for 
its 
simplicity, 
clarity, 
and explanatory
 power. 
It 
is 
also
 fundamentally 
flawed. Read the rest of this entry »

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Ideas Have Consequences: The Education of Paul Krugman

In Current Events, Economics, Politics on March 9, 2010 at 2:29 pm

Paul Krugman fumed as he read audacious remarks the CEOs of JPMorgan Chase and Goldman Sachs made in testimony before the United State’s Congress:

Dimon had commented that financial crises were just things that happened every few years; Blankfein had compared the crisis to an act of God, like a hurricane. Krugman was curious to know whether these giants of Wall Street understood what they’d done wrong.

But only gradually has Krugman himself come to understand what can go wrong when reductive economic thinking is applied to the real world — and even he has a way to go. An excellent profile by Larissa MacFarquhar in the March 1, 2010, issue of The New Yorker (citations to hardcopy pages follow), traces Krugman’s own consciousness of politically embedded economic knowledge in a way that reveals much about the epistemic stance of the discipline vis-à-vis practical action in the world. Read the rest of this entry »