1. First, I'm working on my Keynes/Newton paper this morning, which includes a lot of members of the Royal Society, which means I'm doing a lot of googling on these members just to get a few basic facts to give some context. It turns out, British science (and I'm assuming all scientific communities) are relatively incestuous in the sense that there's a lot of intermarrying of scientific families, and kids becoming famous scientists and marrying other scientists, etc. This is not new of course, and people who know the science of economics know there are a lot of families that do economics generation after generation too. This raises the basic question of nature vs. nurture. I think the smart answer to that question is simply "both, and let empirical work sort it out if you really care how it breaks down". But one thing I was thinking about when going through these Royal Society biographies was that while the "nature" side is more or less straightforward in what we're talking about, "nurture" captures an awfully complex set of ideas. Economists have a tendency to think of it in terms of family resources (being able to send your kids to good schools), and perhaps instilling in them a recognition of the value of the investment, but a part of it is probably also a more general inspiration and frame of mind. A good economist needs a good education, and inheriting intelligence is probably important too - but as we all know some people just have a knack for "the economic way of thinking". Paul Krugman's success, for example, is that the economic way of thinking comes so natural to him that he can also explain it easily to the general public. This is a different sort of "nurture" than we often think of. Keynes grew up in an economists household. Larry Summers, Jamie Galbraith, John Stuart Mill, Walras, etc. etc. all grew up in families run by economists. Is it any wonder they're good at thinking like economists? It's also a matter of who you look up to. My great-grandfathers on both sides have influenced my view on the world a lot: Dr. Barnard Joy on public education and H. Vernon Eney on state-federal relations, constitutionalism, and reform movements. Sure they did OK in life financially and that trickles down and helps me out, but the real influence of these two men on me has been much less direct than that and has been more inspirational than anything else. It stands to reason - when you see the rest of the world looking up to illustrious family members, of course you're going to think that whatever they did in that field has to have been valuable.
Anyway - nature vs. nurture is a false dichotomy, but it's also a dichotomy that hides a lot of the detail on the nurture side.
2. Second, in thinking about the reporting on the situation in Europe and fiscal policy here, it seems to me that while we know time is very important for macroeonomics, we need to think more about differences in timing across different actors. Financial markets can probably move faster than anyone, central banks are the next fastest, consumers, workers, and capital owners are the next fastest, and fiscal policy makers are the slowest. This ranking is determined largely by institutional factors that structure decision making (in a dictatorship, for example, the fiscal authority could probably move about as fast as consumers/workers/capital owners - but still probably slower than central bankers or financiers). Now, we all still work with expectations of action, so the difference in reaction time is not as simple as it first looks. Financiers and central bankers may move much faster than the fiscal authority but they still have to act with expectations about what the fiscal authority will do, so they do not have a free hand. How would we model this? Usually we take the objective functions of these different decision makers, optimize them, and figure out the implied equilibrium as if they all acted at once. Sometimes we explicitly make them act in stages (as in a lot of the time inconsistency literature where government and households may act together in the first period, and then the government re-optimizes in the second period).
The trouble is, sometimes these players act quicker than you might expect. The stimulus package was passed in relatively short order, for example - with follow-up actions by the fiscal authority much more delayed. So perhaps the best way to model this is to take a cue from models of price setting behavior. You could do a Calvo-type model with different probabilities re-optimization opportunities assigned to each decision maker (financiers get the highest probability, central banks second highest, households and firms third, and fiscal authorities fourth). This will get the order in, gives the opportunity for surprises, and (consistent with other Calvo pricing models) will still give you agents working on the basis of expectations of actions of other agents.
For the Weekend...
5 hours ago