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    Why do many economists think inside the box?

    Fatih Özatay, PhD31 January 2010 - Okunma Sayısı: 1117

     

    I would like to start with a 'very difficult' question: How do you indicate the TL value of oranges that worth 5 liras per a kilogram in short? You say 5 liras/kg, right?  You say thousand liras/square meter for land; meters/second for speed, or Newton/square meters for pressure.
    MIT professor Blanchard's macroeconomics is one of the couple of books thought in sophomore macroeconomics courses in prominent universities. We also teach it at TOBB University of Economics and Technology. In the last edition of the book Blanchard made a change in 'the open economy' section: he changed the definition of exchange rate. In earlier editions, he used the European definition probably as he is French: an increase in the exchange rate indicated that the domestic currency lost value against foreign currency. In other words, dollar exchange rate in the earlier editions indicated how many liras one dollar worth. In the new edition, however, an increase in the exchange rate indicates that domestic currency gained value against foreign currencies. That is, the exchange rate shows how many US dollars one lira worth. This definition is generally used by Americans. In fact, Blanchard changed the definition due to popular demand from a number of professors from US who teach the book at their classes.
    This is one of the subjects that confuse me since the beginning of my studies in the field of economics. Think of a time period where the Internet was not yet invented and thus academic studies were not easily accessible. And imagine that you obtain a successful academic study. You start to read it; and after a couple of pages you see that the exchange rate is defined just as the opposite of the way you are accustomed to see. You get totally confused: did the domestic currency gain value? Why then exports increased? Domestic currency should have depreciated because the exchange rate decreased. But was not it the exact opposite?

    I do not know you, but it at least confuses my mind. Way before, I realized that I have a 'learning disorder': For instance, I think someone's name is İskender but he corrects me and tells me that his name is actually Ertuğrul. However, I cannot stop mixing the two up. So in time I developed a solution for this disorder. For instance, if I know that man's name is either İskender or Ertuğrul, I put into my mind a phrase for him: 'the guy who has the same name with the former football player at Beşiktaş and current coach of Bursaspor'. This is a roundabout method; you have to run a simple algorithm in your mind. But it works and minimizes the errors.

    Unfortunately, I could not come up with a similar method for exchange rates. Therefore, I teach Blanchard's book from the last edition but return to the old edition at the open economy chapter.
    So, the question we will ask is; why do economists not indicate the unit when defining the exchange rate and why does this not constitute a standard? If the chapter where the dollar-lira exchange rate is defined showed that 'E lira/dollars', we would understand that one dollar was equivalent to E liras. Writing down the units always makes it easy to solve a science problem. It reduces the risk of making mistakes. Say that you multiplied two variables and reached a result; say that you found the value of kinetic energy. If you also multiply units; you can control whether or not the result you found corresponds to the energy unit.
    There is an even more significant difference between study in engineering and study in economics which is particularly valid for the study of economics in Turkey: Many economists are unaware of the importance of conjuncture. It is likely that some textbooks in Turkish also play a role in this.

    You come up with chapter titles like 'Keynesian model', 'neoclassicals' or 'monetarists'. This divides the mind into compartments. If the professor teaching the course is popular among students and is inclined to one model, that model is favored and supported by students. For instance, the economy contracted and unemployment rose. If you are a 'neoclassical model supporter', you argue that the state shall not intervene. If you support the 'Keynesian model' you claim that public expenditures must be increased and tax rates must be reduced. However, the current milieu of the economy, which can also be called the initial conditions, is quite important.   Economy contracted and unemployment increased after both the 2001 crisis and 2008 global crisis. But if in case of the former public expenditures were increased and tax rates were reduced, catastrophic outcomes would occur. However, it was exactly what should have been done (though in a controlled manner) in 2008 and 2009.

    In short, economic policy cannot be made independent of the initial conditions and the conjuncture the economy is faced with. This is a usual situation for an engineer. A machine that would run in an environment prone to corrosion would be designed differently than a machine that will not run in such an environment. However, the environment is never taken into account in developing economics study if not in developed economics study. As a result, you raise economists that think inside the box and that restrain from eclectic thinking.

     

    This commentary was published in Radikal daily on 31.01.2010

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