TJ Palanca

Economics

2012-04-20

On Stochasticity



Sometimes the noise is more important than the signal.

It’s been a while since I’ve written anything original, so I’m planning to get back on track with this blog. No, this isn’t going to be an econometrics lecture, nor do I promise complete accuracy.



The ui represents stochasticity in this linear regression.

We all know that letter at the end of the sample regression function: u. It’s the stochastic disturbance term. Peculiarly, it is absent in the population regression function, the form and intensity of which is, according to my professor, only known to God. If you follow this vein of thought, you would eventually come to the conclusion that the u is simply the sum total of our ignorance. I disagree; I believe that the u represents something more than the lack of knowledge; it represents change and freedom. That u actually captures all effects, big or small, that weren’t and cannot be captured in the structured hash of the equation; the chaos in the world, as one might say.

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2012-04-20

On Interest Rates and Mortality



A limited time on this earth makes time precious.

I’ve always been puzzled by interest rates. They say it’s the price that relates future goods to present goods. Simply put, it’s a price tag on the ability to consume goods now rather than later (for example, a saver who defers the purchase of his marshmallows will get an interest on his savings for more marshmallows in the future.)

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2012-04-19
On Trial, Error and the God Complex
Tim Harford, who writes one of my favorite blogs, The Undercover Economist, speaks at TED about the merits of trial and error, the failures of the God complex, and the importance of making good mistakes. It seems so obvious when you listen to him, but it’s when you look around and see everyone trying to fix the world’s problems with their own preconceived master plans that you see how few people grasp the beautiful heuristic process of variation and selection.
2012-04-19
On Prices: Informative, Summative, and Coordinating
Nowadays, people usually take for granted that they can buy all sorts of stuff. It never crosses the mind how difficult it is to actually make the consumer products. As Milton Friedman demonstrates in the following video, no one person can make a product even as simple as a pencil from scratch.
It is only through the voluntary coordination of the efforts of various economic agents that we can make the products we use today.
Critical to this coordination is the price system which, through a simple number, informs the various economic agents on what to produce, how to produce, and for whom to produce in order to maximize profit. This allows people, who might not even know each other, to cooperate and produce immense value for the economy.
This video is actually based on an essay by Leonard Read entitled “I, Pencil”. To sum up, here is a TED talk by Thomas Thwaites where he narrates how he tried to make a toaster from scratch.
2012-04-19

On Quotes from F.A. Hayek



What a glorious mustache

Here are some interesting quotes I dug up from Friedrich A. Hayek:

On the inherent conceit of top-down approaches:

“The curious task of economics is to demonstrate to men how little they know about what they can imagine they can design.”

It’s amazing how the simple yet powerful price mechanism coordinates and optimizes the structure of production in the economy, and how plans by the many and not plans by the few allow this mechanism to operate well.

On redistributory mechanisms:

There is all the difference in the world between treating people equally and attempting to make them equal.

Only what one deserves.