Asset Pricing by John Cochrane. This is the book if you want to understand finance theory from an economic viewpoint.

As the first of these Economist Jokes says, economists have a reputation for disagreeing. And given that Jason Soon is a big Hayek fan, and I’m an admirer of (though not a follower of ) Gunnar Myrdal, we would be expected to disagree more than most. But, facts have a way of forcing themselves on our attention, and, given the experience of the past 100 years or so, it’s not too hard to conclude that:
(i) in general, free trade in goods is a good idea
(ii) free trade in financial capital is not such a good idea
As Jason observes, even strong free-traders like Jagdish Bhagwati agree on this. Similarly, despite writing some very effective critiques of standard trade theory, so does Paul Krugman. Since there’s no fundamental difference between international and domestic trade, I’d take the points further to say
(i) in general, free markets in goods are a good idea
(ii) in general, financial markets need regulation
Those who like plenty of cut and thrust in their blogging should not be disheartened by this sudden outbreak of consensus. There’s still plenty of room for disagreement. I see health, education, infrastructure services and labor markets as being more like the financial sector while I’m sure Jason sees them as being more like ordinary goods markets.

Happy 0-th birthday to Rosemary Morgan. Best wishes to David and Katie

I managed to avoid saying anything about the Kernot-Evans business in the hope that someone else would say it for me. For the record, I agree with Ray Cassin.

The NY Times says that America ought to be discussing Battle Plans for Iraq. The bigger question, I would have thought, is, what do they do once they’ve got rid of Saddam? Bush senior had no answer to this one, and therefore decided to leave him in place.

A question which must have occurred to most of us: Is Blogging a Fad? has been answered pretty well by Arnold Kling. My own two cents worth on the subject. The boundaries for technofads can be set on the one hand by CB radio (one of the first big fads) and email (clearly not a fad). Of the currently hot technologies, I’d say SMS is more like CB radio – an inherently limited technology, with lots of in-group jargon, but no real use that can’t be better served by boring things like voicemail. Blogging is, I think, more like email – easy to use, and with a range of possible uses that still leaves a lot of room for new ideas. The odd bits of jargon (e.g. memes) are like those 🙂 things in email -fun if you’re into it, and easy to ignore if you’re not.

A piece in the Guardian retells the old story about how the big end of town came out winners when the dotcom boom went bust. The sympathy for “small investors” is a bit overdone. Anyone could see that the dotcoms were a bubble, and many said so as loudly as possible, including yours truly . Those who bought into it and didn’t get out in time deserved all they got (nothing). But as the market hits five-year lows, it’s difficult to see how, in this world of defined-contribution superannuation, anyone can avoid being taken to the cleaners by stock-market operators.

My friend and colleague Gerry Garvey noticed this blog and sent me a working paper on whether the use of option grants as a way of boosting reported profits actually succeeds in fooling the markets. The short answer is “Yes”. For the long answer, with lots of algebra and econometrics, you can read the article.

This is a reply from Kenneth Rogoff to Joe Stiglitz. He lands some good punches, without, in my view, fully answering the Stiglitz critique of the IMF. As it’s long, I’ve posted it as a text file.

Plugging his new book, Gil Gordon asks us to Take the Turn It Off Quiz. I came out only moderately addicted because I don’t have a pager, and rarely use voicemail and mobile phones. If he’d asked how often I check my blogstats, on the other hand ….