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For those not in the know, I’m applying for a cadetship (internship) at the Reserve Bank this summer. Therefore, I shall be preparing by familiarising myself with economic and financial policy prior to my interview. So I thought I might as well share it with all of you. So I guess for the next month or so, this blog will be filled with economics related posts.

So I guess a quick summary of my economic beliefs is in order. I don’t like to label myself with any particular school, cause frankly I don’t belong to any school but just blatantly plagiarise any policy I think is a good idea. I’m a strong behavioural and non-classical enthusiast (particularly with respect to experimental economics and game theory) but rather than formally incorporating them into economic models, I think they’re most useful in sharpening our intuition when we analyse models in the more classical economic theories.

As derided as Homo economicus is, these assumptions are abstract simplifications so we can build mathematical models to describe an incredibly complex system. And many of them are very useful in describing reality – in particular the notion that decisions occur at the margin. I think that an underemphasised point in economics is that it is simply the aggregate decision-making of million different individuals. Though none of those individuals are strictly rational in the economic sense, I think on average you’ll find that they are. Where they are not, then I’m sure behavioural economics can pick up the slack.

I’m a big fan of microeconomics over macroeconomics. In the end, what is macroeconomics but the aggregate decision-making of a hundred different industries? Inflation theory makes no sense till you look at the regulatory structure of hte major industries comprising the CPI. Think about competition within the supermarkets and think of the effect that would have on CPI.

As to what school I belong to, I would say I’m definitely a fusion of the Keynesian and neoclassical schools. I think I’m a bit more neoclassical than the average student simply because I see flexibility as a much greater asset in maintaining stability than most other people. And I’m suspicious of anyone claiming that government is competent and efficient. Having once stood in a queue, I do assure you that it is not. Unfortunately, many of the claims that government can do a particular thing are after-the-fact knee jerk reactions. “Well why didn’t you regulate subprime mortgages better?!” Well yes, they could have, but every single year there would be a new variant of subprime mortgages which wouldn’t be covered by the regulations and we’d need to pass a different law each year and I really think you over-estimate how many laws you can pass in a 10 week Parliamentary session (or however long it is).

But there is a role for government in passing regulations as a baseline. Seriously – how big of a burden is it on business to “not commit fraud, lie on documents or murder opposing counsel.” Ok. I can see why you would be tempted to murder the other side’s lawyer, but my point stands. I think rather than regulations, the frontline of our defence should be a strong and flexible regulator and counter-party surveillance. No regulator can keep tabs on everything going on in a market, its just not possible. How can a person sitting in an office in Sydney understand everything going on across the country? Most business deals are confidential. Its somethingcalled business confidentiality. It is just simply very hard to keep track of everything. That is why it is counter-party surveillance – due diligence and the like – which should be the crux of our economic policy. Subprime mortgages was a case where regulations prevented or did not properly encourage counter-party surveillance.

Government has a critical role to play in economic policy – not in managing the economy, but in ensuring that it manages itself smoothly through intelligent regulation. It has a role to play in protecting property rights and criminalising acts which hurt more than they benefit. And at times of great need, it may pass stimulus packages.

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