Wall Street Smarts

This was your comparative reading for the week:

Wall Street Smarts by Calvin Trillin
Smart Guys and Wall Street by Paul Krugman

As your readings for the week have been suspended for the duration of Singapore's Silly Season, this will be a presentation instead.

What makes a theory valid?

Calvin Trillin is a humorist, not an economist. The essay is a tall tale told by a fictitious man. Wall Street Smarts exists in the realm of fable, establishing timeless truths (or morals) from fabrications.

Why was there a financial crisis in 2008? Trillin tells a story instead, which Paul Krugman, winner of the Nobel Prize for Economics, endorses from his observation of graduate school and the financial service industry.

How do we measure the validity of a piece of qualitative research (or in this case, a qualitative essay)? Without recourse to charts and statistics, the idea expounded must be tested in terms of theoretical rigour, explanatory value (both in context and transferability), and credibility. The biggest test of whether a qualitative piece of reasoning is valid lies very much with its credibility - when deconstructed and restated in its barest axioms, would you be able to buy the explanation whether or not you agree with it?

Wall Street Smarts, restated

Why did the financial crisis of 2008 occur? One could point to the many economic explanations - overinvestment, market bubbles, toxic instruments. But why were overinvestment, market bubbles, and toxic instruments promoted? Why indeed were derivatives invented and then pushed the way they were?

Here, the economists have no answers because the question asks for an exogenous explanation for the crisis, which lies outside the boundaries of the economics discipline.

Trillin in effect proposes an explanation that turns the spotlight on the history of economics, the social anthropology of the finance industry, and the political economy of employment.

1. In the old days where finance was about selling actual industry, the financial services sector largely recruited from a hereditary class of bankers and financiers. Barriers to entry were not too high: a college education would have done it (plus either relatives or friends or classmates in the industry).

2. Owing to comparative lower prestige, the financial services sector did not attract the best, the brightest, the most ambitious, the most greedy.

3. The roots of the financial crises of the late 20th century and 2008 lie in the increase of prestige of the financial services sector, its attraction of the best and the brightest (etc.) graduates, and the increase in university tuition and student debt, and of course the balloon in executive pay in the financial sector compared to other sectors.

4. The last two factors create an industry fronted by innovative, ambitious, and greedy agents who were smart enough to invent complicated toxic instruments, fake products, massaged company accounts...

5. The financial crisis occurs because there is no longer any correlation between the healthy trade of toxic instruments and massaged numbers, and the health of the real economy.

Wall Street Smarts, Singapore civil service edition!

The next best test (other than the very subjective notion of 'credibility') is transferability. What other context, what other industry can we find a similar set of environmental factors?

We note that a post-independence strategy of the Singapore is its much-vaunted introduction of university graduates into its civil service. Gathering pace more in the late 1970s, the policy has morphed into the recruitment of scholars fast-tracked into senior posts and handpicked for politics by the ruling PAP.

Note the increasing salaries and bonuses for the civil service. Note the increasing salaries for MPs and ministers - which only began when the scholars started entering politics. Note the increasing reliance on complicated KPIs and statistics that no one can comprehend and therefore trust, note the trumpeting of dodgy rankings that somehow suggest Singapore is the best nation is this and that and the other. Note the anger from the ground about how far the trumpeted KPIs and rankings are divorced from the everyday reality and experience of normal Singaporeans.

Wall Street Smarts - not just a story that took place a long time ago in a country far, far away.

Underemployment in post-crisis economies

Your comparative readings for the week

Ex-NUS graduate: I'm a failed product of our meritocratic system
In Japan, young face roadblocks
The curse of the class of 2009

Discussion questions
1. What is a labour market?

2. As a perfect market, how would we theorise it to work? In a perfect, rational world how would the labour market deal with a recession situation? How would a "recession graduate" experience this?

3. Consider the real world examples. Why does it not work perfectly? Can there be cultural, social reasons why a local labour market will never work perfectly?

The ultimate national day video project

Your reading for the week at SINdie

Excerpts:

Before August ends, take a trip down with us through memory lane and look at a special set of videos. These videos have been around since 1985 and are influential in the way they have shaped our perception of ourselves, the places, the people and the systems around us.

Nobel Prize winner on immigration

Your reading for the week

Paul Krugman, The Curious Politics of Immigration

Excerpts:

The [Republican] party likes inexpensive workers - and would really enjoy a huge guest-worker program that would both provide such workers and ensure that they can neither vote nor, in practice, unionize...

Open immigration can't coexist with a strong social safety net; if you’re going to assure health care and a decent income to everyone, you can't make that offer global.

There is only one party to vote for

Your reading for the week:

Shirley Tan, "To the Memory of Goh Hung Chuan, PBM, my grandfather"

My grandfather sits by a stone table in the courtyard. As an aunt walks out of the main house, my grandfather calls: "Come."

Dutifully, she heads towards her father. Without saying a word, she picks up a red China graph pencil and marks a cross in a box next to the PAP logo. Then, she leaves.
Grandfather wets his right index finger with his tongue and wipes away the red cross.
Another aunt prepares to go to work. "Come," grandfather calls out to her.
This is repeated with every grown up aunt and uncle every day during that holiday which I spent with my grandparents.

I did not understand why until I was of voting age.

Grandmother told me: "Your grandfather also made me practise every day, so that there would be no mistake when we went to the voting centre. I would always be in front of him in the queue to collect our voting slips and we would time ourselves entering and exiting our individual booths. I would always show your grandfather that I had voted for PAP, before dropping my voting slip into the box."

Grandfather wanted his whole family to vote for PAP. So he schooled everyone who could vote that there is only one party to vote: PAP.

Story continues here.