Tuesday, October 23, 2007

Economics is not a Rocket Science

This is from an interesting book, with an unimpressive title: The Knowledge and The Wealth of Nations: A Story of Economic Discovery, page 169
(Lucas) sought a 1957 book by Richard Bellman, Dynamic Programming. Bellman was a mathematician working at RAND Corporation, quite literally a rocket scientist. He had invented a set of techniques designed to optimize decisions in which long chains of choices had to be made amid changing circumstances -if for example, you wanted to fire a missile into the upper atmosphere and hit a target halfway around the globe, or even travel to the moon".
"Lucas hoped the same methods could also be applied equally to calculate a point at which to spend or save, to decide when to draw down inventory, or to switch from stocks to bonds. Anything that required a formal statement of the links between present and future was a candidate be improved by rocket science".
Now I know why I had so much trouble preparing for Macro mid exam. (grin)

OK, let's just play jazz.


  1. Rizal, pls try to think an aggregate for the size of a province, then find an applicable macroeconomics concept for our country to be divided into smaller independent contexts. :)

  2. Good thought. Maybe we can then come up with the optimal number of local entities for economic growth --I don't know about separatism, though.

  3. If you like Bellman, read his autobiography, "Eye of the Hurricane" He may be smart, but I wouldn't wanna be him.

  4. There's nothing about separatism.

    Think Indonesia as an unconditional free trade region.

    Take a standard approach:
    Y = C + I + G + (X-M)
    AD = SRAS, P = Y

    Ysum = Csum + Isum + Gsum + (X-M) between Sum & the rest of Ind

    ADsum = SRASsum, Psum = Ysum

    Yjaw = Cjaw + Ijaw + Gjaw + (X-M) between Jaw & the rest of Ind

    ADjaw = SRASjaw, Pjaw = Yjaw

    Yind = Cind + Iind + Gind + (X-M) between Ind & the rest of ind

    ADind = SRASind, Pind = Yind

    Yind = f (Ysum, Yjaw, Ykal, Ysul, Ytim)

    Pind = f (Psum, Pjaw, Pkal, Psul, Ptim)

    With Ind monetary authority who controls dP = f (dRate)

    Balance of Payment can be set something like this as well, right?

    Eg., you're a Jawa income tax resident:
    - working in Sumatera,
    - sending money to your family in Jawa for their spending in Jawa,
    - lending money/invest to Sumatera business,
    - buying land in Kalimantan,
    - spending money to your parents in Sulawesi, and
    - giving charity to the people of Papua.

    You can still work out the BoP, right?

  5. I haven't looked at that possibility, but, alas, it has to wait since I still have piles of papers to digest.

    I thought you wanted, using Bellman's dynamic programming, the point at which a region decide to separate from or stay within the country --which is a very interesting exercise, too