Economics and the value of art

More than a “Veblen good” the recent record auction price for Picasso’s “Les femmes d’Alger (Version ‘O’)” signals that the extraordinarily wealthy have nothing better to do with all of the surplus value that they have captured.

occasional links & commentary

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Neoclassical economists don’t have a lot to say about the value of art. Basically, they start from the proposition that a work of art, such as Picasso’s “Les femmes d’Alger (Version ‘O’),” is often considered to have two different values: an aesthetic or cultural value (its cultural worth or significance) and a price or exchange-value (the amount of money a work of art fetches on the market). They then demonstrate that, within free markets, individual choices ensure that the price of art generally captures or represents all of the various dimensions of value attributable to the work of art, rendering the need for a separate concept of aesthetic or cultural value redundant. Therefore, on their view, Picasso’s painting is “worth” the record auction price of $179.37 million.*

But the Wall Street Journal (gated) observes that yesterday’s sale of other paintings—including Mark Rothko’s “Untitled (Yellow and Blue)”—reveals something else:

Some paintings act like object lessons in tracking the global…

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The new BIS ‘Handbook on security statistics’. A reason to celebrate.

Real-World Economics Review Blog

The BIS (Bank for International Settlements) has, together with the IMF and the ECB, published a new handbook on how to estimate debt. A reason to celebrate. Mainly, of course, as the handbook enables more consistent and better measurement of debt-securities (mortgages, bonds and the like). But also as this handbook shows how much economic statistics are consistent with the ideas and concepts of institutional and Post-Keynesian statistics. And how inconsistent with mainstream economics. About the first fact we can cite the website blurb (which does not mention the phrase ‘The Great North Atlantic post 2008 debt crisis’ but we all know what this is about):

The importance of securities markets in intermediating financial flows, both domestically and internationally, underscores the need for relevant, coherent and internationally comparable statistics. This need was recognised by the G20 Data Gaps Initiative

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Dollarama Inc hikes dividend by 12.5% as profit rises almost 30%

Business is booming at the low end of the social ladder.

Financial Post

MONTREAL — Dollarama Inc. says its fourth-quarter profit rose about 21 per cent to $100.3 million — above analyst estimates.

It also announced a hike to its quarterly dividend, which will rise by 12.5 per cent to nine cents per share, starting on May 7.

Dollarama’s profit amounted to 76 cents per share, up from 59 cents per share or $83 million in last year’s fourth quarter.

Analysts had estimated 71 cents per share of adjusted earnings and 75 cents per share on a fully reported basis.

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Sales for the Montreal-based company rose to $669 million for the quarter ended Feb. 1, up 14.9% from a year earlier, while sales for comparable locations were up 8.5 per cent.

The company says comparable-store growth was driven by a 3.6% increase in the number of transactions and a 4.7% increase in the average transaction value.

A year earlier, Dollarama’s sales…

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Models, maths and macro: A defence of Godley

Critical Macro Finance

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.

The quote is, of course, from Piketty’s Capital in the 21st Century. Judging by Noah Smith’s recent blog entry, there is still progress to be made.

Smith observes that the performance of DSGE models is dependably poor in predicting future macroeconomic outcomes?precisely the task for which they are widely deployed. Critics of DSGE are however dismissed because?in a nutshell?there’s nothing better out there.

This argument is deficient in two respects. First, there is a self-evident flaw in a belief that, despite overwhelming and damning evidence that a particular tool is faulty?and dangerously so?that tool should not be abandoned because there is no obvious replacement.

The second deficiency relates…

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Bank of Canada’s surprise rate cut seen hurting Canadian banks’ profits

Expect the squeeze on Net Interest Margins and the deterioration of loan books to signal lower profitability and (eventually) job cuts.

Financial Post

The surprise rate cut by the Bank of Canada on Wednesday is expected to contribute to a dampening profit picture for Canada’s banks, according to an analyst at Moody’s Investors Service.

“Persistently low rates create profitability headwinds which combined with lower consumer credit growth will dampen the profit picture for Canadian banks in 2015,” said David Beattie, senior vice-president in the financial services group at Moody’s.

He said low rates would compress the closely watched net interest margin, which measures the difference between interest income earned by the banks and the amount of interest paid out to their customers including depositors, relative to the amount of their interest earning assets. As for the banks’ cost of capital, the rate cut “will not move the dial,” Mr. Beattie said.

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The central bank shocked markets Wednesday morning by cutting the overnight rate to 0.75% from 1%, the first movement in…

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Everything you were Taught About Risk is Wrong

They way we are taught to think about risk is wrong as this post illustrates in its MPT takedown. How about articulating ‘regret’?

Wall Street and Beyond

In my experience, “Risk” is the single most misunderstood concept in finance. Volatility, risk and uncertainty are all terms that are used interchangeably on Wall Street. The confusion is in no small part due to the strong influence of “Modern Portfolio Theory”, which continues to live on despite the fact that it makes no sense. At the core of MPT is the (flawed) idea that risk is equivalent to price volatility. It’s remarkable to me that so much complex math has been built on the back of such a dumb assumption.

Risk = Volatility?

The willingness of the financial community to accept this assumption is astounding. Any reasonably intelligent person who stops to think about this for 5 minutes will realize how nonsensical it is:

  1. Volatility measures the extent to which a stock price has fluctuated historically, both upward and downward over an arbitrary time period (e.g. a month). Risk

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Why Canadians can expect low interest rates for longer — much longer: Morgan Stanley

Should be of no surprise to anyone who follows real people working in the real economy where our growth has been a mirage rather than those who think it acts as a metronome and can be propelled by over reliance on the resource sector and household indebtedness.

Financial Post

Don’t look for another interest rate hike for two more years; in fact, there is a one in three chance the Bank of Canada will actually cut rates before the end of this year, Morgan Stanley predicts.

The latest forecaster to take a stab at the impact of plunging oil prices on Canada’s economy, the American bank stands out for its bearish take.

The bank not only pushed its forecast for the first rate hike to 2017, it predicted others would soon follow suit.

“The fall in oil is undisputedly negative for Canada’s economy,” the bank wrote in its report Wednesday “Canada Outlook: Sands through the hourglass.”

“Rate differentials should continue to move against Canada, if, as we expect, the market pushes out expectations for tightening from the Bank of Canada into 2017, reflecting a later closing of the output gap.”

Until Tuesday, most economists have expected a rate increase…

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