[Here, in The Beauty Contest, we plan not to write only about finance and macroeconomics, but about other topics too. We are lucky to start this endeavour having José de Arcos with us, who will write today about the significance of Einstein’s gravitational waves. José de Arcos holds a Ph.D. in Physics from the Illinois Institute of Technology and he is currently working as a Postdoctoral Research Fellow at the Harvard Medical School. He also participated in the Daya Bay reactor neutrino experiment in Shenzhen, China]
I recently had the great honor of attending a lecture by Dr. Rainer Weiss where he introduced the achievements of the Laser Interferometer Gravitational-Wave Observatory (LIGO) experiment  in an easy going and approachable tone. He has inspired me to spread the word and share with you one of the most remarkable accomplishments in human history in my own way.
In the past, no such long time ago in the timescale of the universe, the first human species looked up toward the stars for first time, wondering, as we do today, what secrets were hidden in those twinkling lights. The first astronomers deduced that there was some kind of pattern in the never-ending dance of stars, a periodicity that taught them when was optimal to harvest their crops, and as a result the first civilizations flourished. The same lights showed the way to all travelers, sailors and wanderers who pushed our own frontiers a bit further at a time, until we mapped the whole world. But even then, we kept looking up to the infinity of the darkness, still wondering what secrets were hidden in those sparkling dots. One of the first experimental physicists, Tycho Brahe, kept track of the position of the planets for decades, providing Johannes Kepler with enough data to recognize a mathematical pattern: the planets moved in an elliptical fashion. And along came Newton, who, in a staggering demonstration of intelligence, was able to unravel the laws of gravitation. The work of three men changed the history of all humanity in a remarkable way.
Celestial navigation was one of the first practical applications of astronomy
[This post was co-written with Rafael Wildauer, Ph.D. Candidate at Kingston University, who is doing research on the links between income and wealth distribution, credit, growth and financial stability]
We are pleased to present our first report on the US economy using a model we have developed together over the last year. We will only provide here a brief summary with the main conclusions; interested readers can read the whole report for free here. Senator Sander’s economic program (and the discussion that has erupted in the last few weeks) has provided us with a nice example of why having a simple but holistic model of the US economy can help a lot in discussing economic policy issues and in dispelling ‘half-way’ economic reasoning. Because a copy-paste strategy from the report would be boring for the readers of the blog, we have decided to add a brief analysis of the Mr. Sander’s economic program as an example of the usefulness of the model advocated here. We think it is worth discussing what has been left out by Gerald Friedman as well as by his critics – notably Christina and David Romer. If you already read the original report, then you can skip the first section and go directly to the section dealing with Mr. Sanders’ economic program.
The Kingston Financial Balances model (KFBM)
First, a few words about the model. The Kingston Financial Balances Model (KFBM) is a stock-flow-consistent (SFC) model that tracks the evolution of the main variables of the US economy. A SFC model is, in a nutshell, a framework that ensures that all real and financial flows of an economy accumulate into stocks over time. For many people (e.g. engineers, physicists and accountants), we are sure this definition will not be very innovative. But in economic modelling, it is. Most of the economic modelling is carried out without any concern for the accounting consistency of real world economies. At the most basic level, such models simply estimate ‘sophisticated’ econometric equations for the GDP components (i.e. consumption, investment, etc.), and then they sum them up to come up with a (usually short-term) forecast for GDP, but without mentioning the implications of these expenditures for the financial positions of the different sectors of the economy. At a more advanced level, exemplified for instance by the Dynamic Stochastic General Equilibrium (DSGE) models, the sophistication falls on a rational description of the agents of the economy, but again, with little concern for the accounting consistency of the framework. In other words, economists have been in general very busy to come up with more sophisticated models, but accounting consistency is not among the top priorities.