Two factors shaping the economics profession today

100 Blogs for Economics Students

A Sales Pitch for Laissez-Faire Health Care

Dan Klein is now at George Mason.

An Unwelcome Message for Obama

An Unwelcome Message for Obama

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Of Golf, Capitalism and Socialism

Of Golf, Capitalism and Socialism

By Armen A. Alchian

A puzzle has been solved. Despite their intense interest in sports, no golf courses exist in the Socialist-Communist bloc. Why is golf solely in capitalist societies? Because it is not merely a sport. It is an activity, a lifestyle, a behavior, a manifestation of the essential human spirit. Golf's ethic, principles, rules and procedures of play are totally capitalistic. They are antithetical to socialism. Golf requires self-reliance, independence, responsibility, integrity and trust. No extenuation is granted misfortune, mistake or incompetence. No second change. Like life, it is often unfair and unjust, with uninsurable risks. More than any other sport, golf exploits the whole capitalist spirit.

And along these lines

59 Is the New 30

Trilemma

This is a technical paper - but the issue of "trilemma," or "impossible trinity" -- a country simultaneously may choose any two, but not all, of the three goals, monetary independence, exchange rate stability and financial integration is important.

Click here.

Incentives

Bill Boyes over on Liberty blogs the relationship between incentives and performance.

Incentives matter. I think Boyes highlights a key application in economic reasoning, one that I have been reflecting on in the context of my summer reading as well as the current expansion of the state in our country.

Incentives come from the institutional framework of society. These institutions, as Douglass North tells us, can be formal or informal, and they are important in shaping the incentives that shape behavior. Boyes does a great job of exemplifying the impact of incentives and incentive changes in this post.

However, I am interested in the process by which both the institutions and the incentives change. In rereading North's challenging book - Understanding the Process of Economic Change - I encountered his concept of adaptive efficiency. North argues that the emergent and evolutionary process that characterizes change is shaped to a large extent by the degree of adaptive efficiency embedded in a society.

In addition, he argues that while formal institutions can be changed very quickly (the example that Boyes provides us - or the current effort to change the "rules of the game" for health care) while informal institutions (norms, beliefs, values, and shared cultural constructs) change very slowly, in his words this change is incremental and gradual.

So, what we seem to be seeing in contemporary political debate in the US is an effort to quickly change a formal institution in the face of no change in informal institutions. Stated differently, current political leaders seem to be attempting to share formal institutions in a way that conflicts with informal institutions.

This also seems to illustrate the adaptive efficiency of our society - that is a flexibility that encourages trial and error and failure. To the extent that the current political movement fails, there has been a higher order outcome and, tragedically, vice versa.

The relationship between Economics, Values and Organizations is the topic of a collection of essays that I might recommend.

So, Boyes challenges us to consider the impact of an attempt to change formal institutional structure in a rapid, tops down manner. I can't help but think about the alternative implied by Boyes - the emergent and evolutionary development of institutional structures described by Hayek.

Douglass North - Economic Performance Through Time

http://nobelprize.org/nobel_prizes/economics/laureates/1993/north-lecture.html


Arnold Kling on Adaptive Efficiency

http://www.tcsdaily.com/article.aspx?id=061807A

Benjamin Friedman - The Moral Consequences of Growth

Nathan Rosenberg - How the West Grew Rich

Opposing view - Megan McAardle
http://meganmcardle.theatlantic.com/archives/2009/08/did_big_government_save_us_fro.php

Gary Becker writes

So legitimate reasons exist for concern about the speed and strength of the recovery of the American economy. However, I worry much more about various regulations, spending, and controls being introduced by the present Congress and by President Obama than by intrinsic difficulties in the American economy.

Arrow on the Increasing Cost of Healthcare

Arrow on the Increasing Cost of Healthcare

The Nobel laureate Ken Arrow:

Oh, why health costs increase? The basic reason why health costs increased is that health care is a good thing! Because today there is a lot more you can do!

The Harmony of Interests in Practice

This is what markets are all about at the end of the day: the harmonization of the self-interest of actors via decentralized coordination. That harmonization allows us to live in peaceful cooperation and extend the benefits of Mises' Law of Association to more and more of humanity. A computer calling me to remind me to refill my prescription might seem like a little thing in the broader scope of human accomplishment, but it symbolizes the real processes that have made possible the levels of peace and prosperity that we have.

http://austrianeconomists.typepad.com/weblog/2009/07/the-harmony-of-interests-in-practice.html

Hurrying Into the Next Panic?

Hurrying Into the Next Panic?
By PAUL WILMOTT
Published: July 29, 2009
On top of an already dangerously influential and morally suspect financial minefield is now being added the unthinking power of the machine.

Economic Principals

David Warsh continues to write about a story that seems to be ignored by the profession and the press.

A major reason is Harvard University’s Russia scandal. Summers’ temperament and his policies at Treasury, both under Robert Rubin and as secretary himself, and how they might have contributed to the financial meltdown, would weigh in the balance, too. From a distance of twelve years, the Russian episode may seem musty with age. Who cares what happened when Harvard undertook its mission to Moscow in the brief heyday of the Russian robber barons?

To recap: a young Harvard professor, Andrei Shleifer, a Russian émigré, is hired by the US Agency for International Development in 1992 to advise the government of Boris Yeltsin on behalf of the US government. In 1997, Shleifer is caught investing in the Russian economy (and trying to set up his wife in a government-licensed business there) and fired by USAID. For the next eight years, he is shielded, at least to some extent, by his friend and mentor, Larry Summers, first at the Treasury Department, then as president of Harvard.


In 2004, a Federal judge finds Shleifer and Harvard to have committed civil fraud and orders Harvard to repay. Two years later, when Summers is asked to resign the Harvard presidency, his conduct in the affair is described as one of the reasons. When he returns to Washington as senior advisor to President Obama, listed among his brain trust is none other than Nancy Zimmerman, Mrs. Andrei Shleifer.

War on Drugs . . . drugs won.

“We’ve spent a trillion dollars prosecuting the war on drugs,” Norm Stamper, a former police chief of Seattle, told me. “What do we have to show for it? Drugs are more readily available, at lower prices and higher levels of potency. It’s a dismal failure.”

For that reason, he favors legalization of drugs,

Summer 2009 Reading

Douglas Irwin - Against the Tide: An Intellectual History of Free Trade, Free Trade Under Fire

Both books are excellent, the first provides an historical overview of the pre and post Adam Smith debate about the foundations for mercantilism (protectionism) and free trade. Irwin traces much of the thought back to classical works of philosophy.

David Landes The The Unbound Prometheus: Technical Change and Industrial Development in Western Europe from 1750 to Present

Wealth and the Poverty of Nations was an outstanding read (must for economic historians). This book is tougher going but worth it as Landes goes into significant detail. If time is an issue, I would recommend Mokyr.

Joel Mokyr The Levers of Riches

I loved reading this book - Mokyr does a wonderful job, well let me quote from this Amazon review:

"Mokyr has demonstrated, yet again, that he is one the best economic historians around. His book is a treasure trove of facts and insights about technological progress often overlooked in other accounts. Further, his argument that economics might do well to adopt the methodology of evolutionary biology instead of the standard application of Newtonian physics is cogent and convincing."--Howard Bodenhorn, St. Lawrence Univ.

"Joel Mokyr is a first-rate scholar who has read a wide body of literature. The book is very well written, lively and engaging. It is closely reasoned and well executed"--Nathan Rosenberg, Stanford University

"Joel Mokyr likes telling his story and he tells it well; his book makes for good reading and rereading, and this in itself sets him apart from many of his fellow economic historians."--The New York Times Book Review

According to Joel Mokyr, economic growth is the result of four distinct processes: Investment (increases in the capital stock), Commercial Expansion, Scale or Size Effects, and Increase in the Stock of Human Knowledge (which includes technological progress proper as well as changes in institutions). Throughout his brilliant book, he correlates technological creativity with economic progress throughout classical antiquity, the Middle Ages, the Renaissance, the Industrial Revolution, and then into the later 19th century.

Eric Rauchway Blessed Among Nations

Thomas Sowell A Conflict of Visions

Sowell at his best. This analysis of the constrained and unconstrained visions is clear and direct. He relies heavily on Adam Smith and William Godwin for illustration.

Adam Smith: Theory of Moral Sentiments, Lectures on Rhetoric and Belles Lettres, Lectures on Jurisprudence, Wealth of Nations, Essays on Philosophical Subjects

This reading is a delight. I was invited to a Liberty Fund colloquia on Smith in July, 2009.

Laird Bergad - The Comparative Histories of Slavery in Brazil, Cuba, and the United States
Fiction

Michael Gruber Tropic of Night

Gruber's first novel. I really enjoyed The Book of Air and Shadows, this one not so much. I will try his newest book The Forgery of Venus.

David Liss A Conspiracy of Paper

I am pleasantly surprised - I could not finish The Coffee Trader and his latest The Whiskey Rebel received negative reviews, but this is wonderful. I have the sequel - A Spectacle of Corruption on order.

John Sanford - Rules of Prey

Sanford's first Lucas Davenport and I am so glad I got to read the beginning.

Daniel Simmons Drood

Wow, talk about an unreliable narrator. A very intense exploration of . . . addiction, obsession, jealousy and . . . Charles Dickens. Excellent historical fiction - made me realize how little I know about this period, Dickens and Dicken's fiction. Very long, but worth it. I have - The Terror, on my reading list.

"Why is Economics Not an Evolutionary Science?"

Kaldor Facts

From Economist's View

The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital, by Charles I. Jones and Paul M. Romer, NBER WP 15094, June 2009 [open link]: 1. Introduction ...[I]t is easy to lose faith in scientific progress. ... In any assessment of progress, as in any analysis of macroeconomic variables, a long-run perspective helps us look past the short-run fluctuations and see the underlying trend. In 1961, Nicolas Kaldor stated six now famous “stylized” facts. He used them to summarize what economists had learned from their analysis of 20th-century growth and also to frame the research agenda going forward (Kaldor, 1961):

1. Labor productivity has grown at a sustained rate.
2. Capital per worker has also grown at a sustained rate.
3. The real interest rate or return on capital has been stable.
4. The ratio of capital to output has also been stable.
5. Capital and labor have captured stable shares of national income.
6. Among the fast growing countries of the world, there is an appreciable variation in the rate of growth “of the order of 2–5 percent.”

Redoing this exercise nearly 50 years later shows just how much progress we have made. Kaldor’s first five facts have moved from research papers to textbooks. There is no longer any interesting debate about the features that a model must contain to explain them. These features are embodied in one of the great successes of growth theory in the 1950s and 1960s, the neoclassical growth model. Today, researchers are now grappling with Kaldor’s sixth fact and have moved on to several others that we list below.

One might have imagined that the first round of growth theory clarified the deep foundational issues and that subsequent rounds filled in the details. This is not what we observe. The striking feature of the new stylized facts driving the research agenda today is how much more ambitious they are. Economists now expect that economic theory should inform our thinking about issues that we once ruled out of bounds as important but too difficult to capture in a formal model.

Here is a summary of our new list of stylized facts, to be discussed in more detail below:

1. Increases in the extent of the market. Increased flows of goods, ideas, finance, and people — via globalization as well as urbanization — have increased the extent of the market for all workers and consumers.
2. Accelerating growth. For thousands of years, growth in both population and per capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the last century.
3. Variation in modern growth rates. The variation in the rate of growth of per capita GDP increases with the distance from the technology frontier.
4. Large income and TFP differences. Differences in measured inputs explain less than half of the enormous cross country differences in per capita GDP.
5. Increases in human capital per worker. Human capital per worker is rising dramatically throughout the world.
6. Long-run stability of relative wages. The rising quantity of human capital relative to unskilled labor has not been matched by a sustained decline in its relative price.

In assessing the change since Kaldor developed his list, it is important to recognize that Kaldor himself was raising expectations relative to the initial neoclassical model of growth as outlined by Solow (1956) and Swan (1956). When the neoclassical model was being developed, a narrow focus on physical capital alone was no doubt a wise choice

From - Economists View

Financial Community Norms
Bill Easterly:

Rulers, communities, and revolution, by Bill Easterly: ...Some have had a simplistic view of institutions in development as deriving only from top-down formal rules and laws. ...[M]uch research indicates otherwise.

First, formal rules that are incompatible with community norms often have no effect (this extends to things like trying to have registered land titles when the local community already has customary allocation of land rights, research on paper land titles in Africa confirms they have little effect on anything).

Second, if the rulers are especially oppressive they could enforce the incompatible formal rules by force, which would make communities worse off. But in a free society, the community can resist the rulers, which is part of the benefit of a free society.

Third, most rules we live by in a free society are more the product of community norms than they are of formal laws. (Fancy version: Rules emerge out of complex social interactions in a spontaneous order.) This is a good thing, as it makes the rules more responsive to local circumstances and needs. Down with arbitrary rules, up with community norms.

There's a lesson here for regulation. It's not enough to change the rules. If the culture doesn't change to support those rules, the rules won't be effective.

The Theory of Moral Sentiments - Part 6

Part 7

Part VI: Of the Character of Virtue. First sentence: "When we consider the character of any individual, we naturally view it under two different aspects; first, as it may affect his own happiness; and secondly, as it may affect that of other people." Concerned about character. Challenge to take care of yourself; prudence depends on communion with impartial spectator.

Podcast 6

The Theory of Moral Sentiments - Part 5

Podcast 5

Two great articles on the invisible hand.
"In Adam Smith's Invisible Hands: Comment on Gavin Kennedy", by Daniel B. Klein. Econ Journal Watch, vol. 6, no. 2, pp 264-279. May 2009.

"Adam Smith and the Invisible Hand: From Metaphor to Myth", by Gavin Kennedy. Econ Journal Watch, vol. 6, no. 2, pp 239-263. May 2009.

The Theory of Moral Sentiments - Part 4

Podcast 4