16 | October | 2008 | Organizations and Markets

Archive for 16 October 2008

The Impotence of the Economists

| Peter Klein |

My friends in sociology don’t like being ignored by politicians and by the general public. Well, one thing we’ve learned over the last several weeks is that academic economics, too, has virtually no influence on public policy. It’s increasingly clear that the majority of academic economists oppose, often strongly, the AIG rescue, the Paulson plan, the Fed’s move into the commercial-paper market, the Treasury’s acquisition of equity stakes in large banks, and the new round of financial-market regulations that’s just around the corner. Even Greg Mankiw, who sort-of favors the bailout, worries that his pal Ben hasn’t worked hard enough to convince his fellow academic economists.

What do we learn from all this? That economists are poor communicators? That economics is an inherently difficult subject? Or that politicians and special-interest groups willfully ignore what economics teaches about scarcity, tradeoffs, incentives, and the general welfare?

Surely the poor state of economics education plays some role. I’m not an admirer of Paul Krugman’s newspaper columns, but I respect the fact that he’s willing to write for the general public. (If only his columns had some economics in them!) Very few elite economists concern themselves with public education. Ultimately, however, the blame rests with politicians — that uniquely vile breed of humanity — and the special interests they serve. Maybe Albert Jay Nock had it right after all. Economists keep thinking, writing, and teaching, not because anybody in power is listening, but in hope that somewhere out there is a Remnant, however small, keeping the flame alive.

16 October 2008 at 9:06 pm Peter G. Klein 7 comments

Strong-Man Economics

| Lasse Lien |

Here is an interesting paper from the NBER working paper series. Bolton, Brunnermeier and Veldkamp show that it can be optimal for organizations to hire an irrational manager. Irrational in the sense that the manager is less likely to revise strategy as new information becomes available (i.e. is resolute).

The basic setup is that in the first stage the manager receives a signal about the state of the environment and formulates an initial strategy. In the second stage the organizational members act, deciding how closely the will align their actions to the proposed strategy. The actions of individual members are chosen given their knowledge about the manager’s type and a private signal about the environment. The latter may lead them to anticipate a revision of the strategy. In the third stage the manager receives a second signal about the state of the environment, and in the fourth and final stage the leader decides on the final strategy and payoffs are realized.

The essence of the argument is that the less likely the manager is to revise strategy, the better the coordination of the individual members actions. So there is a time-consistency problem that is reduced when a manager is resolute in the sense of not updating as much as optimal adaptation would suggest, and this is known by followers. The paper also supplies interesting discussions of what happens if the leader can commit to not revising strategy (instead of being a resolute “type”), and the cost of resoluteness if the manager can learn from followers.

One can always quibble about the assumptions made in game-theoretic models. An example here would be the assumption that there is no coordination problem after the manager announces his/her final strategy, only in the period between the initial strategy announcement, and the arrival of the second signal about the environment. But definitely a good read, which nicely captures the trade-off between coordination and adaptation. Hereby recommended (the paper, that is, not the hiring of irrational managers or politicians).