Posts filed under 'Business History'
Doug North Line of the Day
| Peter Klein |
From Bob Margo’s EH.Net review of North, Wallis, and Weingast’s Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History:
In my book people are iconic if I can summarize their life’s work in ten words or less. North takes two: “Institutions matter.”
He adds: “The opposite perspective — viewed in isolation most institutions don’t matter much, being Harberger triangles and small ones at that — has its fans in modern economics. But North has convinced the majority of economic historians, a goodly share of world’s development wonks, and the Nobel Prize Committee that he’s right.”
Update: Art Carden beat me to this.
2 comments 25 June 2009
Capitalism’s Challenges: Cycles of Expropriation
| Benito Arruñada |
Following up my previous entry on cycles of statism, I ask next: How important are cycles of expropriation? Consider, for example, how Bolivia has nationalized foreign oil firms every 34 years. In the most recent round, the nationalizing decree read:
Consider that Bolivia was the first country on the Continent to nationalize ts hydrocarbons, in 1937 with Standard Oil Co, a heroic measure, and done again in 1969 with Gulf Oil, leading the present generation to carry on the third and definitive nationalization. (Supreme Decree 28701, Evo Morales, President, May 2006).
In an experiment with Marco Casari we find similar patterns under more “democratic” circumstances. You may download the paper here.
Add comment 22 June 2009
Does Capitalism Suffer Cycles of Statism?
| Benito Arruñada |
Does the current expansion of the State reverse a previous reduction, to be reduced once again in the future? Or, alternatively, is there a sort of ratchet effect, with a trend towards greater statism disguised by cycles along such increasing trend?
I am inclined to think that cycling has not taken place around a stationary average but around an increasing tendency (see the figures). But perhaps a better way of facing these questions would be to disaggregate in different dimensions. For instance, in several papers with Veneta Andonova I argue that freedom 
of contract has been in decline for more than a century in Western Law, both in civil- and common-law countries. Something similar could probably be said about trade, but in the opposite direction. However, in both freedom of contract and trade, it might be the case that exchange opportunities have expanded mainly as a result of technological change (e.g., cheaper transportation and communications), whatever the legal constraints. In terms of research, how could these trends be measured?
These thoughts were triggered by a timely and extremely suggestive paper by Witold J. Henisz presented at the Workshop on “Manufacturing Markets” organized last week in Villa Finaly, Florence, by Eric Brousseau and Jean-Michel Glachant. My next few blogs will address other aspects of Henisz’s views on the broader challenges facing capitalism.
2 comments 18 June 2009
Peter L. Bernstein (1919-2009)
| Peter Klein |
I was saddened to learn (from Kenneth Anderson) that Peter L. Bernstein, author of Against the Gods: The Remarkable Story of Risk and other popular works, died June 5. Bernstein was a terrific writer and a clear and provocative thinker with a gift for making difficult concepts accessible. I was greatly influenced by an earlier book, Capital Ideas: The Improbable Origins of Modern Wall Street, which I came across in graduate school while searching for a dissertation topic. Bertstein’s characterization of the brokerage industry in the 1960s and early 1970s, before the deregulation of brokerage fees — an Old Boys Club, lacking competition and innovation — inspired me to examine the role of corporate internal capital markets in replicating the resource-allocation function normally performed by external capital markets, and how the growth and development of financial markets following liberalization contributed to the end of the conglomerate period.
Here are obituaries in the WSJ and NYT and here is Bernstein’s wiki.
1 comment 15 June 2009
The Industrious Revolution
| Peter Klein |
Hans-Joachim Voth calls Jan de Vries’s new book on household behavior during the early modern period “staggeringly erudite, insightful, stimulating, and on all the main points, convincing.” The book, The Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present (Cambridge, 2008) builds on de Vries’s earlier concept of an Industrious Revolution, the two centuries before the Industrial Revolution in which consumers increased their production of marketable goods, largely at the expense of leisure time. “The industrious revolution was a household-level change with important demand-side features that preceded the Industrial Revolution, a supply-side phenomenon” (De Vries, 1994). Adds Voth:
The sheer amount of hard work that went into every aspect of these chapters is hard to convey. Surveying the rise of consumer items through the prism of probate inventories shows the author confidently mastering the abundant historical literature in four or five languages. De Vries’ reconstruction of Europeans’ increasing consumption of “colonial luxuries” — sugar, tea, and coffee — alone is going to be useful for all scholars working in the area.
This book may be of interest not only to economic and business historians, but also to management scholars in marketing and consumer behavior.
Add comment 28 May 2009
Ferguson on Financial History and the Crash
| Dick Langlois |
I too loved the Ferguson piece in the New York Times. More sound bites: “In the months ahead,” he predicts, “the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.”
1 comment 22 May 2009
Deregulation and the Financial Crisis
| Peter Klein |
Niall Ferguson joins Charles Calomiris, Jerry O’Driscoll, Arnold Kling, and many others in questioning the supposed link between “deregulation” and the financial crisis. As Ferguson emphasizes, the timing is all wrong; there is no time-series correlation between specific patterns of regulation and deregulation and particular financial or economic outcomes. The relaxation of Glass-Steagall restrictions on universal banking is an oft-cited example, but, as these writers point out, no one has offered any specific mechanism by which universal banking contributed to the problem (indeed, the opposite is likely to be true). The “laissez-faire caused the crisis” meme may be pithy, but is there any systematic theoretical or empirical evidence for it?
Ferguson has the best line (suggested by Luke): “It is indeed impressive how rapidly the economists who failed to predict this crisis . . . have been able to produce such a satisfying story about its origins.”
3 comments 22 May 2009
My “No New Economy” Slides
| Peter Klein |
Here, for the curious, are my slides from this morning’s talk at the Law and Economics of Innovation conference, titled “Does the New Economy Need a New Economics?” (Short answer: no.) This will eventually morph into a paper so comments are most welcome (and thanks to those who have already helped). I’m looking forward to Susan Athey’s keynote later today.
9 comments 7 May 2009
Cheer Up With the Depression Bundle
| Peter Klein |
Sorry, couldn’t resist the headline. But check it out: Murray Rothbard’s America’s Great Depression, Bob Murphy’s Politically Incorrect Guide to the Great Depression and the New Deal, Dave Beito’s Taxpayers in Revolt, and John T. Flynn’s Roosevelt Myth, all for $49! That’s quite an uplifting deal.
More great news: Contra Keynes and Cambridge, vol. 9 of Hayek’s Collected Works, is now out in paperback from Liberty Fund, and just $14.50.
4 comments 1 May 2009
Open Innovation: Not So New
| Peter Klein |
The new issue of the always-interesting Industrial and Corporate Change features a paper by the always-interesting David Mowery, “Plus Ca Change: Industrial R&D in the Third Industrial Revolution.” Picking up this blog’s theme that Very Little Is New Under the Sun (OK, not explicitly), Mowery argues that the much-touted New Econonmy concept of “open innovation” is not, in fact, completely new, but an incremental change from previous R&D practices:
The structure of industrial R&D has undergone considerable change since 1985, particularly in the United States. But rather than creating an entirely novel system, this restructuring has revived important elements of the industrial research system of the United States in the late 19th and early 20th centuries. In particular, many of the elements of the Open Innovation approach to R&D management are visible in this earlier period. This article surveys the development of industrial R&D in the United States during the postwar period. In addition to emphasizing continuity rather than discontinuity, this discussion of the development of US industrial R&D during the Third Industrial Revolution stresses the extent to which industrial R&D in the United States, no less than in other nations, is embedded in a broader institutional context. My discussion also highlights the extent to which its development has been characterized by considerable path dependency.
Add comment 5 April 2009
New Online Books
| Peter Klein |
Thanks to the Mises Institute, the Institute of Economic Affairs, the Library of Economics and Liberty, and other organizations, great works in social science continue to appear in free online editions. Some of the newest include:
- Carl Menger’s Investigations into the Method of the Social Sciences (1883), which features the famous section (book 3, chapter 2) on unintended consequences;
- Larry White’s Free Banking in Britain (1984); and
- Hayek’s Individualism and Economic Order (1948), which contains the classic essays “Economics and Knowledge,” “The Use of Knowledge in Society,” and “The Meaning of Competition,” among others.
1 comment 28 March 2009
Dutch Treat
| Peter Klein |
There’s only two things I hate in this world. People who are intolerant of other people’s cultures, and the Dutch. — Nigel Powers
Karel Davids’s new book, The Rise and Decline of Dutch Technological Leadership: Technology, Economy, and Culture in the Netherlands, 1350–1800 (Brill, 2008), provides an interesting look at knowledge flows within and between regions, an important idea in the modern literatures on economic geography and regional innovation. Writes EH.Net reviewer William TeBrake:
According to Davids, the northern Netherlands, the territory encompassed by the Dutch Republic, was the technological leader during much of the seventeenth and eighteenth centuries, before relinquishing that role to England by 1800, and in the process of explicating the rise and fall of Dutch technological leadership, he has called into question a number of commonplace assumptions found in the historiography of the period in question. . . .
One of the most interesting features of his study is the attention he pays to the truly remarkable concentration during the seventeenth and eighteenth centuries of literally hundreds of industries powered by windmills in the Zaan district, just across the IJ/harbor from Amsterdam, forcing the reader to reconsider how revolutionary the English Industrial Revolution really was. Further, there are several important areas in which he has significantly revised current understanding of the course of technology, economy, and society during the late-medieval and early-modern periods. . . . [For example], Davids makes clear that technological leadership in the Dutch Republic was much less tied to economic advancement than is usually assumed. Indeed, the Republic’s technological leadership began to peak only when the economy of the Dutch Republic already had begun to decline, during the late seventeenth century, and such leadership continued for another century thereafter, before giving way to England only after 1780. Finally, Davids makes a compelling case for locating the causes of technological leadership (and its decline) not only in market forces but also in institutional and cultural conditions, including the relative openness or secrecy of economic, cultural, and political life.
5 comments 23 March 2009
Railway Gauges and Path Dependency
| Dick Langlois |
You’ve all read the viral email asserting that the railroad gauge we have today — and, in some versions, the size of the space shuttle fuel tanks, which had to be transported by rail — is a direct result of the wheel gauge of Roman chariots. Not surprisingly, the real story is more complex, and many gauges coexisted (and to some extent continue to coexist) in the U.S. and around the world. My former colleague Doug Puffert tells this story in full detail in his new book, Tracks across Continents, which has just appeared from the University of Chicago Press. The book is a useful addition to the catalog of case studies of path-dependent technology.
The book came out of Doug’s thesis at Stanford, where he worked with Paul David and Brian Arthur. He was a visitor at UConn in the 1988-89 academic year. I can still remember his seminar presentations, which involved simulating the evolution of railways on a Macintosh of the era. (One thing you probably won’t learn in Doug’s official bio is that, before coming to UConn, he won a car on Wheel of Fortune. I always tell students about this when I teach the QWERTY story — a student of Paul David who really knew his letter frequencies.)
1 comment 20 March 2009
Watching the Growth of Walmart
| Peter Klein |
This animated map showing the US growth of Walmart from 1965 to 2007 proves the adage that a picture is worth a thousand words. Lots of other cool visualizations at FlowingData, like the Heavy Metal Band Names Flowchart. (Thanks to SKK.)
3 comments 10 March 2009
Blue Eagle Redux
| Peter Klein |
Assuming this is not a joke, Obama has unveiled a new stimulus-plan logo. Projects funded by the American Recovery and Reinvestment Act — primarily roads and bridges, I presume — will sport this handsome emblem. It lacks the 1930s-era fascist style of the NRA’s Blue Eagle but is much in the same spirit. Will those who maintain these roads and bridges be fined for failing to display the logo? (Business owners without a Blue Eagle could be fined up to $500 — more than $8,000 in today’s dollars — and get six months in jail.) Will consumers be encouraged to bycott those without the colorful insignia?
Jason Taylor and I have written that the Blue Eagle may be more important than economic historians have realized. In the early days of the NRA it seems to have played a strong cartel-enforcement role. Eventually business owners and consumers learned that NRA officials were not punishing cartel violations and the Blue Eagle began to disappear from store windows and newspaper advertisements. Our analysis is game-theoretic, but I’m sure our friends from that other discipline would proffer a different explanation based on institutional legitimacy and that stuff.
3 comments 4 March 2009
More on the Evolution of Accounting
| Peter Klein |
For some reason posts dealing with accounting are among our most popular. Perhaps this says something about the Nerd Quotient of the typical O&M reader. Anyway, if you liked the recent post about the evolution of accounting rules, you may enjoy this paper that looks at the problem more systematically.
Accounting is an Evolved Economic Institution
Gregory B. Waymire and Sudipta Basu
We consider accounting from an evolutionary perspective. Accounting encompasses the creation of transactional records, the summarization of records in t-accounts, and the preparation of audited financial statements. Accounting’s history spans at least 10,000 years dating back to the first human settlements in ancient Mesopotamia. Our focus is on the study of accounting history in three ways: providing useful thoughts experiments valuable to researchers interested in the development of modern practices, the use of historical data to test formal hypotheses about the origins of accounting practices, and the development of theories and related empirical evidence that explain accounting based on evolution and ecological rationality. Within this third area, we describe the basis for hypotheses and empirical analyses concerning six issues: (1) the emergence of recordkeeping, (2) the effect of double-entry bookkeeping on the scale and scope of economic organization, (3) the spontaneous emergence of norms of practice in accounting, (4) the impact of law, regulation, and taxation on accounting, (5) the demand for broad principles in evaluating accounting method choices, and (6) the relation between economic crises and major discontinuities in accounting practice.
Add comment 24 February 2009
Patent Pools and Innovation
| Dick Langlois |
In a (fairly) recent paper, which may soon see the light of day in volume from Cambridge University Press, I argued against Alfred Chandler’s analysis of RCA and the early American consumer electronics industry. In Inventing the Electronic Century (2001) Chandler holds that, by creating capabilities (notably central R&D capabilities), RCA was the fountainhead of innovation in that industry, at least until after World War II. I argue instead that, as a government-created patent pool, RCA in fact retarded innovation in what was actually a fairly modular industry. Recently, I came across a paper by two economists from Stanford called “Do Patent Pools Encourage Innovation? Evidence from the 19th-Century Sewing Machine Industry.” They provide quantitative evidence that an earlier patent pool (also) retarded innovation. Here is the abstract:
Regulators favor patent pools to encourage innovation in industries where overlapping patents and excessive litigation suppress innovation. With patent pools, member firms share patents freely with each other and offer one-stop licenses to outside firms. Thus patent pools are expected to promote innovation by reducing litigation risks for pool members and lowering transaction costs for outside firms. We examine this prediction at the example of the first patent pool in U.S. history, the Sewing Machine Combination (1856-1877). Our data confirm that pools reduce litigation risks for members and that pool members patent more in the years leading up to the pool. Pool members, however, patent less as soon as the pool is established and only resume patenting after the pool dissolves. We construct objective measures of performance to examine whether such changes reflect changes in strategic patenting or actual effects on innovation. Performance data suggest that innovation slowed as soon as the pool had been established and resumed only after the pool had been dissolved. Why might patent pools discourage innovation? Our data indicate that pools may discourage innovation by increasing litigation risks for outside firms and by diverting research by outside firms to inferior technologies.
This last point also held true in the case of RCA: as RCA controlled all of the key patents for the radio and licensed them only en bloc, there was no incentive for outsiders to create new products that would compete with only one or two of RCA’s technologies.
1 comment 19 February 2009
Viral Marketing
| Peter Klein |
My friend Tom Woods has written a new book, Meltdown, that explains the economic crisis from an “Austrian” perspective. Tom is a historian by training but has an excellent grasp of economic theory and policy (disclaimer: I consulted on the book). The book is aimed at the intelligent lay reader and was produced very quickly (Tom writes faster than I read) to take advantage of today’s unique educational moment. The book went on sale today.
Tom is promoting the book via the usual means (scholarly and popular websites and blogs, email lists, some TV and radio appearances) and some of his admirers have launched a viral marketing campaign, based at GetTomonTV.com. Can viral marketing work to promote a quasi-academic book? Will policy wonks, economic journalists, and concerned citizens blog, text, and twitter like Blair Witch groupies or Christian Bale fans? How does one promote books (and, for that matter, journal articles) in the Web 2.0 world? Most important, how do I use this knowledge to promote myself?
3 comments 9 February 2009
Symposium on Alfred Chandler
| Dick Langlois |
I just discovered that Business History Review published a special issue this summer in memory of Alfred Chandler. The papers are mostly short, hagiographic, and written by relatively big names — all as it should be. Tom McCraw mentions one detail I had never known: Chandler was dyslexic.
1 comment 23 January 2009
Skidelsky on Ferguson
| Peter Klein |
Thanks to Humberto Barreto for forwarding Robert Skidelsky’s review of Niall Ferguson’s The Ascent of Money: A Financial History of the World from the New York Review of Books. Here’s Ferguson talking about the book on NPR. There are plenty of reviews by journalists as well. I haven’t read the book but this review by former O&M guest blogger David Gordon makes me wonder if it’s worth the effort.
Add comment 6 January 2009
Guilds and Innovation
| Peter Klein |
Most economic and management historians see the guild system as partly responsible for the stagnation of the medieval European economy. A new book, Guilds, Innovation and the European Economy, 1400-1800 (S. R. Epstein and Maarten Prak, eds., Cambridge, 2008) offers a revisionist view, challenging the stereotype of guilds as “moribund rent-seekers whose habitual reaction to technical innovation was resistance and rejection.” The reality is more complex, says reviewer Christine MacLeod:
What emerges from this exceptionally coherent volume is not only the complexity of this institution, whose history spans more than half a millennium and a myriad of particular trades and local circumstances, but also the persistent tensions to which it was subjected, both internally from individualistic and capitalist challenges to its collective ethos and externally from the exigencies of nation states. Moreover, it adds another spur to the demanding search for innovation in the workshop and on the construction site, rather than in the too easily accessed and counted records of the patent office.
Add comment 22 December 2008
In Praise of the US Auto Industry
| Peter Klein |
The proposed bailout of GM, Ford, and Chrysler overlooks an important fact. The US has one of the most vibrant, dynamic, and efficient automobile industries in the world. It produces several million cars, trucks, and SUVs per year, employing (in 2006) 402,800 Americans at an average salary of $63,358. That’s vehicle assembly alone; the rest of the supply chain employs even more people and generates more income. It’s an industry to be proud of. Its products are among the best in the world. Their names are Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi, and Subaru.
Oh, yes, there’s also a legacy industry, based in Detroit, but it’s rapidly, and thankfully, going the way of the horse-and-buggy business.
I pulled these numbers from Matthew Slaughter’s fine piece in yesterday’s WSJ, “An Auto Bailout Would Be Terrible for Free Trade,” which points out that the US is one of the the world’s largest recipient of Foreign Direct Investment and that an auto industry bailout would surely reduce the flow of FDI, at the expense of the US economy. “Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.” Bailouts may also spur retaliatory actions by governments in US export markets, doing further damage to free trade. In short, what the Big Three and their supporters want is the most crass form of protectionism, a blunt demand that US taxpayers, consumers, and producers fork over the cash, now and in the future, to prop up an inefficient, failing industry.
NB: In 2001 I was part of a delegation of US officials visiting Singapore in advance of negotiations over a possible bilateral free trade agreement. The issue was Singapore’s Government-Linked Enterprises (GLCs), nominally private firms partially owned by the Singaporean government. Did these links constitute a trade barrier, putting US firms doing business in Singapore at a competitive disadvantage? We interviewed US executives based in Singapore and learned that the government did not seem to offer the GLCs special favors in input or output markets (though they did benefit from a lower cost of capital). Anyway, as I read Slaughter’s piece I imagined myself as a Singaporean official visiting the US, interviewing foreign executives in the financial-services and, perhaps, automobile industries, asking if they thought US companies got special government protection. To ask this question is to answer it.
14 comments 21 November 2008
Always Two, There Are: A Master, and an Apprentice
| Peter Klein |
Here are the proceedings of a conference on apprenticeship, the much-maligned, but frequently valuable, practice of learning a trade through experience, rather than formal classroom education.
Paul Ryan notes in his EH.Net review:
Its publication responds to the extensive contemporary interest in apprenticeship — among historians, as part of discussions of the role of guilds, proto-industrialization and social change; and among policy analysts, reflecting the benefits of apprenticeship for school-to-work transitions, notably in Germany. . . .
Most contributors subscribe to a revisionist historical view of apprenticeship, as less monolithic, standardized and guild-regulated, and more determined by economic factors, than in traditional interpretations, notably the ganze Haus perspective of the German historical school. Both individually and collectively, the papers document the heterogeneity of apprenticeship. Thus contract durations and completion rates are shown to have varied considerably, even within particular occupations in particular towns in particular periods, despite clear guild prescriptions.
Add comment 30 October 2008
New NBER Working Papers
| Peter Klein |
Three new NBER papers likely to interest the O&M crowd. (Aggressive Googlers can probably find ungated versions.)
Railroads and the Rise of the Factory: Evidence for the United States, 1850-70 by Jeremy Atack, Michael R. Haines, and Robert A. Margo
Over the course of the nineteenth century manufacturing in the United States shifted from artisan shop to factory production. At the same time United States experienced a transportation revolution, a key component of which was the building of extensive railroad network. Using a newly created data set of manufacturing establishments linked to county level data on rail access from 1850-70, we ask whether the coming of the railroad increased establishment size in manufacturing. Difference-in-difference and instrument variable estimates suggest that the railroad had a positive effect on factory status. In other words, Adam Smith was right – the division of labor in nineteenth century American manufacturing was limited by the extent of the market.
The Limited Partnership in New York, 1822-1853: Partnerships Without Kinship by Eric Hilt and Katharine O’Banion
In 1822, New York became the first common-law state to authorize the formation of limited partnerships, and over the ensuing decades, many other states followed. Most prior research has suggested that these statutes were utilized only rarely, but little is known about their effects. Using newly collected data, this paper analyzes the use of the limited partnership in nineteenth-century New York City. We find that the limited partnership form was adopted by a surprising number of firms, and that limited partnerships had more capital, failed at lower rates, and were less likely to be formed on the basis of kinship ties, compared to ordinary partnerships. The latter differences were not simply due to selection: even though the merchants who invested in limited partnerships were a wealthy and successful elite, their own ordinary partnerships were quite different from their limited partnerships. The results suggest that the limited partnership facilitated investments outside kinship networks, and into the hands of talented young merchants.
Inside the Black of Box of Ability Peer Effects: Evidence from Variation in Low Achievers in the Classroom by Victor Lavy, Daniele Paserman, and Analia Schlosser
In this paper, we estimate the extent of ability peer effects in the classroom and explore the underlying mechanisms through which these peer effects operate. We identify as low ability students those who are enrolled at least one year behind their birth cohort (repeaters). We show that there are marked differences between the academic performance and behavior of repeaters and regular students. The status of repeaters is mostly determined by first grade; therefore, it is unlikely to have been affected by their classroom peers, and our estimates will not suffer from the reflection problem. Using within school variation in the proportion of these low ability students across cohorts of middle and high school students in Israel, we find that the proportion of low achieving peers has a negative effect on the performance of regular students, especially those located at the lower end of the ability distribution. An exploration of the underlying mechanisms of these peer effects shows that, relative to regular students, repeaters report that teachers are better in the individual treatment of students and in the instilment of capacity for individual study. However, a higher proportion of these low achieving students results in a deterioration of teachers’ pedagogical practices, has detrimental effects on the quality of inter-student relationships and the relationships between teachers and students, and increases the level of violence and classroom disruptions.
Add comment 27 October 2008
Blame Basel, Not “Deregulation”
| Peter Klein |
Says Charles Calorimis in the Saturday WSJ. First, as Calorimis points out, there wasn’t any deregulation. (Jacob Weisberg, what part of this can’t you understand?) Indeed, by any reasonable measure, government has grown more under George W. Bush than under any administration since LBJ — after this month, perhaps since FDR. Specifically, Calomiris notes:
Financial deregulation for the past three decades consisted of the removal of deposit interest-rate ceilings, the relaxation of branching powers, and allowing commercial banks to enter underwriting and insurance and other financial activities. Wasn’t the ability for commercial and investment banks to merge (the result of the 1999 Gramm-Leach-Bliley Act, which repealed part of the 1933 Glass-Steagall Act) a major stabilizer to the financial system this past year? Indeed, it allowed Bear Stearns and Merrill Lynch to be acquired by J.P. Morgan Chase and Bank of America, and allowed Goldman Sachs and Morgan Stanley to convert to bank holding companies to help shore up their positions during the mid-September bear runs on their stocks.
Even more to the point, subprime lending, securitization and dealing in swaps were all activities that banks and other financial institutions have had the ability to engage in all along. There is no connection between any of these and deregulation. On the contrary, it was the ever-growing Basel Committee rules for measuring bank risk and allocating capital to absorb that risk (just try reading the Basel standards if you don’t believe me) that failed miserably. The Basel rules outsourced the measurement of risk to ratings agencies or to the modelers within the banks themselves. Incentives were not properly aligned, as those that measured risk profited from underestimating it and earned large fees for doing so.
That ineffectual, Rube Goldberg apparatus was, of course, the direct result of the politicization of prudential regulation by the Basel Committee, which was itself the direct consequence of pursuing “international coordination” among countries, which produced rules that work politically but not economically.
Update: Here’s Larry White on the phantom deregulation.
Add comment 18 October 2008
Searle Center Symposium on Property Rights and Innovation
| Peter Klein |
It’s next month in Chicago. The high-powered lineup includes Joel Mokyr, Avner Greif, Robert Merges, Lynne Kiesling, Stan Liebowitz, Scott Stern, my old classmates Emerson Tiller and Rich Brooks, and many more. Harold Demsetz gives the keynote. Wish I were going.
2 comments 15 October 2008
Political Origins of the Financial Crisis
| Dick Langlois |
Okay, so maybe I’ll write about the financial crisis after all.
Stan Liebowitz has been pointing for a long time to the political origins of lowered lending standards — pressure on Fannie Mae to increase “affordable housing” — and to the role of those lowered standards in the mortgage bubble. “[I]n an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s. The decline in mortgage underwriting standards was universally praised as an ‘innovation’ in mortgage lending by regulators, academic specialists, GSEs, and housing activists. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble.”
Today the AEI has posted a nice piece by Peter Wallison and Charles Calomiris saying much the same thing. Even more interesting, however, is a long article in Saturday’s New York Times that chronicles the process in great detail.
Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.
“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.” (more…)
6 comments 6 October 2008
GM-Fisher: Yet More
| Peter Klein |
The debate over the acquisition of Fisher Body by General Motors, like the Energizer bunny, keeps going, and going, and going. . . . The new issue of Industrial and Corporate Change has two more papers, “Lawyers Asleep at the Wheel? The GM–Fisher Body Contract” by Victor Goldberg and “The Enforceability of the GM–Fisher Body Contract: Comment on Goldberg” by Ben Klein. Here are the abstracts:
Goldberg: In the analysis of vertical integration by contract versus ownership, one event has dominated the discussion — General Motors’ (GM) merger with Fisher Body in 1926. The debates have all been premised on the assumption that the 10-year contract between the parties signed in 1919 was a legally enforceable agreement. However, it was not. Because Fisher’s promise was illusory the contract lacked consideration. This note suggests that GM’s counsel must have known this. It raises a significant question in transactional engineering: what is the function of an agreement that is not legally enforceable?
Klein: Goldberg unconvincingly claims that the General Motors (GM)–Fisher Body contract was in fact legally unenforceable. But even if Goldberg’s contract law conclusion were correct, it is economically irrelevant. It is clear from the actions of Fisher and GM and from the testimonial and other contemporaneous evidence that both transactors considered the contract legally binding and behaved accordingly. Therefore, proper economic analysis of the Fisher–GM case should continue to assume contract enforceability, and the economic determinants of organizational structure illustrated by the case remain fully valid.
2 comments 26 September 2008
Notes from the Economic History Association Meeting
| Dick Langlois |
I am only now (slowly and partially) emerging from a crush of administrative and teaching responsibilities at the beginning of the semester. But I did manage to drive down to New Haven last weekend for some of the Economic History Association meeting. It was an eventful meeting in many respects, including a fire at the hotel Thursday night that sent conference-goers into the street in their pajamas as well as an apparent outbreak of food poisoning from the Saturday night banquet. Happily, I was spared both of those experiences.
For at least two of the three sessions I managed to attend, there emerged a theme: that a lot of interesting work in economic history today is rediscovering and reinventing ideas that Nate Rosenberg, Paul David, and others were discussing in the 1970s and earlier: learning by doing and factor prices, technological and economic complementarities, and general-purpose technologies. (I have been known to talk about the Stanford School in this respect.)
In his keynote address on Saturday — evidently similar to his Clarendon Lectures last year and probably dating back at least to this paper — Daron Acemoglu talked about the issue of skill bias in technological change. In the 1970s, labor economists were arguing that Americans were investing too much in education, since rising wage rates should lead to labor-saving technical change, which would reduce the supply of skilled jobs. Of course, just the opposite happened: skilled jobs grew even faster than skilled workers, creating a skill premium in the U.S. Acemoglu presented a clever general-equilibrium model in which the bias of technological change is endogenous. Under certain assumptions, supply of a factor of production (like skilled labor) can create its own demand. The intuition is that a larger supply of a factor (like skilled labor) can increase the market for complementary innovations to an extent that offsets other effects. (For my own Rosenbergian take on why technical change should be biased toward higher skill levels, see here.) Interestingly, Joel Mokyr discussed Acemoglu’s presentation using a 1975 Paul David paper as a framework. (more…)
1 comment 25 September 2008
What Would Hayek Say?
| Peter Klein |
About the events of the last week? Probably the same thing he said in 1932:
Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. . . . To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection — a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. . . . It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.
That’s from the introduction to Monetary Nationalism and International Stability, included in the new collection we mentioned earlier. Thanks to Jeff Tucker for the tip and links to the source material.
18 comments 21 September 2008
