Archive for September, 2008
Paulson, Bernanke, Congress: We Need Your Help!
| Peter Klein |
With our economy in crisis, the US Government is scrambling to rescue our banks by purchasing their “distressed assets”, i.e., assets that no one else wants to buy from them. We figured that instead of protesting this plan, we’d give regular Americans the same opportunity to sell their bad assets to the government. We need your help and you need the Government’s help!
Use the form below to submit bad assets you’d like the government to take off your hands. And remember, when estimating the value of your 1997 limited edition Hanson single CD “MMMbop”, it’s not what you can sell these items for that matters, it’s what you think they are worth. The fact that you think they are worth more than anyone will buy them for is what makes them bad assets.
Here’s the link (via Sean Corrigan, and please excuse the language). Remember, if people can’t get rid of their bad assets, they will have to cut back their spending, hurting local businesses, which will then be unable to spend, hurting other businesses, and so on, generating a “consumption crunch” that will cause the next Great Depression. Please, somebody, break some windows!
Best of “On the Economy”
| Peter Klein |
Tom Keane’s greatest (interview) hits, featuring Nassim Taleb, Bill Gross, Robert Lord Skidelsky, Mohamed El-Erian, Eugene Fama, Peter Peterson, James MacGregor Burns, Peter Bernstein, Allan Meltzer, Martin Feldstein, James Poterba, Peter Fisher, David Malpass, Milton Friedman, Thomas Schelling, Myron Scholes, William Sharpe, Edmund Phelps, Gary Becker, Robert Mundell, Robert Solow, Amartya Sen, Robert Lucas, Kenneth Arrow, and Paul Samuelson.
30 September 2008 at 11:08 am Peter G. Klein Leave a comment
A Critique of Modern Law and Economics Research
| Peter Klein |
From Eric Engle. How can I not link to a paper with “Theoretical Puffery” in the title? (Thanks to Mark Thornton for the pointer.)
Law and Economics: Theoretical Puffery, Exaggerated Claims and Counterfactual Models
Eric Engle
Universität Bremen; Harvard University – Berkman Center for Internet & SocietySeptember 15, 2008
Economic analyses of law predominate in the United States because they can claim to be objective and scientific thus verifiable and the basis of predictions and reproducible experiments. However, several of the claims of economic analysis of law go too far and are entirely unrealistic. This explains why economic analysis of law has not been taken up outside of the U.S. to the extent it has in the U.S. This article points out the unrealistic presumptions within law and economics theory (homo economicus and efficient markets, mostly) and the unrealistic claims of law and economics (that the law is and should be a mirror of the economy). Economic analysis of law cannot and should not serve as a general basis of legal decision making. However, as a special theory applicable as a method for determining certain issues economic methods can well inform legal decision making helping judges to shape justice correctly. This article exposes the competing schools within law and economics and presents a defensible version of economic methodology applied within legal discourse.
Nationalization of US Credit Markets: Where Is the Analysis?
| Peter Klein |
Over and over during the last week we’ve been told that unless Congress, the Treasury, and the Fed take “bold action,” credit markets will freeze, equity values will plummet, small businesses and homeowners will be wiped out, and, ultimately, the entire economy will crash. Such pronouncements are issued boldly, with a sort of Gnostic certainty, a little sadness for dramatic effect, and only minor caveats and qualifications.
And yet, details are never provided. The analysis is conducted entirely at a superficial, almost literary, level. “If the government doesn’t act then banks will be afraid to lend, and people can’t get credit to buy a house or expand their business, and the economy will tank.” Unless we rescue these particular financial institution, in other words, a massive contagion effect will swamp the entire economy. But how do we know this? We don’t. First, we don’t even know if there is a “credit crunch.” Nobody has bothered to provide any empirical evidence. Second, even if credit markets are tight, does it matter? Any predictions about the long-term effects are, of course, purely speculative. Sure, borrowers like cheap and easy credit and tighter credit markets will leave some borrowers worse off. But what are the magnitudes? What are the likely effects on the economy as a whole? (Possibly zero.) What are the possible scenarios, what is the likelihood of each, and how large are the expected effects? Where is the cost-benefit analysis? After all, the seizure of Fannie and Freddie, the takeovers of AIG and WaMu, the modified Paulson plan — the effective nationalization of the US financial sector, in other words — ain’t exactly costless. There are direct costs, of course, to be borne by taxpayers, but the possible long-term effects brought about by increased moral hazard, regime and policy uncertainty, and the like are enormous. Even on purely utilitarian grounds, the arguments offered so far are tissue-paper thin.
Perhaps the dopiest remark I heard today was from Jamie Galbraith on the Diane Rehm show. “I’m a risk-averse person, and the risk of doing nothing is too great.” Huh? Um, shouldn’t a risk-averse person compare the risk of doing nothing with, well, the risk of doing something? Jamie, are the provisions of the bill making its way through Congress this morning risk free?
Government Funding and the Economic Organization of Scienctific Research
| Peter Klein |
A prominent climate scientist, Richard Lindzen of MIT, argues that the politicization of climate science over the last decade is but a symptom of a larger, more general problem caused by government science funding: namely an emphasis on demonstrable results that satisfy the public and have “practical” implications, rather than the pursuit of scientific truth (via Sean Corrigan).
For a variety of inter-related cultural, organizational, and political reasons, progress in climate science and the actual solution of scientific problems in this field have moved at a much slower rate than would normally be possible. Not all these factors are unique to climate science, but the heavy influence of politics has served to amplify the role of the other factors. By cultural factors, I primarily refer to the change in the scientific paradigm from a dialectic opposition between theory and observation to an emphasis on simulation and observational programs. The latter serves to almost eliminate the dialectical focus of the former. Whereas the former had the potential for convergence, the latter is much less effective. The institutional factor has many components. One is the inordinate growth of administration in universities and the consequent increase in importance of grant overhead. This leads to an emphasis on large programs that never end. Another is the hierarchical nature of formal scientific organizations whereby a small executive council can speak on behalf of thousands of scientists as well as govern the distribution of ‘carrots and sticks’ whereby reputations are made and broken. The above factors are all amplified by the need for government funding. When an issue becomes a vital part of a political agenda, as is the case with climate, then the politically desired position becomes a goal rather than a consequence of scientific research. This paper will deal with the origin of the cultural changes and with specific examples of the operation and interaction of these factors. In particular, we will show how political bodies act to control scientific institutions, how scientists adjust both data and even theory to accommodate politically correct positions, and how opposition to these positions is disposed of.
The paper is well worth reading by social scientists and organization theorists. Business-school faculty will recognize the parallels with the call for “relevance” in management education (see the links in Teppo’s recent post). And there are important connections to the arts and humanities; recent scholarship, for example, challenges the notion that public funding produces better art (painting, music, literature, drama) than patronage or commercial funding (Cantor, Cowen, Scherer). Some readers may respond, with Pilate, “What is truth?” Somebody has to pay the bills, in other words, and that party will want something in return. (more…)
29 September 2008 at 10:17 am Peter G. Klein Leave a comment
Mankiw: Defer to the Philosopher-Kings
| Peter Klein |
One of the most disappointing economist responses to the proposed bailout is Greg Mankiw’s. While not exactly endorsing the Paulson-Bernanke plan itself, Greg supports the process through which it emerged. His argument, essentially, is this: Paulson and Bernanke are very smart and have access to better information than the rest of us, so we should stop complaining and go along with whatever they propose.
I find this stunningly naive, for four reasons:
1. It ignores differences in theoretical frameworks or models. No doubt Karl Marx, John Maynard Keynes, Oskar Lange, Paul Samuelson, and Joseph Stiglitz were or are highly intelligent people. Do we have to accept all their policy conclusions? Surely intelligent specialists can come to different conclusions not only because they have access to different information (the Friedmanite view), but because they have different understandings of how the world works. (This is especially true when long-run, rule-utilitarian consequences are at stake.)
2. It ignores the distinction between theoretical and applied economics. Even if people agree on theoretical questions, they may disagree on the application of theory to specific historical situations, which is a matter of judgment, not intelligence.
3. It ignores private interests. Paulson and Bernanke are not disinterested, Platonic philosopher-kings pursing the common good. Presumably they are pursuing private interests, just like every other political actor. Has Greg never heard of public choice?
4. It ignores concerns other than economic efficiency. Economists, like everyone else, have normative opinions. Some may oppose the bailout not on utilitarian grounds, but because they think giving taxpayer dollars to failing enterprises is immoral, regardless of possible contagion effects.
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.
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…)
Advice For Junior Faculty
| Peter Klein |
Last Friday the Chronicle of High Ed published the first in a series of articles giving strategic advice for pre-tenure faculty. In “A Call for Clarity” Cathy Trower and Anne Gallagher identify four common pitfalls facing early-career professors:
- Vague and inconsistent tenure guidelines
- Lack of constructive feedback
- A culture of “don’t ask, don’t tell”
- Divergence between policy and practice
In response they suggest that universities adopt formal written policies, offer tenure workshops, and provide clear interpretation of tenure rules. Good advice. (Thanks to Fabio Chaddad for the pointer.)
A New Hope
| Peter Klein |
Finally, encouraging signs of resistance to the Paulson-Bernanke Corporate Welfare Act of 2008. Naturally, the commentators at our favorite sites at our favorite sites listed in the “Links” section below and to the right have been been against the bailouts from the beginning, but now mainstream scholars and analysts are getting into the act. I don’t mean complaints from members of Congress or The Candidates that the recent and proposed bailouts don’t go far enough (e.g., homeowners should get bailed out too) or that the Paulson-Bernanke proposal doesn’t include enough new regulations. Rather, I’m talking about sensible analysis by prominent, mainstream economists and other experts explaining that a market economy in which profits are private while losses are socialized is, well, not a market economy at all but a socialist or corporate-fascist state. See, for example, statements by Luigi Zingales, John Cochrane, and Richard Epstein, among others. Maybe the Empire can be defeated after all. (Apologies to Seth MacFarlane for modding his image.)
Update: Casey Mulligan is also quite good.
More on Facebook
| Nicolai Foss |
We bloggers face strong competition from Facebook, as recognized in earlier O&M posts. FB integrates numerous functionalities, including blogging features, and allows narcissism to run amok in a more interactive fashion than blogging allows for. Irresistible. Therefore, smart bloggers embrace FB. As of today, O&M also has a category called “Facebook.”
Facebook is, of course, also an attractive hunting ground for all those ICT-obsesssed network sociologists or computer scientists-turned-sociologists (e.g., here and here) out there, as well as for personality psychologists. Concerning the latter, in the latest issue of Personality and Social Psychology Bulletin, Laura Buffardi and W. Keith Campbell report on “Narcissism and Social Networking Web Sites.” The authors conclude, among other things, that narcissists have more friends (rather, acquaintances), more personal info and more glamorous pics of themselves on FB than non-narcissists. (Now, check this profile).
Perhaps not a surprising finding, but still good to now (particularly for job applicants, given that employers now routinely check FB profiles). And surely it won’t take long before we see the first applications in network studies of the “narcissism index” as an antecedent of this or that (“Narcissism as an Antecedent of Knowledge Sharing in Networks”). Heck, they come up with a new measure every morning anyway. (more…)
Request for Urgent Confidential Business Relationship
| Peter Klein |
Perhaps you found this in your inbox today. But, really, is it any sillier than the real thing?
From: Minister of the Treasury Paulson
Subject: REQUEST FOR URGENT CONFIDENTIAL BUSINESS RELATIONSHIPDear American:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
Yours Faithfully Minister of Treasury Paulson
Of course, the word “deregulation” above should be “change in regulation.”
See also: All Your Banks Are Belong to US (via Anthony).
Online Managerial Economics Seminar with Luke Froeb
| Peter Klein |
Luke Froeb, co-author (with Brian McCann) of the excellent MBA text Managerial Economics: A Problem-Solving Approach and co-blogger at Management R&D is conducting an online seminar this Wednesday, “Teaching MBA Students How to Solve Problems Using Economics.” (I can’t bring myself to use the word “webinar.”) All you need to participate is an internet connection and a phone. It’s free but you have to register.
The Coleman Bathtub
| Nicolai Foss |
The so-called “Coleman Bathtub” (or “boat”) is one of the most useful expository vehicles for thinking about multi-level issues in social science research. The diagram portrays macro-micro-macro relations as a sort of rhombic figure with causal relations going down from macro (e.g., institutions) to the conditions of individual actions which then give rise to individual actions that in turn aggregate up to macro outcomes. (Check the 1st chapter in James Coleman’s tome, Foundations of Social Theory).
Although the diagram is exceedingly simple, there are substantial potential issues with it, e.g., are the relations depicted in the diagram really causal relations (can macro-entities cause individual actions? Also, I am tempted to adopt the position that ontologically there really aren’t levels, just interacting social actors). Nevertheless, different levels of analysis abound in social science science research, and the Coleman bathtub is often a great eye opener, particularly for students. And I have frequently used it myself in recent research.
I just had my paper with Peter Abell (Professor of Mathematical Sociology, LSE) and Teppo Felin (you know, the orgtheory.net founder), “Building micro-foundations for the routines, capabilities, and performance links,” published in Managerial and Decision Economics. Another plug: with Dana Minbaeva, a HRM specialist in “my” research center, I have written “Governing Knowledge: The Strategic Human Resource Management Dimension.” You can find it here.
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.
New History of Economics Blog
| Peter Klein |
It’s the History of Economics Playground, written by a team of young scholars in a charmingly irreverent style. “We will trade references. We will review books. We will bear witness to seminars and conferences. We will debate and gossip and express our feelings about life in scholarship.” Sounds like the program here at O&M. Except for this: “The terms of our senior colleagues and supervisors need not be our own.” Eh? What’s that? Speak up, sonny.
Latest Policy Statements from Washington
| Peter Klein |
Via Sean Corrigan:
- U.S. TREASURY TO ENSURE GOOD WEATHER ALL WEEKEND
- U.S. TREASURY TO ENSURE PERSONAL HAPPINESS
- PAULSON SAID TO BE GUARANTEEING ALL MARRIAGES
- BERNANKE PROMISES CUTE PUPPY FOR EVERY FAMILY
Naturally I’m doing my best to ignore the equally inane remarks of The Presidential Candidates. I’m reminded of the great title of Mises’s 1948 essay on Keynes, “Stones into Bread: The Keynesian Miracle.” Oy vey.
Klein Blue
| Nicolai Foss |
Behold, below, Klein Blue — Yves Klein’s famous 1959 painting.
Here is how the Tate Collection describes it:
In 1947, Klein began making monochrome paintings, which he associated with freedom from ideas of representation or personal expression. A decade later, he developed his trademark, patented colour, International Klein Blue (IKB). This colour, he believed, had a quality close to pure space, and he associated it with immaterial values beyond what can be seen or touched. He described it as ‘a Blue in itself, disengaged from all functional justification’.
In contrast to the Klein Bottle, it is two-dimensional. I will leave it to the reader to draw the parallels to Peter (but offer “disengaged from all functional justification” as a clue).
Best Few Sentences I Read Today, University Edition
| Peter Klein |
Fred Schwarz, writing about University programs to have incoming freshmen read and discuss a particular book (usually a propaganda piece like Barbara Ehrenreich’s Nickel and Dimed but in this case Garry Wills’s tedious Lincoln at Gettysburg):
I dislike the whole idea of making everyone read the same book. . . . Why do college administrators persist with schemes like this? They usually say they’re meant to give students “something in common.” So administrators spend half their time dividing students into groups by race, sex, religion, and so forth, and emphasizing their differences; then they spend the other half devising programs, workshops, and silly ideas like this to help everyone overcome them. Nothing surprising there; running a university, like many jobs, is largely a matter of making work for oneself.
Motivation in Knowledge-Sharing Networks
| Nicolai Foss |
Knowledge-sharing networks have become a huge research subject in various fields in management. Much of this work builds from applications of the work of Mark Granovetter or Ronald Burt. It probably represent the most potent sociological impact on management research over the last decade. Even strategic management — which has traditionally been strongly influenced, even dominated, by economics — has been influenced by this research. Prominent work has been done by Hansen (e.g., here and here), Tsai (e.g., here), and Reagans and McEvily (here) (and here is an excellent related paper by Obstfeld).
Most of this work treats motivation in a somewhat indirect manner, if at all. Implicitly, individuals that are placed in similar network positions are taken to give or receive knowledge to the same extent. This need not be the case, however, as individuals need to be motivated to seize opportunities, and motivation can differ across networks and employees. However, most studies of knowledge sharing in networks abstract from the role played by motivation. This may be partly justified to the extent that a network position translates directly into motivation. However, this should be treated as an empirical issue rather than as a starting point for analysis. (more…)
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