Archive for October, 2008

Who Invented the Internet?

| Peter Klein |

OK, we now know it wasn’t Al Gore. (And John McCain didn’t didn’t invent the BlackBerry either.) But who did invent the internet? Physicists have long maintained that they did. Michael Nielsen (via Josh Gans) disagrees:

It’s true that the principal inventor of the web, Tim Berners-Lee, was a programmer working at CERN, the huge European particle accelerator. In 1988 he sketched out a way of hooking up hypertext ideas, developed by people like Ted Nelson and Bill Atkinson, to the internet, developed by people like Vint Cerf and Bob Kahn. He talked the idea up at CERN for a year, with no response. In 1989 he wrote up and circulated a formal proposal around CERN. Again, no response for a year. Finally, he coded up a prototype in his spare time. In this, he actually was helped by his manager, who said it was okay if he used one of CERN’s workstations to build the prototype. It was launched to the world about one year later.

Berners-Lee didn’t succeed because CERN was doing fundamental research. He succeeded in spite of it.

Nielsen goes on to make a more general claim about large organizations tending to stifle innovation, but that is a more complicated and difficult issue. Yesterday in my entrepreneurship class we discussed Zoltan Acs and David Audretsch’s 1990 book Innovation and Small Firms, which paints a more nuanced picture (e.g., the relationship between firm size, scope, complexity, etc. and innovation varies widely by industry, market structure, time, manufacturing technology, and the like). 

Here is my take on the history of the internet, and here is an academic paper on internal capital markets and innovation.

23 October 2008 at 5:09 pm 1 comment

Heckman on Academia

| Peter Klein |

Steve Levitt links to this update on the travails of the University of Chicago’s proposed Milton Friedman Institute. Jim Heckman, an Institute supporter who has recently expressed public doubts about its conception and development, is on the hot seat. Heckman makes an interesting observation, in passing, that relates to a previous discussion of research funding:

Heckman added that all institutes are affected by bias, citing hiring decisions as a source of bias throughout the University.

“I doubt there is a truly unbiased academic. Besides, most biased people don’t see themselves as biased. If you think the [Chicago Graduate School of Business] is an unbiased environment, think again. They are recruited for their views. I wonder also how many free marketers would get jobs in anthropology or sociology,” he said.

“It’s true for any institute. You state a mission, attract funders. They expect the mission to be fulfilled. Very rarely do people fund pure knowledge,” he said.

23 October 2008 at 12:40 am Leave a comment

What Credit Crunch?

| Peter Klein |

I’ve talked before about the wild claims about credit markets being “frozen,” sound investment projects that can’t be funded, worthy borrowers who can’t get loans, and all the rest, claims that are totally unsupported by theory or empirical evidence. Nobody, least of all Paulson and Bernanke (or their ostensibly free-market supporters, such as Mankiw and Cowen), has bothered to provide any data to support these claims. A new paper by three Minneapolis Fed economists, “Four Myths About the Financial Crisis of 2008,” shows that the wild claims are virtually all false. The data show, for example, that despite a rise in inter-bank lending rates, actual lending between banks is about the same as before, and lending between banks and firms and individuals has risen, not fallen, during the crisis. (Loan volume is a better indicator than interest rates, which reflect default risk.) This analysis is based on publicly available data, the same sources I pointed to before. Why is nobody paying attention? (Thanks to Mike Moffatt for the link.)

Update: At least one Marginal Revolution blogger gets it.

Update 2: Bob Murphy writes (October 30): 

I think the authors did a really bad job of it. Some other economists ridiculed it, and I think their criticism is valid. In particular, the Minn Fed paper shows charts that could just as well have come from Paulson showing why his interventions saved the day.

For example, see this at the Economist.com blog: http://www.economist.com/blogs/freeexchange/2008/10/analysis.cfm . . . .

So the problem is that the Minn. Fed authors didn’t do a very good job in picking their charts, I think. If you instead do year/year ones, then things look a lot better for the “there’s no crisis” argument: http://economistsview.typepad.com/economistsview/2008/10/four-myths.html

Even though Mark Thoma (in the link above) doesn’t agree, I think if you look at the charts in his post, you’ll see some pretty amazing things. For example, even *real estate loans* have had yr/yr growth rates in excess of 5% this whole time. I.e. the “credit crunch” just meant a slowdown in their rate of growth.

22 October 2008 at 10:00 am 6 comments

Some New Academic Bloggers

| Peter Klein |

The academic blogosphere becomes more densely populated every day. Please welcome these new (to me at least) citizens:

22 October 2008 at 8:56 am 4 comments

The Case Against Corporate Social Responsibility

| Dick Langlois |

Another sign of the Apocalypse: Robert Reich channels Milton Friedman.

21 October 2008 at 1:36 pm 9 comments

Judgment, Luck, and Schultz

| Peter Klein |

Lasse raised an interesting point a while back about the Knightian concept of judgment, and how it differs from pure luck. Here’s a passage from T. W. Schultz that asks the same question:

[I]t is not sufficient to treat entrepreneurs solely as economic agents who only collect windfalls and bear losses that are unanticipated. If this is all they do, the much vaunted free enterprise system merely distributes in some unspecified manner the windfalls and losses that come as surprises. If entrepreneurship has some economic value it must perform a useful function which is constrained by scarcity, which implies that there is a supply and a demand for their services.

The key to understanding this passage is to recognize Schultz’s rejection, following Friedman and Savage (1948), of the concept of Knightian uncertainty. If all uncertainty can be parametrized in terms of (subjective) probabilities, then decision-making in the absence of such probabilities must be random. Any valuable kind of decision-making must be modelable, must have a marginal revenue product, and must be determined by supply and demand. For Knight, however, decision-making in the absence of a formal decision rule or model — what Knight calls judgment — isn’t random, it’s simply not modelable. It doesn’t have a supply curve, because it is a residual or controlling factor that is inextricably linked with resource ownership. It is a kind of understanding, or Verstehen, that defies formal explanation but is rare and valuable.

Without the concept of Knightian uncertainty, then, Knight’s concept of entrepreneurial judgment makes little sense.

21 October 2008 at 11:50 am 2 comments

Philosophy: Who Needs It?

| Peter Klein |

When Greenspan was appointed Fed chair in 1987 the New York Times Magazine ran a lengthy profile noting, among Greenspan’s other eccentricities, that he was a follower of Ayn Rand, generally regarded as a strong advocate of laissez faire. But Greenspan is doctrinaire only “at a high philosophical level,” wrote Leonard Silk, reassuringly. Murray Rothbard, who knew Greenspan in the 1950s, when both were friends with Rand, got a kick out of that line:

There is one thing, however, that makes Greenspan unique, and that sets him off from his Establishment buddies. And that is that he is a follower of Ayn Rand, and therefore “philosophically” believes in laissez-faire and even the gold standard. But as the New York Times and other important media hastened to assure us, Alan only believes in laissez-faire “on the high philosophical level.” In practice, in the policies he advocates, he is a centrist like everyone else because he is a “pragmatist.” . . .

Thus, Greenspan is only in favor of the gold standard if all conditions are right: if the budget is balanced, trade is free, inflation is licked, everyone has the right philosophy, etc. In the same way, he might say he only favors free trade if all conditions are right: if the budget is balanced, unions are weak, we have a gold standard, the right philosophy, etc. In short, never are one’s “high philosophical principles” applied to one’s actions. It becomes almost piquant for the Establishment to have this man in its camp.

Today Tyler Cowen, writing on Anna Schwartz’s very good interview with the WSJ, calls Bernanke a person “with libertarian sympathies,” which I find puzzling, since I can’t recall any evidence of this sympathy in Bernanke’s writings or policy actions. Perhaps he is a sympathetic libertarian “at a high philosophical level.”

20 October 2008 at 10:01 am 2 comments

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