Archive for March, 2010

Ceci n’est pas une clé mémoire USB

| Dick Langlois |

With apologies to Magritte.

10 March 2010 at 10:56 am 2 comments

Mises Quote of the Day

| Peter Klein |

Nothing can be known about such matters as inflation, economic crises, unemployment, unionism, protectionism, taxation, economic controls, and all similar issues, that does not involve and presuppose economic analysis. All the arguments advanced in favor of or against the market economy and its opposites, interventionism or socialism (communism), are of an economic character. A man who talks about these problems without having acquainted himself with the fundamental ideas of economic theory is simply a babbler who repeats parrotlike what he has picked up incidentally from other fellows who are not better informed than he himself.

This is from Mises’s introduction to the 1959 edition of Böhm-Bawerk’s massive 3-volume set, Capital and Interest. Mises gives some further admonitions: “A man not perfectly familiar with all the ideas advanced in these three volumes has no claim whatever to the appellation of an economist.” This is, shall we say, a minority view. And my personal favorite: “A citizen who casts his ballot without having studied to the best of his abilities as much economics as he can fails in his civic duties. He neglects using in the appropriate way the power that his citizenship has conferred upon him in giving him the right to vote.”

Those lacking time to study Capital and Interest in its entirety may enjoy this new edition of Böhm-Bawerk’s essay “Control or Economic Law,” which is more easily digested.

10 March 2010 at 10:10 am 8 comments

Google Public Data Explorer

| Peter Klein |

How long before we are doing all our empirical research on Google?

You can bet that commercial and subscription-based academic data providers like Thompson Financial, CRSP, Compustat, Global Insight, etc. are paying close attention. (BTW I still think the World Freedom Atlas is cooler.)

9 March 2010 at 12:38 am 4 comments

Unquenchable

| Dick Langlois |

I attended an interesting lecture on Thursday, part of the University’s Edwin Way Teale lecture series on the environment. Normally these lectures do not tend, shall we say, to take perspectives that O&M readers would find congenial. But this lecture, by Robert Glennon of the University of Arizona Law School, was interesting along a number of dimensions. The talk was based on his book Unquenchable: America’s Water Crisis and What To Do About It. Here is the abstract:

From manufactured snow for tourists in Atlanta to trillions of gallons of water flushed down the toilet each year, Dr. Robert Glennon reveals the heady extravagances and everyday inefficiencies that are sucking the nation dry. The looming catastrophe remains hidden as the government diverts supplies from one area to another to keep water flowing from the tap. But sooner rather than later, the shell game has to end. And when it does, shortages will threaten not only the environment, but every aspect of American life. America must make hard choices — and Glennon’s answers are fittingly provocative. He proposes market-based solutions that value water as both a commodity and a fundamental human right.

The talk was interesting not only in that I learned a few things about the screwed-up water system in the U. S. (the broad contours of which I was vaguely familiar with) but also in that it presented an interesting case study in rhetoric. Glennon spent most of the talk revving up the environmentalist crowd, with lots of show and tell about the effects of bad water policy and a tour through various command-and-control policies that environmentalists might think of to fix the situation. (He even paused to make fun of Ann Coulter’s claim that the flush toilet is man’s greatest invention.) But Glennon’s bottom line, revealed at the very end, is that the only thing that will fix the problem is properly assigning property rights and trading those rights on markets. This was the conclusion I was expecting, not only because of the abstract but also because Glennon has an NBER Working Paper with Gary Libecap. Maybe this is the way to go in selling market-based solutions.

8 March 2010 at 11:46 am 4 comments

It Was the Best of Times, It Was the Worst of Times

| Peter Klein |

Many are enjoying the irony of Sandra Bullock winning a best-actress Oscar (for The Blind Side) and a worst-actress Razzie (for All About Steve) in the same year. It made me think of Robert Hodgson’s recent paper in the Journal of Wine Economics, noting that wines winning awards in a particular competition are no more likely to win awards in other competitions. “An analysis of the number of Gold medals received in multiple competitions indicates that the probability of winning a Gold medal at one competition is stochastically independent of the probability of receiving a Gold at another competition, indicating that winning a Gold medal is greatly influenced by chance alone.” Perhaps acting awards work the same way?

8 March 2010 at 10:24 am 6 comments

Jobs Of Yesteryear: Obsolete Occupations

| Peter Klein |

A fascinating pictorial from NPR on jobs made obsolete by technological innovation. Great illustrations of the labor-market side of creative destruction. (Planet Money via Russ Roberts.)

5 March 2010 at 5:42 pm 5 comments

Org. Structure and Diversification

| Peter Klein |

The March 2010 issue of the Journal of Industrial Economics has just come out, and it features my paper with Marc Saidenberg, “Organizational Structure and the Diversification Discount: Evidence from Commercial Banking.” I’m quite happy with the paper, which went through many rounds of revision and consumed a great deal of time and energy. I blogged the details earlier. The published version is behind a firewall; if you can’t get through I’d be happy to mail you a copy.

5 March 2010 at 2:21 pm Leave a comment

Peer Review

| Peter Klein |

Thanks to MN.

5 March 2010 at 11:51 am Leave a comment

Gene Fama’s Autobiography

| Peter Klein |

Here’s an autobiographical essay by Gene Fama written for the Annual Review of Financial Economics. Fama’s work on agency theory (with Mike Jensen) and on corporate finance (with Ken French) should be of particular interest to O&Mers, though some may disagree with his introductory claim that “[f]inance is the most successful branch of economics in terms of theory and empirical work, the interplay between the two, and the penetration of financial research into other areas of economics and real-world applications.”

Fama’s Chicago-Booth colleagues add the following note about Fama’s institutional leadership, presumably directed at today’s Fama-bashers:

Rather than rest on his laurels or impose his own views on the group, Gene has always sought the truth, even when it appeared at odds with his own views. . . . The current finance group at Chicago includes a diverse set of people who specialize in all areas of modern finance including, behavioral economics, pure theory, and emerging, non-traditional areas such as entrepreneurship and development that were unheard of when Gene arrived at Chicago. Contrary to the caricatured descriptions, there is no single Chicago view of finance, except that the path to truth comes from the rigorous development and confrontation of theories with data.

4 March 2010 at 12:27 pm 5 comments

I, Taco

| Peter Klein |

Some California design students tracked the ingredients in their favorite local taco and came up with this cool image.

Of course, it’s supposed to show us the horror of all those food miles, but what I see is the miracle of the market.

3 March 2010 at 2:15 pm 5 comments

Price Level Shocks, uhm, Screwed Up Relative Prices, and Organization

| Craig Pirrong |

Peter’s post on the relation between inflation, vertical integration, and markets brings a couple of other thoughts to mind.

First, and most importantly, the number and characteristics of markets are endogenous too, and respond to changes in the amount of uncertainty in the environment, including the amount of uncertainty resulting from monetary shocks that (in Sherwin Rosen’s unforgettable in-class phrase) “f*ck up relative prices.” In particular, the number and variety of futures markets depends on the amount of uncertainty. The big boom in the creation of futures markets in the 1970s corresponds with, and was arguably caused by, the coincident inflation of that period, and the associated volatility in relative prices.

Second, although Peter’s point, and previous research, focuses on the implications of inflation on organizational choices and market vs. firm choices, in the current environment it is worthwhile pondering the implications of deflation. Certainly we have more research on the effect of inflation on the variability of relative prices due to our more recent inflationary experiences, and this was a major source of concern about inflation among Austrians, but the current situation makes it worthwhile to consider the effects of deflation on the pricing system, and firms’ responses to that.

Perhaps an examination of Japanese experience since 1990 would be worth some in-depth analysis.

Personally I am torn as to whether inflation or deflation is the greater risk in the near to medium term. The huge monetary overhang in the US and around the world (resulting from quantitative easing and other extraordinary monetary policies), and the inability of the Fed to commit credibly to drain reserves from the system when money demand picks up make me believe that it will be hard to avoid a burst of inflation. But all current indicators point to flat or declining prices.

It is hard to see things ending in a Goldilocks moment — just right. Thus, it is likely that that there will be a shock to prices generally, arguably a large one, and that this will disrupt relative prices for a variety of reasons. (Including, notably, the very likely case where these price level shocks lead to government policy interventions that distort relative prices.)

Thus, Peter’s research program may be rejuvenated, courtesy of the Fed, ECB, the Chinese Central Bank, etc. It is indeed an ill wind that blows nobody any good.

2 March 2010 at 2:29 pm 3 comments

How Grad School Is Just Like Kindergarden

| Peter Klein |

Another gem from the PhD Comics guy (click to enlarge).

2 March 2010 at 10:11 am Leave a comment

Vertical Integration and the Informational Content of Prices

| Peter Klein |

Many years ago, when I was taking Williamson’s Economics of Institutions class at Berkeley and fishing around for dissertation topics, I had the idea to do some empirical work on the relationship between inflation and vertical integration or conglomerate diversification. The basic idea is that monetary expansion not only raises price levels, but also increases the dispersion of relative prices — introducing “noise” into the price mechanism — giving entrepreneurs an incentive to internalize transactions, on the margin, they would have otherwise conducted in the market. My interest was partly piqued by an off-hand remark by Dick in a review of Chandler’s Scale and Scope:

Things began to go wrong in the 1960s with the wave of conglomerate diversification, that is, with diversification by companies into areas wholly unrelated to their “core competence.” ITT was the paradigm of this phenomenon. Originally an international maker of telephone switching equipment, it bought, among other things, an insurance company and the maker of Hostess Twinkies. Chandler sees this as an inefficient practice, with many of the disbenefits of overextended British personal capitalism. There is no historical precedent for such unrelated diversification, he notes, except for German Konzerne during the hyperinflation of the 1920s. What is interesting — and what Chandler doesn’t mention — is that it is precisely inflation, in this case the Lyndon Johnson inflation of the 1960s, to which many have pointed as the cause of the wave of conglomerate mergers. The conglomerate is in effect an “internal capital market” that invests in a diversified portfolio of unrelated interests. But why? The stock market is much better at diversifying away risk than is such an arrangement, and it has many other advantages as well. In a time of inflation, the argument goes, price signals become distorted as managers find it difficult to disentangle changes in relative prices (that is, real prices) from changes in the price level. In such a world, the internal information and control within a conglomerate may have advantages that outweigh the disadvantage.

But, in any case, the trend in the less-inflationary 80s was the opposite one, the breaking apart of corporate holdings. . . .

The idea that conglomerate diversification, and “hierarchies” more generally, are responses to conditions in external markets has proven very useful in my own work; it also appears in Amar Bhidé’s neglected 1990 paper on diversification. Dick’s review cites a 1989 paper by Don Boudreaux and Bill Shughart linking US inflation rates and a measure of vertical integration but I couldn’t find such a relationship for diversification, and ended up going in a different direction. (more…)

1 March 2010 at 11:19 am 13 comments

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