Posts filed under ‘– Klein –’
A Political Slogan Even an Economist Could Love
| Peter Klein |
Spotted on Sheldon Richman’s blog:
Exploit Price Discrepancies, Not People!
(It links to Mises’s “Profit and Loss.”)
Essays on Cournot
| Peter Klein |
Martin Shubik reviews Jean-Philippe Touffut’s edited volume Augustin Cournot: Modelling Economics (Elgar, 2007) for EH.Net. Contributors deal with Cournot’s contributions to economics, probability theory, and statistics, with mixed results (according to Shubik, who thinks Cournot’s contributions to game theory deserved more ink). Shubik thinks Cournot was “not only was a mathematician and probabilist, he was an excellent modeler linking the economic world with basic abstract models . . . [particularly the] modeling and application of a mutually consistent expectations model to oligopoly and economic competition.”
Shubik opens the review with this interesting (if a touch immodest) anecdote:
In the early 1950s, when I was a graduate student at Princeton, I had two academic heroes. They were Cournot and Edgeworth (in my lesser Pantheon were Jevons and Walras). As soon as John Nash discussed his thesis on noncooperative games with me, I pointed out to him that his solution which was mathematically highly general was in essence the one that Cournot had applied to economics and had presented in his great book of 1838. The solution called for individual mutually consistent expectations. At that time game theory in either cooperative or noncooperative form was virtually ignored in economics. It seemed to me that this natural extension of Cournot, whose work was unknown to Nash, was going to extend the scope of oligopolistic studies considerably. Nash and I were joined by John Mayberry in writing an article accepted by _Econometrica_ (“A Comparison of Treatments of a Duopoly Situation,” 1953, 141-54.) This, I believe was the first treatment of oligopoly expanding on Cournot’s work utilizing modern game theory. The mathematical tools were being forged to expand vastly the noncooperative equilibrium methods to economics so brilliantly started by Cournot.
In his introduction to Menger’s Principles Hayek expresses surprise that Menger, unlike Jevons and Walras, seemed unfamiliar with Cournot.
JOM Special Issue on the Resource-Based Theory of the Firm
| Peter Klein |
Jay Barney, Dave Ketchen, and Mike Wright are editing a special issue of the Journal of Management on “Resource-Based Theory: Twenty Years of Accomplishments and Future Challenges.” Proposals should be submitted between 1 March and 1 April 2009 for an issue to appear in 2011, the 20th anniversary of the 1991 special issue of JOM that helped establish the field (particularly with Barney’s paper, “Firm Resources and Sustained Competitive Advantage,” which has 9,889 cites on Google Scholar as of this posting). The full call for papers is below the fold. (more…)
No Analysis, No Data
| Peter Klein |
Earlier I complained that public discussions of the current financial situation are largely devoid of analysis. A recent example: virtually no one has explained why the commercial-paper market is “frozen.” We’re told that even firms with good commercial prospects can’t turn over their short-term notes, leaving them desperately short on working capital. In other words, there is real economic value to be created by extending short-term credit to these firms, but no one is willing to lend. $20 bills on the sidewalk, indeed! Presumably there is some kind of Stiglitz and Weiss (1981) story underlying these claims — banks cannot distinguish good from bad borrowers, so they refuse to lend to anyone — but nobody has bothered to spell it out, or to explain how indiscriminate Fed purchases of commercial paper solves the problem. Ah, well, perhaps to ask for analysis makes one a stuffy and unrealistic fundamentalist.
Bob Higgs notes that not only is the analysis largely absent, the data are wildly inconsistent with the kinds of claims being made.
The Federal Reserve System publishes comprehensive data on commercial paper issuance, commercial paper outstanding, and interest rates on commercial paper. I presume that these data give us a clearer picture of what’s going on in the markets than a covey of hyperventilating Wall Street commentators. (more…)
Salerno on Hayek
| Peter Klein |
Joe Salerno’s introduction to the Hayek collection mentioned earlier is now online. Writes Joe:
Hayek’s amazingly precocious intellect and creative genius are on full display in these works. Thus, before the age of thirty, Hayek already had fully mastered and begun to synthesize and build upon the major contributions of his predecessors in the Austrian tradition. These included, in particular: Eugen von Böhm-Bawerk’s theory of capital and interest; Knut Wicksell’s further elaborations on Böhm-Bawerk’s capital theory and his own insights into the “cumulative process” of changes in money, interest rates and prices; Ludwig von Mises’s groundbreaking theories of money and business cycles; and the general analytical approach of the broad Austrian school from Menger onward that focused on both the subjective basis and the dynamic interdependence of all economic phenomena.
There is something else about Hayek that becomes apparent when reading his contributions in this volume. The young Hayek was a great economic controversialist, perhaps the greatest of the twentieth century. His entire macroeconomic system was forged within the crucible of the great theoretical controversies of the era. His opponents were some of the great (and not so great) figures in interwar economics: Keynes, W.T. Foster and W. Catchings, Ralph Hawtrey, Irving Fisher, Frank Knight, Joseph Schumpeter, Gustav Cassel, Alvin Hansen, A.C. Pigou, Arthur Spiethoff to name a few. Hayek took on all comers without fear or favor and inevitably emerged victorious. As Alan Ebenstein notes, “Hayek came to be seen in Cambridge, as Robbins and LSE’s point man in intellectual combat with Cambridge.”
Hayek’s views are essential to understanding the current mess, though it’s hard to summarize Hayek’s business-cycle theory in a bumper-sticker slogan that, say, Barney Frank could understand.
Society for Entrepreneurship Scholars Manuscript Boot Camp
| Peter Klein |
The Society for Entrepreneurship Scholars runs a manuscript “boot-camp” to help junior faculty and graduate students in entrepreneurship, as well as established scholars from other disciplines who are new to the entrepreneurship field, get a manuscript ready for publication in a top-tier journal. Bill Schulze and Sharon Alvarez are chairing the conference this year, to be held 11-13 December at the Solitude Mountain Resort near Salt Lake City. A team of senior scholar-mentors, including Rajshree Argawal, Julio DeCastro, Greg Dess, David Deeds, Harry Sapienza, and me, will work with participants to get their manuscripts in shape. There’s also great networking and, this year, great skiing.
Submissions should be sent to ses@utah.edu by November 3. The full announcement, with all the relevant contact information, is posted below the fold. (more…)
Mundane Austrian Economics
| Peter Klein |
The “Austrian” school of economics gets frequent mention on this blog. It even comes up in mainstream discussions of the financial crisis. But what exactly is it? Why do I care so much about the economy of Austria (or, I’m sometimes asked, Australia)?
The label “Austrian” describes a particular tradition in economic analysis, one that dates back to Viennese economist Carl Menger’s 1871 Principles of Economics (hence the geographic identifier). The Austrian approach is usually associated, particularly in applied fields like organization and strategy, with Hayek’s ideas about dispersed, tacit knowledge, Kirzner’s theory of entrepreneurial discovery, and an emphasis on time, subjectivity, process, and disequilibrium. Even Lachmann’s “radical subjectivism” is getting some play. Various Fosses and Kleins have also argued that Austrian capital theory has some implications for entrepreneurship.
Despite this renewed interest in the Mengerian tradition, the Austrian approach to “basic” economic analysis — value, production, exchange, price, money, capital, and intervention — hasn’t gotten much attention at all. Indeed, it’s widely believed that the Austrian approach to mundane topics such as factor productivity, the substitution effect of a price change, the effects of rent control or the minimum wage, etc. is basically the same as the mainstream approach, just without math or with a few buzzwords about “subjectivism” or the “market process” thrown in. Even many contemporary Austrians hold this view.
In a new paper, “The Mundane Economics of the Austrian School,” I suggest instead that the Austrians offer a distinct and valuable approach to basic economic questions, an approach that should be central to research by Austrians on theoretical and applied topics in economics and business administration. (more…)
Revenge of the Aggregates
| Peter Klein |
I first studied macroeconomics back in the dark days before the microfoundations revolution had filtered down into the undergraduate curriculum. We learned Y = C + I + G and that was about it. Fluctuations in aggregate demand cause fluctuations in aggregate output, Hayek be damned. Relative price changes — between markets at the same place in the time-structure of production, or between higher- and lower-order sectors — were completely ignored.
Supposedly mainstream macroeconomics has moved beyond this crude level of aggregation. But you’d never know if from the discussions of the last few weeks. “Banks” aren’t “lending” enough. “Businesses” and “consumers” can’t get “loans.” “Firms” have too many “bad assets” on their books. The key question, though, is which ones? Which banks aren’t lending to which customers? Which firms have made poor investments? Newsflash: a loan isn’t a loan isn’t a loan. I hate to break it to the Chattering Class, but not every borrower should get a loan. The relevant question, in analyzing the current mess, is which loans aren’t being made, to whom, and why? The critical issues revolve around the composition of lending, not the aggregate amount. Focusing on total lending, total liquidity, average equity prices, and the like merely obscures the key questions about how resources are being allocated across sectors, firms, and individuals, whether bad investments are being liquidated, and so on. (more…)
Humorous Headline of the Day
| Peter Klein |
OK, it’s bailout related, so the humor is macabre, but here goes, courtesy of the Financial Times:
Iceland in emergency talks to prevent bank meltdown
When even the ice is melting, it’s getting serious.
Nobel Pickin’ Time
| Peter Klein |
The econommics Nobel chatter has already begun (1, 2, 3, probably many more). I’ll just borrow from last year’s post for those who follow such things:
How about a prize for organizational economics? Coase, of course, whose 1937 paper is foundational to the field, has already won, as have Akerlof, Spence, Stiglitz, Mirrlees, Vickrey, Hayek, and others whose work has greatly informed the study of organizations. But, for a prize recognizing organizational economics per se, whom would you pick? Williamson, Holmström, Milgrom, Roberts, Hart, Tirole, Aghion? Perhaps Alchian, Demsetz, or Jensen. Maybe a personnel economist (Lazear) or someone in corporate finance or accounting (Bill Schwert, Stewart Myers, René Stulz, Raghuram Rajan, Cliff Smith, Milton Harris, Artur Raviv)? Suggestions?
An entrepreneurship Nobel for, say, Baumol and Kirzner isn’t out of the question, but seems unlikely. What do you think?
Self-Fulfilling Prophecy?
| Peter Klein |
Commentators seem to take it for granted that this week’s crazy stock-market performance, particularly Monday’s 700-point drop in the Dow, proves the reality of the financial crisis. But in today’s Fed-watching age, in which even the most cryptic pronouncements of Federal Reserve officials send traders rushing to their keyboards, do you think the repeated statements by the Fed chair, Treasury secretary, and other insiders that the economy is on the verge of total collapse might just have a teensy, weensy effect on financial markets?
“Henry, banks are still lending. Hurry, say ‘credit crunch’ again and maybe we can scare ’em off!”
BTW isn’t it interesting that the phrase “not lending” has become a synonym for “lending less”? The Paulson plan “could channel enough money to enough banks to get them to resume lending,” says Knowledge@Wharton. So banks are currently making zero loans? Wow. I sense a profit opportunity. Hmmm, Don Boudreaux points to a Christian Science Monitor piece revealing that “only 63 percent of consumers applying for a car loan are being approved compared with 83 percent a year ago.” Yep, sounds like zero lending to me.
More Bailout Humor
| Peter Klein |
In dark times, sometimes all you can do is laugh.
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Strange Bedfellows
| Peter Klein |
One of the interesting aspects of this week’s House vote on the Paulson plan was the coalitions it generated. The Treasury Secretary, the Fed Chair, and leaders of both the Democratic and Republican sides stood hand-in-hand to urge lawmakers to support the bailout. Conservative Republican and liberal Democratic members joined forces to defeat it. What gives? Larry White points to ideology: “Republicans who voted no didn’t like the fact that $700 billion would be taken from taxpayers. . . . Democrats who voted no didn’t like the fact that it would be going to Wall Street.” Maybe, but I prefer Gordon Smith’s suggestion:
Anthony Ha uses the data at MapLight.org (a website dedicated to “illuminating the connection” between money and politics) to tell another familiar political story. Looking at this page, Anthony observes:
Overall, bailout supporters received an average of 54 percent more in campaign contributions from banks and securities than bailout opponents over the last five years. The disparity also held true if you look at individual parties. In fact, the 140 Democrats who voted for the bailout received almost twice as much money from banks and securities as the 95 Democrats who voted against it. (The difference was closer to 50 percent for Republicans.)
Does anybody have data that would permit some quick-and-dirty analysis, say a logistic regression of the House votes as a function of legislator and district characteristics, contributions from the commercial and investment banking industries, and other interest-group variables?
I’m From the Government, and I’m Here to Make You Some Money
| Peter Klein |
I’ve noted before how most commentators on the financial crisis are ignoring political economy. Virtually everyone, with the exception of the good folks at Mises.org, The Beacon, and a few other sites, treats Paulson, Bernanke, bank regulators, members of Congress, and other principals as the benevolent dictators of neoclassical welfare economics. (This is true even of people you’d think might know something about public choice.) But it’s impossible to analyze the current situation without reference to special interests — not only those whose actions are responsible for the current mess, but also those taking advantage of the situation to rewrite the rules and increase their authority.
One example: A particularly foolish (and dangerous) meme working its way through Washington and the surrounding punditocracy is the idea that the Paulson or modified Paulson plan isn’t really a $700 billion bailout. It’s an asset purchase, the argument goes, not a transfer payment; the Treasury buys $700 billion of bad securities, holds them, and sells them later, once market conditions improve. Maybe the Treasury can sell these assets for, say, $500 billion, so the net cost to the taxpayer is only $200 billion. Heck, if prices rise enough, taxpayers may even make money on the deal! (That’s what the junior senator from Missouri said today. Plenty of clever-silly people are saying this kind of thing too.)
The scenario is pure fantasy. Think of it this way. Treasury gets the $700 billion by borrowing (say, from the Chinese) or through increased tax revenue. Suppose the value of these assets really does rise to $500 billion, and the Treasury sells them back to investors. What will the US government do then — return the 500 billion to taxpayers? Does anyone seriously think Congress would cut taxes or offer rebates to give that money back? Not on your life. Congress will simply take that $500 billion and spend it on new programs. The Paulson plan represents an increase in government expenditures of $700 billion, period. Joe and Jane taxpayer will never get a penny of that $700 billion back, no matter what happens to asset prices.
Teaching Economics through Cinema
| Peter Klein |
I wrote something a while back on the entrepreneur in film. Here’s a working paper on the use of cinema in economics education more generally. Gherardo Girardi experiments with movies in the clasroom and reports the results, summarized by this (perhaps unintentionally) droll remark: “The results from the student surveys show that the students strongly wish to see the proposed module introduced.” No kidding.
Girardi’s recommendions include some surprises along with familiar items:
- Death of a Salesman (Arthur Miller, 1949, US) – Choice of profession, sense of self worth based on economic performance;
- Grapes of Wrath (John Steinbeck, 1939, US) – Property rights, migration, trade unions;
- Oliver Twist (Charles Dickens, 1838, UK) – Economics of crime, economics of charities;
- Rogue Trader (James Dearden, 1999, US) / Wall Street (Oliver Stone, 1987, US; C) – Psychology of financial markets, business ethics;
- Balkanizateur (Sotiris Goritsas, 1998, Greece; C) – Efficiency of capital markets;
- La Terra Trema (Luchino Visconti, 1948, Italy) – Poverty and the risks of entrepreneurship;
- St. Francis (Michele Soavi, 2002, Italy) / Francis, God’s Jester (Rossellini, 1950, Italy) – Choice between wealth and poverty
- Mother India (Mehboob Khan, 1957, India; C) – Rural financial markets in poor countries;
- Pride and Prejudice (Jane Austin, 1813, UK) – Dowries, economics of inheritance;
- Ashani Sanket (a.k.a. Distant Thunder, Satyajit Ray, 1973, India) – Economics of famines;
- Robin Hood (author unknown, 1973 Walt Disney production recommended) – Morality of stealing from the rich/the state
See also From ABBA to Zeppelin, Led: Using Music to Teach Economics.
Karl’s Revenge
| Peter Klein |
I closed my first post on the bailout mess with “Capitalism, requiescat in pace.” Here’s Martin Masse with the details. (Thanks to Mark Thornton.)
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?
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