Please turn on JavaScript

Brooks Wilson's Economics Blog: EconTalk
Showing posts with label EconTalk. Show all posts
Showing posts with label EconTalk. Show all posts

Monday, February 9, 2009

Acemoglu on Greed

One of my favorite economists, Daron Acemoglu of MIT, was interviewed by Russ Roberts on EconTalk today. Their discussion was based on an Acemoglu paper, "The Crisis of 2008: Structure Lessons for and from Economics," January 11, 2009. At 20:47 minutes, Roberts and Acemoglu discuss a quote on page five of the paper and provided below.

Acemoglu highlights the difference between economists' evaluation of the impact of greed on society and just about everybody else's. Greed is a constant and part of the nature of humankind. Societies create wealth by building sound laws, regulations, and institutions.

A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract. When channeled into profit-maximizing, competitive and innovative behavior under the auspices of sound laws and regulations, greed can act as the engine of innovation and economic growth. But when unchecked by the appropriate institutions and regulations, it will degenerate into rent-seeking, corruption and crime. It is our collective choice to manage the greed that many in our society inevitably possess. Economic theory provides guidance in how to create the right incentive systems and reward structures to contain it and turn it into
a force towards progress.


Read more!

Monday, January 19, 2009

Being Good Vs Being Popular

Over the course of time, Russ Roberts, the host of EconTalk, has interviewed three Nobel Laureates in Economics whose work was not immediately accepted. The economists are Milton Friedman, Gary Becker, and Vernon Smith. You can listen to the interviews by following the links inserted on their names. All sciences have an established body of work, and these economists challenged the prior beliefs of their professions embody by that work. It is proper and fitting that great effort should be necessary to move the center of economic belief. It is also proper and fitting that their ideas, given empirical support eventually won out, and their contributions are now widely recognized.

In short, Friedman opposed what was then the dominant economic belief that markets were unstable, and that government intervention was needed in the form of fiscal policy to stabilize markets. He argued that markets were inherently stable, and that through sound monetary policy involving a rule, a constant rate of growth in the money supply, government could best maintain economic growth. He was a Monetarist in a Keynesian world. Much of his work is now incorporated into the two dominant schools of Macroeconomics that followed his academic career, New Classical and New Keynesian economics.

Gary Becker extended economic research into nontraditional areas began in 1955 with the economics of discrimination, and followed by human capital, the allocation of time, crime, and the family. Other economists, particularly older ones, tended not to notice Becker’s contributions because they were nontraditional. He missed job opportunities, and the recognition that lesser economists received. By the middle of the 1970s Becker noticed that young economists greatly admired his work, and furthered his research.

Vernon Smith introduced experimental economics to the profession. In 1955, with a new Ph.D. from Harvard he began to teach at Perdue University. He soon realized that he did not understand the connection between how people operated in markets and the theory of supply and demand. The conventional stories did not explain how market reached equilibrium.

He began experimenting on students, and gained great insight into how markets reached equilibrium. His work demonstrated that markets were more efficient than traditional models demonstrated--economic agents did not need perfect information, and the number of agents did not need to be large. He attempted to publish his work in the Journal of Political Economy, a journal that was generally pro-market. His paper work was not accepted for publication.

In his interview on EconTalk, Smith quips,

Why did I send it to the JPE? Why that's a University of Chicago journal, and I thought, what have I shown? I've shown that markets really work quite well, better than I anticipated, and better than the...conventional wisdom as we taught it in economics. So I said, I'll send it to the JPE because those guys in Chicago have a reputation for believing in markets so they'll like this. Well that was wrong. I think it became evident why it was wrong. If you believe in markets you don't necessarily need evidence.

Smith describes in some detail his travails in publishing his work. He submitted his paper twice, and both times the referees rejected the paper. Eventually, Harry Johnson took over as new editor and asked Smith to submit yet another revised version. Ultimately the paper was published and Smith quotes Johnson as saying,

I haven't been at this job very long and I've learned a lot. I've discovered that you have to keep evaluating everybody, including yourself. I have to confess that I was one of the original referees (that was negative on the paper), but you've convinced me.

Good work, hard work paid off, and acclaim followed.


Read more!

Friday, January 16, 2009

Friedman on Businesses and Markets

Many have noted an apparent paradox of businesses that demand freedom from government taxation, regulation, social engineering are begging for government bailouts. Today, we read that Bank of America will bet an additional $20 billion in taxpayer money on their bold investments (HT Drudge). Does anyone smell a moral hazard? In an episode of porn gone wild, Larry Flynt and Joe Francis are asking for a $5 billion bailout of the porn industry. It seems like the demand for porn is more elastic (responsive to changes in price) than porn executives believed and anti-porn leaders had feared. And who will forget the specter of auto executives driving to DC and eventually winning a $17.4 billion bailout.

In an EconTalk podcast of Milton Friedman hosted by Russ Roberts, Friedman explains that there is no paradox in business behavior. They are doing what's best for them.

[I]t's always been true that business is not a friend of a free market...It's in the self-interest of the business community to get government on its side. It's in the self-interest of a particular business...But the real puzzle—puzzle isn't quite the right word—the real problem here is where do you find the support for free markets? If free markets weren't so damn efficient, they could never have survived because they have so many enemies and so few friends. People think of capitalism or free markets as something that obviously is supported by business. People think that if a business party is a party in politics, it will promote free market. But that's wrong. It will be in the self-interest of individual businesses to promote a tariff here and a tariff there…


Read more!

Sunday, January 4, 2009

Economics and Religion

On October 9, 2006, Russ Roberts interviewed Larry Iannaccone, pictured above, on the economics of religion for EconTalk. All of the discussion is worthwhile, but I want to focus on the impact of state regulation on religion.

Beginning at 11:25 minutes, Iannccone explained that intellectuals at the time that English colonies were established believed that religion was important for society, creating positive externalities which are benefits that society receives from individual membership in a church. They also believed that people would not attend religious services if membership was not mandated. To order society so that individuals and society as a whole received the benefits of religion, colonial rulers established state religions. The state mandated that citizens be members of the state church, and set up barriers to entry, making it difficult to impossible to participate in a non-state sponsored religion.

The Constitution of the United States began the first experiment with free market religion and strengthened the Great Awakening. As people could choose their religion freely, state churches declined, and upstart religions like the Methodists and Baptists grew rapidly. As competition among churches increased, the overall proportion of people that attended increased.


Read more!

Friday, December 26, 2008

Why Illegals Don't Respect Our Laws

On Sunday, a good friend and I began talking about illegal aliens and the law. My friend is very bright, and understands the economic magnet that draws so many to cross our border, but he also has a deep and abiding respect for the legal process established in the constitution and the laws that develop through that process. He believes in the rule of law, the principle that nobody is above the law, and in crossing our border illegally, these people put themselves above the law. What he does not understand is why so many illegal aliens unabashedly demand rights once established within our country.

I have heard the same question voiced by others and I would like to take a crack at answering it. Like many deep questions in life, it reminds me of a conversation between Spock and McCoy in a Star Trek movie. Through a series of movies, Spock dies, but transfers is "katra" the essence of his soul, to McCoy's body. His body is laid to rest on a planet undergoing the rapid evolution to life through the Genesis technology. The process not only creates life on this dead planet, but brings back a Spock that does not have his soul. Our heroes are able to transfer Spock's katra to his body. McCoy asks the obvious question, "What is it like being dead?" Spock answers by telling him that they cannot discuss this question because they do not have a common experience, death, on which to base their discussion.

We do not share a common experience, the rule of law, with most people living in our country illegally. Largely, they come from countries that North, Wallis, and Weingast refer to as a limited access order. The most powerful groups form a dominant coalition that rules the country. It doles out economic benefits to coalition members roughly in proportion to the violence each group could bring to the coalition if not rewarded. Economic benefits are distributed, not earned.

Groups and individuals outside the ruling coalition have resources, and attempt to use them to earn profits or income to better their lives, but their ability to use these resources is limited by the ruling or dominant coalition. The dominant coalition will protect the economic distribution of benefits they establish because disrupting it could plunge the country into something akin to a civil war.

Hernando De Soto wrote an influential book titled, El Otro Sendero, or The Other Path, in which he describes the plight of many Peruvians, most of whom are indigenous, and outside the dominant ruling coalition. They have resources and energy, but the law is against them. The law makes it hard for them to migrate to the cities where there are better economic opportunities, and better access to health care and education. When the book was written, they could not build homes, obtain business licenses, or otherwise legally engage in production or retail trade.

They responded by operating outside the law in informal markets exercising what our founders believed were God given rights of life, liberty (economic and otherwise) and the pursuit of happiness. These illegal activities improved their lives, increasing their economic prosperity, and access to better health care and education for their children. They would like to live within the law, but the law as currently constituted is stacked against them. They would like to change their country through elections, but this is dangerous because it challenges the dominant coalition that limits violence, bringing peace.

When people from these countries cross our borders illegally, their frame of reference is a land of limited access, where the law was designed to punish them. Before they arrive, they know that they will be acting illegally, but for them, it is no different than their current existence. Their law and our law punishes them. They don't understand how our constitution provides opportunity to all citizens operating within the law. It is beyond their experience.


Read more!