EconTalk this week

Steven Kaplan of the University of Chicago talks with EconTalk host Russ Roberts about the richest Americans and income inequality. Drawing on work with Joshua Rauh, Kaplan talks about the composition of the richest 1% and 1/10 of 1%--what proportions come from the financial sector, CEOs from non-financial corporations, athletes, lawyers and so on. Then he discusses how the incomes of these different groups have changed over time. Kaplan argues that these groups have increased their incomes by similar proportions, suggesting that a failure of corporate governance is not the explanation of rising CEO pay. The discussion closes with a discussion of the financial crisis and the compensation in the financial sector.

Quote of the day

“The state has no business getting involved in a matter between two individuals,”

And before you get too excited, the quote is by Cuba's president Raúl Castro and he is explaining why Cuba will now allow people to sell their own cars. Last month the government published rules allowing Cubans to buy and sell used vehicles freely for the first time in half a century. I hope buyers have read their Akerlof.

However while buying and selling used cars is now ok, those allowed to buy new cars is limited to people who earn some foreign currency, including doctors, artists, musicians, members of airline flight crews and the handful of Cubans who work at the American naval base at Guantánamo Bay.

Student protest at Harvard

Students have walked out of Gregory Mankiw's first year economics lectures at Harvard to protest about what the event organizers call a class that promotes a “strongly conservative neoliberal ideology.” Now I can't help but think that "conservative neoliberal" is an oxymoron. Consider that F A Hayek, one of the leading neoliberal economists of his day, wrote an essay on "Why I'm Not a Conservative" and Milton Friedman also called this ideas liberal, not conservative (see the introduction to "Capitalism and Freedom").

Anyway here is Greg Mankiw being interviewed on NPR about the protest.



When I did first year political science we were lectured by an out and out Marxist, should I have walked out in protest because of the "Marxist ideology" being promoted in the class?

I didn't because the classes really were fun.

Critiques of economics

In the comments section of a recent post at TVHE blog the question of Keen's critique of economics given in "Debunking Economics" is raised. Responses to Keen's argument have been made in a number of different places. As to local blogs, in the past, Matt Nolan has commended here and here and I have posted here, here and here. Canadian economist Chris Auld has a more detailed discussion in Auld, M.C., 2002. Debunking Debunking Economics. Working Paper, University of Calgary. Available at http://jerry.ss.ucalgary.ca/debunk.pdf.

An executive summary of a standard reply to Keen's arguments about models of firm behaviour would be that given by Schiffman (2004: 1909-1)

According to Auld, Keen is mistaken concerning the distinction between perfect competition and monopoly (or lack thereof—topic 3), and his perception that mainstream modeling ignores dynamics (topic 6). These errors, in Auld’s estimation, are caused by "either a lack of familiarity with the literature, conceptual errors, or both". As Auld shows, perfect competition can be rigorously derived as the limit of a model of imperfect competition (as the number of firms becomes large). Assume that each firm takes competitors’ outputs as given, but recognizes that it has some degree of market power (its own output influences the market price). The ratio of output under this form of imperfect competition to output under perfect competition is n/(n+1) (where n is the number of firms). When standard theory assumes that firms take prices as given, it is making an innocuous assumption; for example, an imperfectly competitive industry with 100 firms will produce slightly over 99% of the perfectly competitive output.

Another possible approach to rigorously deriving perfect competition is to assume there exists a continuum of firms. In such a situation , it is literally true that any firm can change its output without changing price, even when the market demand is smooth and downward-sloping. Aumann, R. (1964) ("Markets with a continuum of traders," Econornetrica 32:39-50) is a standard reference.

Overall Schiffman notes,

To summarize, Keen is correct that many issues that should be taught to students are not being taught. There is need for a book that introduces students to controversies in theory and methodology, on a level that is accessible to advanced undergraduates. Debunking Economics is, however, too biased to fulfill this need. If one wishes to advocate a reform of economics (and Keen may very well be correct that it is a necessity), one must provide a more nuanced, more accurate, and more up to date picture of its current state.

What to do about Italy?

Right now the Italian economy is doing worse than the Italian rugby team. And that’s not a good thing. As there is an over-400 basis point spread between Italian bonds and German bunds, a 1,900 billion euro public debt, a public debt to GDP ratio of 120% and zero growth prospects for 2012, Italy could be the next Greece.

So, what should the government do now, in the context of the current crisis?

At the IEA blog Dr Alberto Mingardi, the Director General of Istituto Bruno Leoni (www.brunoleoni.it),  outlines some policy options the Italian government could take.

The quickest answer lies in one word: privatisation. The Italian state owns assets worth €1,800bn. Not all of them can be privatised quickly. Nonetheless, Istituto Bruno Leoni, among others, has estimated that the Treasury still holds €100bn in listed or private companies that could be released to the market.

This includes shares in the energy giants ENIand ENEL, 100% of the post and railways monopolies (Poste Italiane and Ferrovie dell Stato), a fully state-owned insurer against accidents at work (INAIL), an insurance company that guarantees to domestic entrepreneurs against political and commercial risks linked with the export of goods and services (SACE) and many others.

On the top of that, the Italian national and local governments own €400bn in real estate. The Berlusconi government is planning to sell some - for a value of €5bn euros a year for three years, which means €15bn all together, i.e. less than 5% of those assets and less than 1% of the total public debt.

It is amazing that, for purely ideological reasons, the Italian government is not undertaking privatisations that would both contribute to the objective of reducing public debt and release still monopolised business sectors to entrepreneurial creativity.

It has often been lamented that Italy's problem is one of credibility. This is true. Italyis not a country without strengths: impressive private savings and strong entrepreneurs are the two most relevant ones. Still, incentives matter. In a world where capital is far more mobile than in the past, Italy's intricate and unpredictable regulations, plus its heavy taxation, make it an unlikely candidate for more investment.

Italians have long waited for a simplification of their legal codes and deep tax cuts. Yet the ingrained resistance of interest groups to a strong restructuring of public finances and, thus, of the scope of government, has made such policies impossible.

Mr Berlusconi and the Italian government should now be what they have never been: bold. This is the right moment to start long awaited liberalisation, aiming at boosting growth. But since the effects of liberalisation take time to materialise, the markets must be reassured of the Italian government's seriousness in getting public debt under control. Privatisation is the right instrument to achieve this.

The problem with academic journals

Noam Nisan at the Algorithmic Game-Theory/Economics blog writes that

Journals are simply not fulfilling their main three functions: dissemination, verification, and allocation of attention.

1. Dissemination: While originally the main point of a print journal was so that Prof. A. can see the results of Prof. B. relatively quickly, it is clear that, in the age of the Internet, journals only slow dissemination compared to, say, putting stuff on the arXiv.
2. Verification: Despite pretenses, refereeing is not really trust-worthy. Results of some importance become believed not when refereed but rather only after the community has studied them for a while.
3. Allocation of attention: an important goal of leading journals is to filter the “important” papers out of all the submitted ones, so that readers need not read everything but rather only the important stuff. I am afraid that today so much is published so that most of what one reads in most journals should have been filtered out. Partially this is a problem of the publish-or-perish culture and partially due to the coarseness of the refereeing model as a filtering tool.

All three of these main goals can be improved upon considerably using the right tools (that need to be figured out) on the Internet. At the same time that the journal system has lost its usefulness, it has created a lot of harmful side effects: the writing of countless worthless papers, lack of recognition for surveys, books, or other non-”paper” contributions, blind and silly use of metrics like impact factors for hiring, grants and promotion which lead to wasteful optimization of these rather than of real research. All these harmful side-effects could be tolerated had the system served its main purpose — but now we are just paying the price but not getting the goods.

I think there are a number of problems with academic journals but the negative externalities that Nisan points out in his last paragraph are not, I would argue, the fault of the journals. Problems with lack of recognition for some types of work or the use of silly metrics for hiring etc are caused by the incentives put in place by administrators for things like promotion, getting grants etc. Here is New Zealand efforts like the PBRF drive the types of side-effects Nisan notes rather than the journals. A lot of useless publishing, for example, takes place just to keep your PBRF ranking up. A lot of lower ranking journal have been created so that people have places to publish the aforementioned useless articles.

On a related matter, the question of the excessive journal pricing by commercial publishers, see Ted Bergstrom's homepage.

Interesting blog bits

1. Kyle Almond asks Just how big is 7 billion?
2. Ed Dolan asks Can Spaceship Earth Carry Seven Billion Passengers, and More to Come?
3. Mario Rizzo notes there are Seven Billion People and Counting
4. Tim Harford on Malthus’s ghost and baby number 7bn
5. Matt Ridley writes on Coping with only six billion

Economics at a young age

From the food blog at NPR.com

But not all candy is created equal, as all children will tell you. And increasingly American kids are getting an early lesson in economics — and business — by finding ways to trade their Halloween candy with friends and siblings.

I decided to peek in on a candy trading party in one of the top 10 Trick-or-Treat scenes in the country — Washington, D.C. I spent the evening with 25 kids, most about 11 years old, who aggressively traded candy after working the streets of the Chevy Chase neighborhood Monday night.

Within seconds of returning home, the first group at the trading party spilled their pillow cases onto the floor and started making piles.

"I've got Whoppers and Nerds. Who wants 'em?" Sierra Lewter, 11, shouted across the room once the floor opened.

Sierra quickly became the queen of Reese's by jumping into the market early. While most kids were still organizing their piles by brand, she was already making moves and trading her way to a hefty collection of Reese's Pieces and Peanut Butter Cups.

Lauryn Donahue displayed a solid grasp of the concept of excess supply. She was working hard to move the less-desirable candy given out at her house earlier that night.

[...]

The decibel level in the candy-trading room rivaled that of Wall Street. The trading peaked about 20 minutes in as cross-room deals had Milk Duds flying overhead while a Jolly Rancher came the other way. Whoppers went for Smarties. Kit Kats went for a Twix. Charleston Chews, the pennies of the lot, didn't seem to move at all.

[...]

As the trading died down, the candy consumption began. Everyone seemed satisfied with the deals they had made.

The first fundamental theorem of welfare economics in action.

Goff on markets

Eric Crampton has been marking Phil Goff on his understanding of how markets work. Eric writes,

Now, here's Phil Goff in last night's Leaders' Debate.

At times you have to intervene. The market is a good system. But there's a thing called market failure. And when you've got 10,000 people chasing sections all at the same time, that's not the normal functioning of the market. And if there isn't the supply to meet that, then your property prices are going to be inflated.

Sorry, Phil, that gets you a C- at best. Yes, if there's a shock to demand for standing houses and supply is relatively inelastic, property prices go up.

I have to say a C- seems a bit too generous for me. Yes prices will rise given that  the relative demand for housing has risen, but to say this is a market failure really is bollocks. The rise in prices shows that markets are working exactly how we would expect them to work. To miss this really does show that Goff doesn't understand a really basic point about how markets work, they allocate scare resources via the price mechanism. They bring about equilibrium by cutting off demand and giving incentives to increase supply.

The real problem here isn't the rise in prices, its the lack of response on the supply side of the market which largely due to restrictions on supply due to local government regulation. So the problem is is government failure rather than market failure.

A slow-growth America can't lead the world

This somewhat obvious point is made by John Taylor in the Wall Street Journal. Taylor argues that after World War II, the U.S. promoted international economic growth through reliance on the market and the incentives it provides. Times have changed. Taylor writes,

At the most recent meeting a year ago in Seoul, the G-20 rejected the president's [Obama] pleas for a deficit-increasing Keynesian stimulus and instead urged credible budget-deficit reduction and a return to sound fiscal policy. And on that trip he had to defend the activist monetary policy of the Federal Reserve against widespread criticism that its easy money was damaging to emerging-market countries, causing volatile capital flows and inflationary pressures.

With a weak recovery—retarded by new health-care legislation and financial regulations, an exploding debt, and threats of higher taxes—the U.S. is in no position to lead as it has in the past.

By contrast, in the years after World War II, the U.S. led the world in promoting economic growth through reliance on the market and the incentives it provides, the rule of law, limited government, and more predictable fiscal and monetary policy. It created a rules-based, open trading system by helping to found the General Agreement on Tariffs and Trade, which slashed tariffs multilaterally. The miraculous postwar European and Japanese recoveries came from greater adherence to these principles of economic freedom and direct support from the U.S.

After getting off track with interventionist policies in the 1970s, the U.S. put its economic house in order in the 1980s, adopting pro-growth policies and creating a long boom that lasted through the 1990s. Again its economic ideas were contagious, not just in Britain under Margaret Thatcher but in the developing world. Seeing the advantages of American-style economic liberty over state intervention and control, Deng Xiaoping expanded his initial and tentative market-based reforms in China and created an economic renaissance. The U.S. helped the countries in Central and Eastern Europe implement market-based reforms, and it encouraged other countries and the international financial institutions to do the same in Africa and Latin America.

As the U.S. has moved away from the principles of economic freedom—instead promoting short-term fiscal and monetary interventionism with more federal government regulations—its leadership has declined. Some, even in the U.S., may cheer the decline, but it is not good for the world or for the U.S.

It could rightly be argued that American economic policy post WW2 was not perfect given its over use of regulation and high marginal tax rates, but comparatively speaking the American model was better than that being used in large areas of the world which were not free either economically or politically. Just compare it with post WW2 Britain with its even greater controls over the economy. John Jewkes summed up the situation in the title of this book "The new ordeal by planning: the experience of the Forties and the Sixties". And it was often better than much of the policy we see today.

Taylor is right when he says,

If [...] the U.S. starts to return to the principles of economic freedom—the best route to improving its own economy—then perhaps it will be able to reassert its economic leadership, benefit the world economy, and in turn create an even more prosperous American economy in a grand virtuous circle.

A musical review of differentiation

I guess you have to be weird to be a mathematician.

(HT: Division of Labour)

Should we believe the German labour-market miracle?

Jobs and the lack of them are top of the agenda for policymakers and increasingly groups of protestors gathered in the financial districts of New York, London, Wellington, Christchurch and elsewhere. Unemployment in many of these countries is in danger of reaching 10%. In Germany, however, unemployment is below 7%. Some hail it as a miracle. This column, from VoxEU.org, finds a scientific – and far less inspiring – explanation.

In recent research (Burda and Hunt 2011), we show that one unnoticed explanation can explain a significant component of the reputed economic miracle. In the export-driven expansion of 2005–07, firms hired significantly less than that expected, given the extent warranted by GDP and wages. As evidenced by data on firm expectations and articles in the business press, firms had unusually low confidence the boom would last. We show that the missing employment increase in the 2005–07 boom was equivalent to 40% of the missing employment decline in 2008–09, and that more than half of the missing employment increase was attributable to firms’ pessimistic expectations. Firms hesitated to hire in the boom, as they feared it would not last, and when eventually the recession they feared arrived, they had less need to fire than in previous recessions.

So if you don't hire people, you don't have to fire them.

EconTalk this week

Ryan Avent of the Economist and author of The Gated City talks with EconTalk host Russ Roberts about The Gated City and how cities have restricted access to land and housing. Avent argues that restricted access has raised housing prices artificially on both the east and west coast of the United States, reducing urban populations and restricting access to labor markets. He argues that this in turn has artificially depressed growth in the United States by keeping workers from their most productive opportunities. The conversation closes with a discussion of possible policy changes that might make cities more accessible to development and growth.

Mechanism experiments and policy evaluations

'Evidence-based policy’ is one of the big things in policy circles these days. One important issue for the research community to think about is ways of increasing the efficiency of the policy-research. One starting point is to revisit the assumption that is prevalent throughout the policy-research industrial complex that the best way to use randomised experiments to inform policy is to test actual policies.

Consider the following example, taken from Improving government efficiency through mechanism experiments by Jens Ludwig and Sendhil Mullainathan at VoxEU.org:

Suppose that the US Department of Justice is interested in learning more about whether to devote scarce resources to supporting ‘broken windows’ policing, which is based on the notion that signs of minor disorder signal to potential offenders that no one cares about crime in the local area, thereby reducing the deterrent threat from punishment and increasing the chances that more serious crimes are committed. Most researchers would argue that the best approach is to carry out a policy evaluation of broken windows policing. Recruit a representative sample of cities, and randomly select some neighbourhoods but not others (or perhaps some cities but not others) to receive broken windows policing. Then compare subsequent crime rates in treatment versus control areas. This policy evaluation would be informative but not cheap. The unit of random assignment in this case is the neighbourhood or city – the level at which the policing intervention of direct interest operates. The number of neighbourhoods or cities that would need to be ‘treated’ to have adequate statistical power is large, and the cost per treated area is high.

Now consider an alternative experiment. Imagine buying a number of cheap used automobiles. Break the windows of half the cars, and then randomly select a set of urban neighbourhoods in which to park cars with different levels of physical damage. Measure what happens to more serious crimes across different neighbourhoods. While less ethically objectionable variants of such an experiment are possible (such as randomising areas to have signs of disorder cleaned up, rather than introduced), our example is basically the research design used in a social psychology experiment in the 1960s that led to broken windows theory and then widespread adoption in New York City in the 1990s. This ‘mechanism experiment’ doesn’t test the policy of direct interest to the Department of Justice, but rather tests the causal mechanism that underlies the broken windows policy.

How can mechanism experiments help economise on research funding? The broken windows theory rests on a simple logic model in which the key policy lever, P (broken windows policing), influences the outcome of primary policy interest, Y (serious criminal offences), through the mediator (M) of local disorder, or PàMàY. Suppose that DoJ thinks it already knows something about policing – specifically, suppose that DoJ thinks it already understands the relationship between broken windows policing and signs of disorder (PàM). Police professionals might need to have learned that relationship to guide all sorts of policing decisions, because citizens dislike disorder for its own sake regardless of whether it accelerates more serious crimes. In that case the new information that DoJ gets from carrying out a policy evaluation of actual broken windows policing is just about the MàY link, but that information is mixed together with the noise about the specific PàM link that would arise in any given experiment. On the other hand the mechanism experiment maximises the research funding available to identify the part of the causal chain (MàY) that policymakers do not already understand. Put differently, mechanism experiments can economise on research funding by taking better advantage of what policymakers think they already know.

This broken windows example is not an isolated case. Depending on what policymakers think they understand, in other applications mechanism experiments might increase the efficiency of research spending by, for example, enabling researchers to randomise at relatively less aggregated (lower-level) units of observation.

So rather than having to test the actual policy directly you may be able to, at lower cost, test the causal mechanism that underlies the policy.

Ludwig and Mullainathan go on to say,

We are not claiming that mechanism experiments are ‘better’ than policy evaluations. In situations where, for example, the list of candidate mechanisms through which some policy might affect outcomes is long and these mechanisms might interact, the only useful way to get policy-relevant information might be to carry out a policy evaluation. Probably more common is the situation in which mechanism experiments and policy evaluations are complements, in which encouraging evidence from a mechanism experiment might need to be followed up by a policy evaluation in order to, for example, reduce the risk of unintended consequences. But at the very least carrying out a series of mechanism experiments first can help improve decisions about when it makes sense to invest research funding in a full-blown policy evaluation.

A country is not a company, and shouldn't be run like one

Over at the, normally reliable, TVHE blog rauparaha writes,

Phil Goff:

[There is] no businessperson in New Zealand that would say when you are in difficulty the best thing you could do is sell off your best-performing assets.

At least both major parties now agree that that the election is all about finding a new CE to run NZ Inc. What a shame we’re not inviting applications from people with proven, international experience.

And I have to say no! The last thing any genral election should be about is "finding a new CE to run NZ Inc". As Paul Krugman (yes even he is right about some things!) said A Country Is Not a Company. To see why consider, for example, the basic point that companies compete with each other but New Zealand doesn't compete with other countries. Thinking that countries compete is a just one false analogy that comes from thinking that countries are like companies when they're not. The point is that Coke and Pepsi, for example, do compete, one gains at the others expense, but New Zealand and Australia, for example, don't, their loss is not our gain. International trade is not a zero-sum game. To see this, note that while Coke may wish to put Pepsi out of business, so that Coke can increase their sales and prices and therefore profits, New Zealand would not gain if we put Australia "out of business".

Why? Well in the Coke/Pepsi case, Coke gain a lot, in terms of sales and profits, from not having Pepsi to compete with and lose little since Pepsi doesn't buy much, if anything, from Coke. Or Coke from Pepsi. This is not true of the New Zealand/Australia example. We may gain some sells if Australia stopped producing, but we would lose much more. Australia is our biggest export market and if they "went out of business", they would stop importing, and that would hurt us a lot. Also they are suppliers of much of our useful imports and that would stop too, which would hurt us even more.

Countries trade, they don't compete. And thus we don't need to find "a new CE to run NZ Inc" because NZ Inc doesn't exist.

Roger Kerr 1945 - 2011 (updated)

The news of Roger Kerr's death came as a shock to me despite the fact that we were all primed to expect it. I can't describe Roger as a close personal friend, but I did meet him on a number of occasions. When in Christchurch he would to come to the economics department or at least meet with members of the department whenever he could. He also gave talks to economics classes discussing issues to do with economic policy when asked. The times I did meet Roger I'm sure I gained a lot more from the encounter than he did!

Roger's influence went beyond New Zealand, Tyler Cowen writes at Marginal Revolution:

Roger had a huge influence on my life. I spent a good deal of time working for him and with him at the New Zealand Business Roundtable in Wellington and he was always up for a discussion and an argument. He seemed to have boundless energy, and he played a key role in making New Zealand a sounder and better country. A lot of my interest in economic policy comes from my time spent with Roger, most of all my interest in the institutional design of central banks but not just. Roger expected you to be ready to discuss anything, at the drop of a hat, and I consider my time with Roger a major influence on my blogging. He exposed me to the New Zealand classical liberal tradition and from that I saw a lot of deficiencies (and some strengths) of the North American traditions. Roger will be missed but we all know that his influence extended far.

And across disciplines, law professor Richard Esptein gives the following appreciation of Roger at the New Zealand Business Roundtable website:

Earlier this morning I received a simple email from Catherine Isaac that “Roger passed away peacefully at home last night surrounded by his family.” That brief email came as no surprise, because her previous communications had indicated that all treatment options had been exhausted. But for me that short message marks the sad end of an era in my personal life.

Roger was one of a kind. I first met him in 1990, when he prevailed on me to come to New Zealand to speak, among other things, against the new pay equity legislation that had just become law into New Zealand. Roger was never a man for half measures so that he managed to line up about eight or ten other speaking engagements during that short stay. It was the first of four such nonstop visits to New Zealand, each of which Roger orchestrated with his customary enthusiasm and efficiency. After each of the trips, he would prepare a transcript of my remarks, be sure that they were edited, and then passed them back to me for elaboration and expansion, after which they were published by the New Zealand Business Roundtable, which he had led since 1986.

Working that closely with Roger over so many years, and in so many different settings, gave a bird’s eye view of the man. Often a close working knowledge of another human being leads to a certain cynicism well captured by the somewhat faded aphorism that no man is a hero unto this valet.

That was not the case with Roger. The more you knew him, the more you came to respect and love him as a person. He had a combination of attributes that are hard to match. On those trips to New Zealand, I was always joined by my wife Eileen, and sometimes by my children as well. We not only worked together, but we vacationed together for extended periods of time. We also managed to get together in other locations, including for the last time at the Mont Pelerin meeting in Stockholm, in August 2009.

Being with Roger was a revelation. All too often it is said of people who are in favor of markets, they only do so because it gives an outlet for their own greed and other base emotions. Nothing could be further from the truth with Roger. The most extraordinary feature about him was the exemplary way in which he consciously chose to lead his life.

For Roger, the freedom under law to act in your own self-interest was an invitation to make sure that you led your life in accordance with the highest principles of right conduct. Roger never used to speak about profit and personal gain. And he never spoke much about how it was that he should lead his own life. He always sensed that self-praise was a way to diminish your own character, so he relied on quiet deeds to communicate the values that he held most dear.

First on that list was his incredible sense of duty toward others with whom he worked. Doing business with Roger was always a pleasure, because you knew down to the marrow of your bones that Roger’s word was indeed his bond. What he said he did, and if that did not satisfy his personal sense of duty, why he would do something else in addition. For Roger the correct ecological balance was to do all that he could to help others, and to be self-reliant in all that he did, so as never to tax the good will resources of others. One might say that throughout his life he enjoyed a favorable balance of trade with the rest of the world. He received much from those with whom he gave, but he always gave back more in return.

Second on that list was Roger’s utter incorruptibility on all matters of first principle. Early in life, and surely in his days at Treasury under Sir Roger Douglas, Roger internalized the importance of open markets and free trade. Watching New Zealand nearly implode under its grotesque policies made a lasting impression on Roger. Taxes and subsidies for competitive advantage fell into the class of original sins. He could never lift a finger to support such ignoble causes, even for his friends.

As head of the New Zealand Business Roundtable, Roger lived his principles on an everyday basis. He labored successfully through his 25 year tenure of office, to make sure that this organization would not seek to find short-term advantages for its members at the expense of the public at large. For Roger, these were matters of high principle, not issues of short-term expediency. To be with him in conversation was to know of the strength of his convictions and of the quiet eloquence and determination with which he defended them.

Third on the list was Roger’s piercing intellect. Dwight Eisenhower once described an intellectual as someone who used more words to say less than he knew. That was never the case with Roger. Over the years, I have had the privilege to read the many addresses and short articles that Roger wrote on a variety in economic and social issues, large and small. In each of these gems, Roger was the master of a clear and orderly exposition of any topic. He possessed the power to persuade without any of the pretense and self-importance of lesser.

During his life, Roger suffered many short term reversals, for his positions were not always popular in intellectual and political circles. But his persistence and clarity have paid enormous dividends to New Zealand. His ceaseless efforts to pass the Employee Contracts Act of 1990 accomplished far more for the health and well-being of New Zealand labor markets than his detractors could acknowledge. The success was so great that even the passage of the misguided Employment Relations Act of 2000 could not undo most of the gains from market liberalisation that the earlier statute had achieved.

Today New Zealand ranks near the top on most indices of economic freedom. Much of the credit for that improvement goes to Roger, whose dedication and wisdom has made the world a much richer place. We shall all miss him greatly, for the grandness of his character, for the strength of his moral fiber, for his clarity of his thought, and for the warmth of his friendship.

Update: Not PC reminds us of this video of the interview Roger Kerr did with Lindsay Perigo earlier in the year.

O’Driscoll on UCLA, Chicago and Vienna

At the ThinkMarkets blog Jerry O’Driscoll writes about the relationship between Austrian economics Chicago and UCLA.

It was obvious to me that Mises had influenced Alchian. Also Hayek, as is made clear in a video of Alchian interviewing Hayek.

Hayek’s classic essays on prices and information were on various reading lists at UCLA. Fisher was used as a text in Hirshleifer’s capital theory class. For purposes of learning capital theory, Fisher was as Austrian as Bohm-Bawerk (and much more accessible). Both Hayek and Mises thought Fisher had improved on BB.

It was by taking Leijonhufvud’s macro course that I became acquainted with Prices and Production. I wrote a term paper on it for that class, which eventually became my dissertation (Economics as a Coordination Problem).

When Harold Demsetz arrived, the influence of Mises on his theory of property rights was evident. We read a lot of Ronald Coase, and his relationship with Hayek at London is well documented by James Buchanan in Cost and Choice.

The relationship between Vienna and Chicago proper is more complex, mainly because Chicago is complex. There was an Old Chicago School of Frank Knight, Henry Simons, Lloyd Mints, Paul Douglas, et al. Some have viewed it as leftwing. It was “Keynesian” on fiscal policy before Keynes. Simons was frequently criticized by classical liberals, yet Hayek defended him vigorously. Simons proposal for 100% reserve banking was adopted as first best by Milton Friedman and second best (to free banking) by Hayek (who thought both systems would be an improvement, but not politically possible).

The new Chicago School, heavily influenced by Friedman and Stigler, struck out on its own. Its relationship with the old school blurred as time passed. On micro topics like competition, there was heavy overlap with modern Austrians. Demsetz and Kirzner made common cause on competition. Hayek was never fond of monetarism, however.

The modern Chicago School of rational expectations and real business cycles is a topic unto itself. But, yes, there is still a connection as John Cochrane and others understand.

Kevin Murphy talks NBA lockout negotiations

Rugby is not the only sport in the news right now. In the US the NBA lockout is big news. Here is an interview with University of Chicago professor of economics Kevin Murphy about the lockout. Here's an interesting point about the relationship between salaries and the number of wins in a season.

NBA.com: One effect of equalizing payrolls is you incentivize good players to go where the money is available. But another might be paying good money to players who might not deserve it, just because more franchises have to spend on … somebody.
KM: That’s a problem. The other thing is, there is some relationship between pay and success but it’s not nearly as strong as people think it is. Even if you were to completely equalize pay across teams, there still would be an enormous variation in strength of teams. In a statistical sense, the level of payroll of a team explains somewhere like 5 percent to 10 percent in the variation in outcomes.
NBA.com: That’s all?
KM: That’s it. I did a little experiment. All you have to do is take the overall distribution of win-loss percentages. Let them tell you what they think the relationship between salaries and wins is. They tell you ‘This much spending is worth this many wins.’ So then you take everybody’s salary down to the mean or up to the mean. Then if you tell me you get an extra win for every $3 million you spend, I’m going to give everyone I’m moving up an extra win for each $3 million. Everybody I move down, I’m going to give one fewer win for each $3 million.
NBA.com: And?
KM: The relationship between salaries and the number of wins in a season is positive, but it’s pretty weak. It certainly is not going to have a dramatic change in the distribution of outcomes. It might change who the winners are and who the losers are, but you’re still going to have some teams that are much better than others. Because some people spend their money much more wisely than others do.

Epstein on the good side of inequality

Law professor Richard Epstein explaining why inequality is a spur for innovation in our economy.

Watch Does U.S. Economic Inequality Have a Good Side? on PBS. See more from PBS NewsHour.

Only economists can save the planet

Economist Ed Dolan has reviewed Gernot Wagner’s book But Will the Planet Notice? Given that Martin Weitzman is coming in a couple of weeks to give the 7th Annual Condliffe Memorial Lecture I thought this piece in the review interesting:

He [Wagner] is especially devastating in his critique of the Endangered Species Act. The ESA is perhaps the least economically inspired piece of environmental legislation on the books, allowing for no tradeoffs or optimization at all. Under the act, everything is all or nothing. If the barred owl is not on the endangered list, it fends for itself until it qualifies. If the spotted owl is on the list, there is, literally, no limit to how much is too much to spend on protecting it. Ten million dollars to save a single bird? Sure, it’s been done. Never mind that the largest expenditures often go to species that are beyond saving while other conservation needs, like habitat protection to keep other species off the list in the first place, are underfunded.

What would be better than dumb regulations? Smart regulations, of course. Wagner likes an idea advanced by his one-time Harvard professor Martin Weitzman: Use DNA testing to measure the genetic distance between species. Adjust the amount of money and effort spent of protecting the spotted owl depending on its genetic distance from its cousin the barred owl. Pursuant to the goal of maximizing genetic diversity, genetic outliers would become the top priority. Measure, maximize, optimize. That’s the economic way of thinking at work.

Weitzman’s work appears elsewhere in the book, as well. Wagner spends a whole chapter elaborating the reasons for thinking climate change is the planet’s number one threat. At first that might seem like overkill, since, for the most part, he seems to address the book to readers who already share his concern for the future of the planet. But it turns out he has more to say than simply to reiterate the findings of the Intergovernmental Panel on Climate Change. Following Weitzman, he explains why conventional climate change research, which focuses on mean values and normal distributions, misses the point.

The risk of climate catastrophe, he argues, is not like the risk that your house will burn down, a case where normal distributions work just fine. Instead, it is more like the kind of systemic financial risk that shook the world after the collapse of Lehman Brothers. Why so? Financial and climate risks both have fat-tailed distributions. That makes it worth taking serious precautions against “black swan” events that are very far from the mean—events that, although not especially likely, would result in huge losses if they did occur.

The consensus among mainstream climate scientists is a mean expected warming of 2 to 4 degrees Celsius by the end of the century. Adapting to such an increase would be costly and disruptive, but it would not mean the end of life as we know it. Instead of the mean, Weitzman and Wagner (who have worked together on the issue) argue that we should be focusing on the 5 percent probability that warming will end up way out in one of those fat tails, say, 12 degrees or more. That would put half the world’s population in areas so hot that a few hours out in the sun would be fatal—even for a person soaking wet, with light clothing and a strong breeze.

The Weitzman-Wagner approach puts the precautionary principle on steroids. With no change in the mean expected rate of warming, fat tails triple the amount we should be willing to invest in climate change now. To put it in dollars, if were willing to tax carbon at $20 per ton based on conventional analysis, then we should be willing to tax it at $60 or more based on fat tail math.

So don't miss the Condliffe Lecture!