Stationary Bandit

Rules by Decree or Emergent Rules

Elinor Ostrom has devoted a substantial portion of her career to understanding how individuals overcome the “tragedy of the commons.”  Her research has spawned a large and ever growing literature that examines how private individuals overcome collective action problems without state intervention.  Her latest book, Understanding Institutional Diversity, presents plenty of evidence that supports her approach.  It is worth the read.

Richard Wagner’s forthcoming review (in the Journal of Economic Behavior and Organization) raises an important issue largely ignored by Ostrom and many fellow New Institutional Economists.  She accepts the definition of institutions as the rules of the game.   Professor Wagner writes that “The danger in thinking of institutions as rules of the game is to think that legislation can serve directly as an instrument to change societal outcomes in some intended manner.”  Implicitly institutions as rules of the game skews the analysis in favor small scale state planning.  It biases policy proposals.  It ignores that people do not respond like automatons.  Sometimes they ignore rule changes and maintain their behavior (consider the effects of Prohibition, as Professor Wagner).  A more fruitful approach views are "articulated descriptions of conduct."  That is, rules emerge from social interaction rather than by decree.  The latter approach has a place in Ostrom's framework.  Hopefully, future research will pursue this agenda,

Impending War between Ethiopia and Somalia?

Recent events suggest that some skirmishes are possible if nothing changes. 

A column of Ethiopian trucks, more than 100-strong and including armoured cars, have crossed into neighbouring Somalia.  A BBC reporter has seen Ethiopian troops in uniform in Baidoa, the base of the weak interim government.

Story here.

Thoughts on "Knowledge and the Wealth of Nations"

I just finished David Warsh’s book, Knowledge and the Wealth of Nations.  It reads as if Mr. Warsh believes that Paul Romer will win a Nobel Prize and have a movie made of his life story (son of a well-known politician, challenging the perfectly competitive model at the University of Chicago, quitting his job at the University of Chicago without having a another job, testifying in the Microsft case, etc.).  I am guessing that Mr. Warsh hopes his book will be the basis of the movie.

 

The book as the sociology of economics is interesting and should be widely read from this perspective.  It is full of interesting tidbits about the internal workings of the profession.  Unfortunately, it does little to help explain the differences in the levels of income per capita across the world.  Mr. Warsh focused on a highly stylized and formal model that has little empirical support.  You would not know that reading the book.   Romer’s model comes across as being fundamental to explaining economic growth.  Much of the recent research (since 2001) has focused on the role of legal and political institutions in determining economic performance.  Daron Acemoglu, Douglass North,and Andrei Shleifer have framed much of this discussion.  Romer rarely appears in their research. 

 

I should say that I think Romer’s research does deserve a Nobel Prize.  He did help move the profession away from the Solow model.  The endogenous growth models represented a significant improvement in understanding. His later work, which Mr. Warsh spends little time discussing, is also enlightening.  My favorites are "New Goods, Old Theory, and the Welfare Costs of Trade Restrictions" and "Economic Integration and Endogenous Growth."  His 1992 paper on the economic miracle in Mauritius is also well worth the read.

Disjoint Economic Analysis

Pete Boettke has a nice post on economists who separate their economics from their policy prescriptions.  I have never understood this.  Pete uses Paul Krugman as an example.  Joseph Stiglitz is another (compare his principles text with his statements when he worked in the White House).  How can one separate their analysis from their recommendations?  Shouldn't the recommendations follow their analysis?

Pete argues that technology is the source of the problem.  Improvements in technology have reduced the costs of publishing opinions.  But what does this say about academics whose research clearly opposes the policies they support?    My guess is that many academic economists form their political beliefs based on non-economic reasons.  Ideology trumps analysis. For example, it seems that the Great Depression framed much economic policy analysis after the Second World War rather than simple supply and demand models.   This was especially true for development economics with its rejection of neoclassical principles.

Milton Friedman has come close to my view.  In his jointly written autobiography (with his wife Rose), he wrote "I have repeatedly experienced attacks on what I regarded as scientific findings by economists who seemed driven more by their values than their objective judgment" (p. 219).  At least I am in good company.

Hope for Doha?

The Doha Round of trade liberalization has not yielded any results.  An upcoming meeting in Geneva has increased hopes that something beneficial will emerge.  The stalemate stems from the following.

The current negotiation position is that the US wants the European Union, India and other countries to make larger cuts to the tariffs they charge on agricultural imports.  It is thought that that the EU at least is willing to go further on cutting these tariffs, but only if the US signals that it is willing to reduce the subsidies it pays its farmers.

Meanwhile, both the EU and the US want the main developing nations, including Brazil and India, to open up their markets to their manufactured goods.

The real issue, as I understand it, is the developing countries want access to the US market and compete with American producers.  Given the relative political strength of the agricultural sector in the US, I doubt progress towards free trade will be made.

Here is the story.

Media Hypocrisy?

When major companies close plants, newspapers are quick to point out the suffering of those who lose their jobs.  They express their disgust with the amount of the salary of the CEO.  If only the CEO would take a reduction in salary, these workers could retain their jobs. 

Here is an instance where very few people will learn of the plight of recently unemployed.  The NYT is closing an Edison, NJ plant and several hundred jobs will be lost.  I wonder how many media outlets will remind us of the salary of the CEO of the NYT?

Is Healthier Wealthier?

Contra Jeffrey Sachs, it is not.  Daron Acemoglu and Simon Johnson, in a new working paper, provide forceful evidence that the hopes of those who believe improving life expectancy leads to poverty reduction are misguided.  Here is the abstract:

What is the effect of increasing life expectancy on economic growth? To answer this question, we exploit the international epidemiological transition, the wave of international health innovations and improvements that began in the 1940s. We obtain estimates of mortality by disease before the 1940s from the League of Nations and national public health sources. Using these data, we construct an instrument for changes in life expectancy, referred to as predicted mortality, which is based on the pre-intervention distribution of mortality from various diseases around the world and dates of global interventions. We document that predicted mortality has a large and robust effect on changes in life expectancy starting in 1940, but no effect on changes in life expectancy before the interventions. The instrumented changes in life expectancy have a large effect on population; a 1% increase in life expectancy leads to an increase in population of about 1.5%. Life expectancy has a much smaller effect on total GDP both initially and over a 40-year horizon, however. Consequently, there is no evidence that the large exogenous increase in life expectancy led to a significant increase in per capita economic growth. These results confirm that global efforts to combat poor health conditions in less developed countries can be highly effective, but also shed doubt on claims that unfavorable health conditions are the root cause of the poverty of some nations. 

In many ways, this should not be surprising.  Most of the improvements in life expectancy since the Second World War have occurred due to public health measures.  These policies have little effect on the institutional structure of wealth creating production.  Increasing life expectancy probably increased investments in human capital but the effect of human capital on development is relatively small.

New Johnny Cash CD

Johnny Cash's posthumous album, "American V: A Hundred Highways" entered the Billboard Charts at #1.  The album is very good, maybe the best of the American Recordings. The success of Cash's recent albums has not received much airtime on country radio.  Rick Rubin, the producer of the album, suggests one way to remind the public of this neglect.

A more immediate possibility is another Billboard magazine advertisement ripping the country music world for its apathy toward Cash. After the overlooked 1996 album "Unchained" (U.S. sales to date: 152,000, according to Nielsen SoundScan) won the Grammy for best country album, Rubin controversially reproduced a famous photo of Cash hoisting a middle finger into the eye of the camera, and sarcastically thanked "the Nashville music establishment and country radio for your support."

"So much of the idea of that ad was really for Johnny's entertainment," Rubin recalled. "It's a great idea, having the No. 1 album and the No. 1 country album, it's a great time for a f--- you from Johnny Cash!"

Here us the story.  Only time will tell if Rubin follows through.

Summers Reflecting on His Legacy

Larry Summers officially ends his tenure as Harvard's President in a few days.  Here are some of his reflections.  Not surprisingly, he views his reign as a success.  Only time will tell. 

WEA Update- Religion and Economics

I just returned from the Western Economic Association Meetings in San Diego.  The Association for the Study of Religion, Economics, and Culture sponsored three sessions on various aspects of the interaction of religion and economics.  Here is the list of papers.  I presented paper on the impact of subsidies for religious institutions on life expectancy.  The tentative results suggest that an increase in religious subsidies was associated with an increase in life expectancy.  The results remained even after controlling for a fair number of possible correlates.  Once I finish revising it, I will put the paper on my nearly completed web page which should be ready soon.