Economic Theory and Prediction

I was listening to a podcast at New Books in Law with Lynn Stout discussing her recent book Cultivating Conscience: How Good Laws Make Good People. She was arguing against the assumption of rational self interested behavior and pointed to the large amount of evidence that people often behave in ways that are not narrowly self interested. She then noted that some economists have tried to get around this by saying that people can value things other than money.  She, however, claimed that doing this eliminated the ability to make predicitions because you could explain anything by making the right assumption about what people value: "They did this because that is what they want to do." I think this misinterprets the sort of predicitions that can be made with economic theory. Economic theory enables us to make predicitions about how groups of people will respond to changes in constraints. Assuming that people value giving money to charity does not prevent me from making predicitions. I predict that, in general, if we lower the cost of giving to charity people will give more to charity. I predict that if we increase the cost of voting, in general, people will vote less. One of the fundamental assumptions in economics is that people like lots of different things and that they have tochoose between them. Assuming that one of those things is a nice house and another is feeding the poor presents no problem.The problem is not assuming that people value things other than money, the problem is using changes in those preferences rather than changes in constraints to explain behavior. For instance, explaining financial crises as a result of greed, as if people have become more greedy, tends not to hold up to scrutiny.

Interestingly enough, Professor Stout later noted that if you want to get people to behave ina pro-social fashion you need to make sure that the benefits of selfish behavior are not too great.

Three Essays In Search of a Point

I just received a job market packet from a large university, which I will not name. The dissertations include "Three Essays in Applied Economics," "Three Essays in Econometrics, and "Essays in Econometrics." Don't worry. There were three essays in "Essays in Econometrics."  

Dealing with the Situation

Here is an example of an attempt at a private solution to a negative externality.

Why Economics Needs History

Barry Eichengreen's INET talk

NEP-HIS

Bernardo Batiz-Lazo's blog on new papers in economic history.

Trust Companies in the Panic of 1907

I recently posted "Sometimes Bad Things Happen to Good Trust Companies: A Reexamination of the Trust Company Panic of 1907" on SSRN

Abstract

The runs on trust companies during the Panic of 1907 have been blamed on unregulated financial innovation. New York trust companies are said to have taken advantage of gaps in regulation to engage in risky behavior, ultimately causing depositors to lose confidence in trust companies. This paper shows that there was not a general loss of confidence in trust companies. Runs were concentrated on a specific group of trust companies: the uptown trust companies. But there is no evidence of mismanagement or unusually risky asset allocation among these companies. Instead, it was the nature of their deposits that made them more susceptible to runs. While traditional trust companies focused on small numbers of large deposits from businesses, the uptown trust companies had large numbers of household deposits.

His Dark Materials and Economic History

According to the documents at the end of Philip Pullman's Once Upon a Time in the North Lyra went on to study economic history. Her dissertation for an M.Phil in Economic History was titled "Developments in patterns of trade in the European Arctic region with particular reference to independent cargo balloon carriage (1950-1970)."

Today in American Economic History

1794 Eli Whitney received a patent for the cotton gin.

1900 Congress passed The Gold Standard Act

government granted monoply

The FDA just granted KV Pharmaceutical a monopoly on the sale of a drug to prevent premature births. For years it had been produced by pharmacies that sold it for $10 to $20. Doctors can no longer use those versions of the drug. KV is increasing the price of a shot from $10 to $1,500. Read the story here.

North and Kuran Video

Douglass North and Timur Kuran discuss institutions and economic performance. Kuran gives a good taste of the argument in his latest book, The Long Divergence.

Great Stagnation

There has been a great deal of discussion regarding innovation prompted by Tyler Cowen's new book The Great Stagnation. Part of the argument is that the rate of innovation has slowed. He acknowledges innovation in information technology but seems to discount its importance to the general population. While I think its clear that innovation and changes in productivity are not constant over time, I'm skeptical that we are in the midst of period of unusually slow rates of innovation, or that the changes in information technology have not had a large and widespread influence. This is what I wrote in The National Economy in 2006

" Observation of everyday life appears to support the productivity data and suggests the rate of innovation accelerated during the 1990s and the first decade of the twenty-first century. In 1985, most college students, like students for decades before them, went to the library to do research with books and journals, took hand-written notes, and typed papers on typewriters while listening to vinyl records. In 2005, students use laptop computers, smaller than portable typewriters, to access more research material online than was available in many college libraries in the 1980s. They type up papers on the same laptop using a word processing program that points out spelling and grammatical errors, and allows them to edit by cutting and pasting without having to retype anything. The vinyl records, first replaced by CDs, are now replaced by other electronic forms of music storage, with thousands of songs stored in devices the size of on old tape cassette. They carry phones smaller than a wallet, and the phones can make calls, store phone numbers, send text messages, receive voice mail, take and send video images, store information, and serve as a calculator."

One might note that I was writing about college students, but looking around now I believe I could say virtually the same thing of 5th graders surfing the internet, while listening to iPods, and texting.

What I'm Reading

Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008 by Moritz Schularick and Alan Taylor you can find a copy here.

What I am watching

John Nye on institutions and economic development

Peace Corps

UMW ranks first among small colleges and universities in Peace Corps volunteers

college and debt

From "A Lifetime of of Student Debt? Not Likely" By Robin Wilson in the Chronicle of Higher Education

"In fact, despite stories of a large number of students who face gargantuan debt, about a third of graduates leave college with no debt at all for their education. Of the 65 percent who face debt, the average they owe is around $20,000. That's just below the starting price of a 2009 Ford Escape.

"Most people borrow a reasonable amount of money, they pay it back, and they are better for having gone to college," says Mr. McPherson.

But for a vocal minority of borrowers, problems with student-loan debt are very real. About 8 percent of undergraduates borrow at least double the national average.

Why do some students borrow more than $40,000 for a bachelor's degree when average borrowing is only half that? The answer is almost never that they are from very low-income families and need that much money to get a four-year degree. Public four-year colleges charged an average of just $6,585 for in-state tuition and fees in 2008-9. The total cost, including textbooks, room and board, and other living expenses, averages $18,326 a year — and financial aid brings that figure down for many students."

Still number one

Manufacturing in the United States

Immigration and Innovation

Here is an excellent editorial on immigration and innovation by Edward Schumacher-Matos in the the Washington Post.

Entrepreneurial immigrants have always played a leading role in American economic history. In 1789 Samuel Slater came from England, having memorized the latest innovations in cotton textile production.

North Conference

The Center for New Insitutional Social Science at Washington University has videos from the conference honoring Doug North.

Un-Freaknomics?

Forbes profile of Alvin Roth presents him as Un-Freakonomics.
"In contrast with the authors of bestselling books like Freakonomics, who are fascinated by obscure but intriguing questions like how to detect cheating by sumo wrestlers, Roth relishes real-world challenges." Much of Freakonomics was about crime and education, hardly obscure issues. I liked that Freakonomics presented economists as people who do research to try to find the answers to questions.
The problem with Freakonomics is the marketing, which was successful but dishonest. Graduating from MIT, teaching at Chicago, winning the John Bates Clark Medal, and publishing in top journals are not indicators that one has gone rogue. Exaggerting the novelty of Freakonomics does a disservice to people like Gary Becker, Douglass North and Roger Miller (who tried to sell a version of The Economics of Public Issues under the title of Abortion, Baseball and Weed), Dick McKenzie and Gordon Tullock, and many others.

The Neglected Field of Economic History?

This is the title of a forum in the latest issue of Historically Speaking, with contributions from Robert Whaples, Deirdre McCloskey, Werner Troesken, Phil Hoffman, and Joel Mokyr.

Shaping the American Economy

The June issue of the Gilder Lehrman Institute's online journal History Now focuses on American economic history with essays byJoyce Appleby, Richard Sylla, Brian Murphy, Roger Farmer, and T.J. Stiles.

What I'm Reading

Peter Rousseau "The Market For Bank Stocks and the Rise of Deposit Banking in New York City, 1866-1897" NBER Working Paper 15770

Although not traded as actively on the New York Stock Exchange as they had been in the past, the over-the-counter market for these securities was efficient and the local newspapers quoted bank stock prices on a regular basis. The prices revealed in this market became reliable sources of information about the soundness of these institutions. Most important,
ordinary depositors – mostly those not actually investing in bank stocks – used this information to choose among the options for placing their savings. It is in this way that the market for bank stocks in New York contributed to increased public confidence in the banking system and the observed rise in deposits.

Take Care the Living

Video of Jeff McClurken talking about his book Take Care of the Living: Reconstructing Confederate Veteran Families in Virginia.

Doug North

The Center for New Institutional Social Sciences at Washington University has posted videos of Doug North talking about his most recent book Violence and Social Orders (Doug North, John Walllis and Barry Weingast)

Oliver Evans Mill

In the 1780s Oliver Evans created a fully automated flour mill. He obtained patent no. 3 for it. George Washington had the system installed in his gristmill at Mount Vernon. The Mill has been resotred and is now the only fully operational Oliver Evans mill (or at least thats what they say at Mount Vernon). For any one interested in economic history it is an amazing sight. You have to go on the week end though; thats when they grind wheat. During the week they grind corn, and that process is not fully automated. You can visit the mill and the distillery without visiting home and plantation.