Saturday, March 31, 2007

Wang Hao

I have just finished reading a biography of an old professor teaching at Tsinghua University. The title of that book is "My School Days," published by Beijing's Joint Publising Company last year (in Chinese). I enjoy it a lot!

There is a chapter in his book where he recollected his interaction with his classmates while they were all attending National Southwestern Associated University during the Second World War.

One of his classmate is Wang Hao, a first class mathematician and philosopher. I have never heard of his name before. Wang went to Harvard after graduating from National Southwestern Associated University and studied under well-known Harvard professor Willard Van Orman Quine. Wang got his Ph.D. only after spending one year and eight months at Harvard!

Here is more information about Wang Hao. This is a book written by by Wang Hao and published by the MIT press. According to the biography, that book is only the first part of a planned trilogy.

Apparently Wang tried to answer 3 questions through his trilogy according to what he told the author of biography. The first one, ie the published one, attempts to answer the question of "What could we know?" The second and third one supposedly attempt to address the questions of "What could we do?" and "What are we after in life?" respectively.

Fable of the Keys

I have just started reading Diane Coyle's The Soulful Science: What Economists Really Do and Why It Matters, and I am already disappointed 60 some pages into the book.

In discussing the latest development in growth theory, Diane mentioned the idea of path dependency as if it is an idea that is widely accepted and non-controversial.

This is simply not true.

The common example used by many to explain the concept of path dependency is related to the keyboard arrangement of your computer(or what used to be typewriter). The arrangement that we have now is called the QWERTY system. Paul David, an economic historian at Standard, published a paper back in the mid-eighties arguing that the QWERTY arrangement is inefficient. The only purpose of that arrangement is to slow typist down in order to avoid the jamming of keys. However, with the passage of time, that jamming problem no longer is relevant. Yet, the QWERTY system persists even though better alternative exists. That alternative system is called Dvorak system. Hence, claimed David, the market fails to shift to a more efficient keyboard arrangement as if it is locked into a particular path of development. That is more or less how the concept of path dependency comes to be known among economists.

The idea is interesting, I have to admit. But is it correct, that is what really matters at the end of the day.

In early 1990s, using historical material recording results on typing contests involving the two keyboard arrangements, two economists (Stan Liebowitz and Stephen Margolis) find out that the claim that Dvorak is a better keyboard arrangemen than QWERTY is simply not substantiated by facts. The title of that paper is aptly called "The Fable of the Keys" and is publised in Journal of Law and Economics. Want to learn about the whole debate, read this book.

Of course, Diane is fully entitled to use David's work in her book. But I expect more even handed treatment. I wish she at least could have mentioned studies which seem to contradict David's claim. She didn't and I am disappointed.

Tuesday, March 27, 2007

A Book You Would Want to Bring with You on Your Next Doctor's Visit

How Doctors Think

Jerome Groopman, a New Yorker staff writer and professor at Harvard Medical School unravels the ultimate medical mystery: how doctors figure out the best treatments -- or fail to do so.

"Jerome Groopman has written a unique, important, and wonderful book about a central paradox of modern life: even though diagnosing an illness is often as much art as science, we want our doctors to speak with scientific surety. Groopman gives a rationalist's tour of the doctor's thought processes -- or lack thereof -- and yet, unlike many rationalists, he never veers toward cynicism. You'll never look at your own doctor in the same way again -- for better or worse," ---- Steven D. Levitt and Stephen J. Dubner, authors of Freakonomics

Find out more about the author here.

Dos and Don'ts For Budding Austrian Economists

So you want to be an Austrian Economist? Read Peter Leeson's advice before you do so. I wish somebody gave me such advice while I was in graduate school.

Monday, March 26, 2007

Government is the Source of the Problem!

Another NYT story said:

"India's drive to become a global economic powerhouse faces a huge roadblock in its inefficient, largely state-controlled financial system, analysts say. Two-thirds of India's banking business is conducted through less than 5 percent of its branches...An estimated 70 percent of Indian citizens are still not part of the banking system, while bureaucracy and inefficiencies are countering the benefits from faster growing parts of the economy, say political leaders and economists."

Can the government do anything about this?

Nope according to the story because of strong resistance from the 750,000 public bank employees, who have strong unions.

Another reason is that "[a] large part of the population is still dependent on the banking system for small requirements,"said Amitabh Verma, joint secretary of banking operations in the Ministry of Finance. Big companies are not the primary concern, he said. Corporations with international ratings"have an alternative,"he said, while these individuals do not.

Read more here.

That makes me wonder, if state-banking is indeed so effective in meeting the poor people's demand for financial services, then why is micro-finance arrangement so popular in India. Afterall, aren't all these micro-finance mechanisms set up specifically for meeting those very same demand of the poor people. Read this.

Per Se Illegality or Rule of Reason?

WSJ has a very interesting story by Ronald Cass, Dean emeritus of Boston Law School, on a pending case which challenges the per se illegality of resale price maintanence.

A Free Marketeer Leads Shanghai

According to a NYT story:

"The ruling Communist Party appointed Xi Jinping as the top leader of Shanghai...Mr. Xi, 53, was the party boss of neighboring Zhejiang Province and is regarded by political analysts in China as favoring deeper market-oriented reforms."
Read more here. Here is more from WSJ.

What's the likely impact of picking Xi to lead Shangahi?

My take is that, barring a heavy hand extending from Beijing to slow Shanghai's explosive development in order to preserve HK's status as China's financial hub, the appointment of Xi might help speed up the development of market infrastructure in Shanghai. Legal infrastructure and other norms of behaviour which are prerequisites in a market economy are what I have in mind here. Growth rates of Shanghai would inevitably rise as a consquence.

The ironic of all this is that just as we have just picked a Chief Executive here in HK who tries extremely hard to make sure that the development of this ex-colony fits in with China's five-year plan and slow Shanghai's growth in order to protect HK's position China's financial center, Beijing has picked a market reformer to lead Shanghai.
**Picture above shows US Treasury Secretary Henry Paulson and Xi walking together during the former's trip to China last year.

Friday, March 23, 2007

Books I Have Been Reading

1. The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen.

Bob Shiller of Irrational Exuberance fame said: A curious, enlightening and creative account of the world's three most influential economists, and why their theories have had such a huge impact on the economic history of the modern world.

2. Final Exam by Pauline Chen.

What it is about?

A brilliant young transplant surgeon brings moral intensity and narrative drama to the most powerful and vexing questions of medicine and the human condition. When Pauline Chen began medical school twenty years ago, she dreamed of saving lives. What she did not count on was how much death would be a part...

3. The Halo Effect: ... and the Eight Other Business Delusions That Deceive Managers by Phil Rosenzweig.

Nassim Nicholas Taleb, author of Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets said the book: "I was taken by this book. It destroys myths concerning the attribution of success in the management literature using potent empirical arguments. It should stand as one of the most important management books of all time, and an antidote to those bestselling books by gurus presenting false patter and naive arguments."

4. And finally, Apollo's Arrow by David Orrell.

David Orrell, Ph.D., received his doctorate in mathematics from the University of Oxford. His work in the prediction of complex systems has been featured in New Scientist and the Financial Times, and on BBC Radio, ABC Radio (Australia) and NPR. His theory that errors in weather forecasts are due not to chaos (the "butterfly effect") but to model error stirred up a storm of debate in meteorological circles. He now conducts research in the area of systems biology. He lives in Vancouver, British Columbia.

Thursday, March 22, 2007

Remembering John

I blogged about the tragic death of Stanford economist John McMillan here.

I was not his friend, and frankly I did not know him. However, we talked a couple of times over the phone when I was a graduate student in the US. That was in the early 1990s.

John was still at UC San Diego back then. Some of you might recall, in the early 1990s, John together with his colleague China expert Barry Naughton and two other authors had written several papers on Chinese SOE reform. One of which called Autonomy and Incentives in Chinese State Enterprise was eventually published in Quarterly Journal of Economics.

I was searching for a dissertation topic, and I thought about doing one on comparing productivity of SOE vs the non-state sector, which was a hot topic at the time. Called John up one day, I asked him if he would provide me with the data set used in several of his studies. He gave me some pointers on how to get hold of the data and told me to get help from one of his co-authors who was more familiar with the data.

I finally got hold of the data though I never used them. I felt forever indebted to him because of his generosity though. A big name professor dispensed his time generously on a unknown student from a far away university (my school is on the east coast, his the west).

That summer I came back to Hong Kong for a short visit. I picked up a book which has the translation of the essay written by John and his coauthors mentioned above. Got it and sent it to John after I returned to the US later that summer. And that was the last time I talked to him over the phone.

John affected me in another way. Another essay of his coauthored again with Barry Naughton served as an inspiration for my thesis. That essay is called How to Reform a Planned Economy: Lessons from China published in the 1992 issue of Oxford Review of Economic Policy. The influence of Hayek was notable in that piece. And that paper served as one of the papers which kick-started the ensuing debate regarding the different approaches transitional economies should adopt in a bid to reform their economies. That's the so called "Big Bang" versus "Evolutionary" approach to economic reform debate.

Wednesday, March 21, 2007

Dick Epstein on Antitrust

From University of Chicago law professor Dick Epstein:

Antitrust Consent Decrees in Theory and Practice

"Epstein observes how differences in antitrust philosophy can shape the kinds of comprehensive settlements that the government will seek and the courts will grant. Epstein takes issue with aggressive antitrust enforcement strategies that seek to use government power to fundamentally alter industry structures or the business practices of regulated firms, in some instances leading to their breakup. To explain the perils of that approach, Epstein carefully examines the history of consent decree litigation, culminating in detailed studies of the AT&T breakup and the government antitrust actions against Microsoft.

Applying modern theories of antitrust analysis, Epstein's central thesis is that bold antitrust remedies that are not tightly tied to a defensible theory of wrongful conduct often prove counterproductive. Such measures typically force firms to adopt business practices and structural reorganizations that substantially impede their ability to compete effectively in the marketplace. The disparate fates of AT&T and Microsoft are the result of a major and fruitful shift in thinking about the use and limits on the antitrust laws in a wide variety of industrial contexts."

You can get it here.

Monday, March 19, 2007

First We have Lawyers, Then Marketing Professors, now It's the Actress' Turn

As things are developing, it seems inevitable that HK would have a competition "law" very soon. Read more here.

Several types of professionals have already voiced their support for such a "law", first we have lawyers (Ronny Tong of the Civic Party for example) and then we have marketing professors (see here), now we have an actress who says independent firm companies would be wiped out without such "law".

SCMP reported today:

"Josephine Siao Fong-fong, the former child star who went on to become one of Hong Kong's most prominent actors, said the ownership of cinemas by the local film industry made life difficult for small-scale filmmakers..."

"In Hong Kong, the market is controlled by big companies who distribute their own films to their own cinemas," she said. "Prime-time bookings - summer holidays, Christmas and the [Lunar] New Year [periods] - are all held for their own films. Independent filmmakers are crowded out and [are] unlikely to survive."

"Time and money are saved [but] quality is lost. Without anti-trust laws a local film industry is unlikely to flourish in Hong Kong," she said."

Read more here.


How did the current big companies become big in the first place? Were they all "small" to start with? If so, then these current big players might very well encounter the same problems that Josephine said the existing small firms have to face. Did all these former small potatoes (now major studios) grow big thanks to the antitrust law?

What is wrong with trading off a bit of quality (assuming Josephine were right that indeed quality is being sacrificed for the sake of saving money and time) in order to save money and time? Obviously, she does not understand that economics does not address problems of the all-or-nothing kind, but choice at the margin.

If indeed independent producers could produce such "quality" products, who is to prevent them from getting the financial support needed for them to build their own cinemas? I am sure a lot of investors would be interested in grapping the market from the existing major players if such opportunities were indeed presence.

Loss of the Economics Profession

Stanford economics professor John McMillan just passed away after fighting with his cancer for the past 9 years. He was 56. Read the press release here.

John was the author of the extremely well written economics book for the layman entitled Reinventing the Bazaar: A Natural History of Markets.

Beyond books, John had also written a bunch of excellent papers on various topics. To me, his best paper is definitely this.
HT to Economic Principals for the pointer.

Go Mason!

My alma mater has hired another young and bright economic historian from U of Pittsburg according to Peter Boettke over at Austrian Economists. His name is W. Troesken and here is his CV.

A couple of years ago I have read his piece "The Letters of John Sherman and the Origins of Antitrust" published in Review of Austrian Economics and I am impressed with his work ever since.

Joined by recent new hires like Gary Richardson and John Nye (which I have talked about in this post) George Mason is soon turning itself into "the" place to go if one wants to become an economic historian!

More Sex is Safer Sex !

Steve Landsburg's new book is out! The title of the new book is, yes, you get it right: "More Sex is Safer Sex."

Here is an advance praise from another Steve of Freakonomics fame:

"Steve Landsburg proves once again that he is better than anyone else at making economics interesting to noneconomists. Landsburg is provocative and playful in his mission to demonstrate how an understanding of economics will change the way you live your daily life. I loved this book."

Here is more info about the book.

Competition "Law" is Not Really a Law

Today's edition of SCMP reported that:

"A cross-sector competition law is to be introduced to regulate seven anti-competitive practices, while exemptions will be given to parties with less than a 20 per cent market share, sources from the government and Democratic Party say.

Seven anti-competitive practices - price-fixing, bid-rigging, market allocation, sales and production quotas, joint boycotts, unfair or discriminatory standards, and abuse of dominant position - will be covered by the law."

Read more here.

Why I have put quotation marks on the word "law" above? Hayek has defined law in many occasions that it is a set of rules of conduct equally applicable to all. Apparently, such will not be the case for our, eh, competition "law"!

Thursday, March 15, 2007

Where Are the Economists?

First we have the lawyers who hijack the whole debate on whether HK should have a competition law, now marketing experts join in.

According to a story in SCMP:

"A Chinese University academic has called for the introduction of a cross-sector competition law after a survey found Hong Kong retailers, especially supermarkets, abused their market power with suppliers.

The survey of 121 suppliers by the university's marketing department found many retailers dictated prices and demanded exclusivity...

Supermarkets were found responsible for an overwhelming majority of the unfair practices by retailers. About 70 per cent of the disadvantaged suppliers were found to have a supermarket as their major retailer...

Professor Sin said a cross-sector competition law was needed to ensure fair play between suppliers and retailers."

Read more here.

Not so fast professor Sin. For your argument to go through, you have to assume that the supermarkets/retailer do not pass on the savings that they get from squeezing the suppliers. If they do, consumers win at the end. And what's the problem with that?

To argue that the retailers are the ones who would buy low (from suppliers) and sell high (to consumers), you have got to show that the retailing industry is not competitive. That of course is a completely different issue which your research simply does not address! Why the rush to conclude that HK needs a competition law then?

Going back to your original thesis, suppliers being squeezed by retailers, if indeed the suppliers feel that they are being squeezed by retaliers, why don't they simply refuse to supply them and set up their own retail outlets through vertical integration? Why complain?

And for those who question the rationale of slotting fees, I strongly recommend them to read the paper by UCLA economist Ben Klein and George Mason University law professor Joshua Wright which you could access here.

BTW, where are HK's economits? Why they are silent on the topic which they should have a lot to say?

Wednesday, March 14, 2007

The Story of Joseph Schumpeter

Harvard's Thomas McCraw has a new book on Schumpeter called Prophet of Innovation published by Harvard U Press. It's over 700 hundred pages long!

Edmund Phelps, 2006 Nobel Lauerate in economics called the book "a truly penetrating biography of the most influential theorist of finance capitalism."

Tuesday, March 13, 2007

Avoid Marginalization Through Competition

Today's edition of The Standard reported on the warnings sounded out by National People's Congress vice chairman Cheng Siwei:

"Like the fabled hare being overtaken by a tortoise, Hong Kong risks losing its position as a international financial center if it sticks to its "old ways," National People's Congress vice chairman Cheng Siwei warned Tuesday in Beijing...

"If Hong Kong people focus on internal political rows but not economic development, they will be marginalized," Cheng told a media briefing less than two weeks before the SAR's March 25 chief executive election."

Read more here.

It is ultimately a time allocation problem, isn't it? If you devote more time to work on political matters, you have less time left to deal with economic issues. But then in economics, we talk about choice at the margin. That is, every one in HK is calculating whether spending one more unit of time in political activities brings higher benefit than other activities. Throw in different preferences, different opportunities confronting different people, it seems unlikely most of HK's working population would devote most of their time to political activities. Therefore, the outcome Mr. Cheng talked about would be an unlikely one.

If one were to worry about HK being marginalized, there is another consideration which is far, far more important in my opinion. That is Beijing's attempt to limit the growth opportunities of mainland cities in order to "enhance" HK's role as our country's premier interntational financial center.

In a market economy, you don't get assigned to such role, you earn it through beating your rivals in the market place. Horning HK's competitive edge through vigorous competition with other mainland cities and other global ones is the only route for HK to stay ahead. However, this is not happening, as I talked about in a previous post.

Monday, March 12, 2007

Democracy and Growth

MIT's Daron Acemoglu and Harvard's Ed Glaeser blog about democracy and growth over at the WSJ blog, read more here.

Shanghai Deserves Equal Treatment

Today's SCMP reports:

"The central government aims to take further steps to reinforce Hong Kong's role as an international financial centre, signalling its intention to highlight the city's importance to China's economy ahead of the 10th anniversary of the handover.

Analysts saw Beijing's efforts to promote Hong Kong's role as a setback for Shanghai, whose leadership has been hit by a series of corruption scandals culminating in the sacking of its former party secretary, Chen Liangyu ...

It is expected to announce more favourable policies soon, probably before the July 1 handover anniversary...

"The conclusion to the decade-long debate on the role between the twin cities has become clear now. Hong Kong, with its existing advantages, should serve China internationally, while Shanghai, with its limitations, should focus on serving the domestic market," Professor Zhong said. "

Read more here.

My response is, why shouldn't Shanghai be allowed to compete with HK? If Shanghai's legal framework and other institutions are inadequate to serve as China's international financial centre at this point in time, wouldn't it be more productive to speed up their development rather than condemn it to an insignificant role.

Why HK's is so worry about Shanghai? Afterall, it competes quite successfully with world gaints like London and New York, why it fears to compete with Shanghai?

Actually it is not correct to say HK is competing with Shanghai. As long as China has the ability to grant favorable policies to HK but not to Shanghai, the playing field is tilted even before the game begins.

Wednesday, March 07, 2007

Bidding Farewell to Laissze Faire in HK

In the HK Standard today:

" In an unprecedented move, the government announced Wednesday it will invest directly in movie productions to back Hong Kong's ailing film industry. Officials hope direct investment from the HK$300 million film development fund announced by Financial Secretary Henry Tang Ying-yen in his budget speech last week will bring about a revival to the industry that a senior official has described as "very important."..."

Rationale for the policy, according to Secretary for Commerce, Industry and Technology Joseph Wong:

"First of all, the film industry, is a very important creative industry in Hong Kong and [its] revival will have a lot of spill-over effects." Secondly, he argued, there are also many examples of governments playing a "more active part" in supporting film industries in France, the United Kingdom, Singapore and South Korea."

Read more here.

Yo Joe, please name one industry which does not generate spillover effects, externalities, third-party effects...or whatever fancy name you can come up with?

Oh yeah, Joe, on your second point, would you please explain to me why whatever policies other countries have implemented must be a good thing? Could they all be wrong at the same time? They might not, but we, as taxpayers who pay for the final bill, deserve an explanation not an assertion. Wouldn't you agree?

And would you please also info us Joe, what criteria you would use when deciding which movie deserves government dole ? And who has the final say when picking a particular set of criteria for such purpose in the first place?

Transaction Cost Economics: An Introduction

A paper of the same title by one of the TCE's pioneers Oliver Williamson.


Have you ever had the following experience. You go to the bookstore, not knowing exactly what you want to get. Then, just when you are pretty sure you are not going to get anything on this trip. You see something. A book is sitting at that corner of the bookshelf which usually no one will ever bother to check. There, you find your book of the day, book of the month may be, or may be a book which will change your perspective for the rest of your life.

I had that experience the other day...I found this book called The Difference by Scott Page.

No amount of internet search has enabled me to discover this book, and I perform that kind of internet search every single day.

Here is a blurb on the book by Nassim Nicholas Taleb, author of Fooled by Randomness and The Black Swan:

"Another highlight of 2006 was to find in my mailbox The Difference by Scott Page. Page examines the effect of cognitive diversity on problem solving and shows how diversity acts like an engine for tinkering. It works like evolution. By subverting the big structures we also get rid of the Platonified one way of doing things. This is a landmark book."

Thursday, March 01, 2007

Simon Johnson, IMF's Next Chief Economist?

WSJ reported that Simon Johnson at MIT has been nominated as the next Chief Economist at the IMF, read here. Here is Simon's webpage at MIT. A bio of him can be found here.
Professor Johnson and his MIT colleague D. Acemoglu and Harvard's James Robinson have done a series of very innovative work on the long-term determinants of economic growth.

Puzzle of the Day: Accountants' Interests in HK's Fiscal Matters

The Hong Kong government has just announced its latest budget for 2007-2008, read more here.

The HK Standard reported today that:

"Auditing firm Ernst & Young said Thursday: "It was perhaps a little disappointing the financial secretary did not say much on the subject of Hong Kong's narrow tax base, nor the wide proposals for reform which have been put to him throughout 12 months by various professional bodies, the public and industry."...

"Over the years, much has been said and written about Hong Kong's narrow tax base and the possible need for tax reform. But in his 2007-08 budget, Tang only devoted one paragraph to the topic," said accounting firm PricewaterhouseCoopers."

Read more here.

The million dollar question is of course why accountants have so much interests in HK's tax system at all? Their self-interests are behind this, an economist like me would argue.

But then why only accountants, why tax lawyers and other professionals who might get something from steering the tax system their way have not exhibited similar enthusiasm?

You foreign readers out there, would you please let me know whether accountants in your place of residence are as interested in the tax system as those we have here, thanks!