Another New Monograph on China

Not long after the publication of Barry Naugton's The Chinese Economy, now students of China will get a treat from another China expert Dwight Perkins at Harvard. His monograph entitled "The Challenges of China's Economic Growth", which will appear in print later, is now available at American Enterprise Institute's website.

Books I Recommend

If you enjoy Fooled by Randomness, probably you would enjoy Taleb's new book The Black Swan.

A few good law and economics works are out in the past few years, Don Wittman has just added another one to the list. It's called "Economic Foundations of Law and Organization."

Wary that it may take you too long to read Adam Smith's two great works, try this one then.

Just a reminder, John Taylor's Global Financial Warriors is out now.

Should Tax Payers Subsidise Family Farms?

Apparently some US politicians think tax payers should do so. Here is what Washington Post reported on today:

"In today's fast-paced, interconnected world, there are few industries where sons and daughters can work side-by-side with moms and dads, grandmas and grandpas," Rep. Jerry Moran (R-Kan.) said last year. "But we still find that today in agriculture. . . . It is a celebration of what too many in our country have forgotten, an endangered way of life that we must work each and every day to preserve."

Read the whole story here.

Jerry's argument is flawed. If one really values the satisfaction derived from working with dad, mom, bro, and sis, then the one who benefits from this work arrangement should pay, but not unrelated third parties who gain nothing from such work arrangement.

His argument is also confusing in that it seems to imply that people have now lost their freedom to work with one's family members. This is not true. Modern folks can always choose to work side by side with their family members if they want to. But that work arrangement carries with it a hefty price tag in terms of lower productivity that few people will choose to do so today. So it is wrong on Jerry's part to call this work arrangement "endangered" as if we were being forced to abandon such institutional arrangement. No we don't.

As Demand for Adoption Goes Up, So Does its Price

In introductory economics class, all students learn that price of the good in question rises if demand curve shifts rightward. And yes, it applies to child adoption as well.

A story in Wall Street Journal today reported that:

"China, the most popular foreign country for U.S. adoptions, is considering new rules that could disqualify thousands of would-be parents. Those new rules would bar people who are single, obese, over 50 years old, or currently taking psychiatric medications from adopting Chinese children, according to several U.S. adoption agencies that have seen the regulations. They would ban disabled people and families with net assets of less than $80,000. And they would set new minimums on length of marriage for couples seeking to adopt."

Why China would like to revise its adoption policy?

The story continues:

"China says its rationale for a change in rules is simply that it cannot meet the demand of prospective families. Birthrates are falling, and as the Chinese economy booms, fewer parents are abandoning their children due to poverty. A traditional preference for boys appears to be waning, so fewer girls are put up for adoption. And with the recent loosening of China's one-child rule, more families are keeping their second child. The result is that "the number of kids available for international adoption is naturally declining," says Sun Wencan, who runs the adoption department of the Social Welfare Division of China's Ministry of Civil Affairs."

Read the whole thing here.

Why Home Schooling is Controversial?

I have long been an advocate for parents to have the right to teach their children at home here in HK. In the US, and some other countries, it is legal for parents to teach their kids at home.

I am always curious why such a sensible policy seems so controversial to most people.

The basic rationale in support of homeshooling is this: nobody knows a kid better than his/her parents. QED.

I am not arguing for the banishment of traditional schools, I am arguing for a marginal change in educational system, to let parents have one more choice in seeking out the best education for their kids. And what's wrong with that?

On the supply side, for those with vested interests in the exisiting education system, I can see why they would oppose such a sensible policy. For an example, if you were a teacher at a public school, more kids being taught at home mean less students enrollment. That in turn means less funding and one might have to accept a pay cut someday.

Another reason for opposing home schooling came to my mind after I read this story in the New York Times. I call this the "I know your kid better than you do syndrome". Educational experts simply know, or think they know, how to teach other peoples' kids better than those kids' parents. This is certainly debatable.

From the demand side, the reason why parents may not want to teach their own kids (other factors being held constant, like their income, time availability, their educational level) at home also occured to me while reading the same NYT story. Peoples' innate fear to go about their own way without guidance. People simply want to be told what to do. This seems related to what Hayek has said in Fatal Conceit. That contemporary people still have that lingering longing to be led, part of the legacy we inherit to this day from the time when we live in a small community and individuals' decisions are made according to the directions of the wiseman in the group.

Ben Bernanke in China

New York Times reported that Treasury Secretary Paul Paulson Jr. has enlisted Fed Chairman Ben Bernanke to join him in yet another trip to China next month.

The main goal of the trip is again to push (or is the word threaten more appropriate?) China to do something about the massive trade imbalances between the two countries. Certainly the value of Yuan would once again be the focus of discussion.

What would stengthen Paul's hand in negotiating with the Chinese is not the presence of Fed Chief Bernanke though. It is the fact that the Democrats have staged a comeback in eletions just completed. Paul could leverage on the fact that he needs to bring home concrete results in order to stop the Congress, now in the hands of the Democrats rather than controlled by the Republicans, from passing protectionist laws that might have harmful effects to China's exports i a bid to get concessions from his Chinese counterparts.

Will the Chinese be so easily bluffed? Stay tuned, we would find out in a month.

And here is the NYT story.

Allan Meltzer on Friedman

Here is the link.

Robert Barro Right, Gary Becker Wrong, Can it be Real?

" In a 1973 workshop, I presented my paper, published in the 1974 Journal ofPolitical Economy, about Ricardian Equivalence for budget deficits. (In the model, taxesand budget deficits had equivalent economic effects, along the lines expressed by theclassical British economist David Ricardo. However, I should mention that no one in the1973 workshop noted the connection between my paper and Ricardo.)

This was the onlytime I witnessed a seminar attended simultaneously by the three great pillars of theChicago School—Milton, George Stigler, and Gary Becker. At one point, Gary and I gotinvolved in a heated dispute on a technical point in the paper. I recall Milton putting hishead down, deep in thought for at least a full minute, while the room was silent. Given Milton’s mental quickness, this prolonged deliberation was quite unusual, and there wasan atmosphere of thick tension in the room.

Finally, Milton lifted his head and declared,in an incredulous way, that Gary was wrong (a nearly unprecedented event) and that I was therefore right. For some reason, Gary lacks any recollection of this event."

Read on Bob Barro's recollection here, also make sure you scroll down to the very end of the paper where you will two extremely nice pics of M.F., one with him standing patiently waiting for his traffic ticket!

Thomas Sowell on M.F.

"Milton Friedman may well have been the most important economist of the 20th century, even if John Maynard Keynes was the most famous."

Tom Sowell on his teacher M.F. in WSJ.

Gary Becker on M.F.

"After my first class with him a half-century ago, I recognized that I was fortunate to have an extraordinary economist as a teacher. During that class he asked a question, and I shot up my hand and was called on to provide an answer. I still remember what he said, "That is no answer, for you are only restating the question in other words." I sat down humiliated, but I knew he was right."

That is Gary Becker writing about his first contact with his teacher M.F. Read it here.

Dick Posner's post is far more negative though, read it also.

Larry Summers on M.F.

"Milton Friedman and I probably never voted the same way in any election. To my mind, his thinking gave too little weight to considerations of social justice and was far too cynical about the capacity of collective action to make people better off. I believe that some of the great challenges we face today, like rising inequality and global climate change, require that the free market be tempered instead of venerated. And like any economist, I have my list of areas where I believe Mr. Friedman oversimplified or was simply wrong.

Nonetheless, like many others I feel that I have lost a hero — a man whose success demonstrates that great ideas convincingly advanced can change the lives of people around the world."

That is from a NYT oped written by Larry Summers, read the whole thing here.

Origin of the Methodology of Positive Economics?

In an 1992 interview, as a digression while responding to a question on the Mont Pelerin Society, M.F. said:

"As an amusing footnote, one of the major benefits that I personally derived from the first meeting of the Mont Pelerin Society in 1947 was meeting Karl Popper and having an opportunity for some long discussions with him, not on economic policy at all, but on methodology in the social sciences and in the physical sciences. That conversation played a not negligible role in a later essay of mine, "The Methodology of Positive Economics," which has probably led to more pages of subsequent print by others than anything else I've written. It just shows how nature and science works in wondrous ways."

Read the interview here.

James Shikwatis versus Jeff Sachs

Mr. Shikwati, from Kenya, is now a conservative phenomenon.

"He has published scores of articles hailing business as Africa's salvation; offered free-market lectures on five continents; and, defying the zeitgeist of the Bono age, issued scathing attacks on foreign assistance, which he blames for Africa’s poverty. When Western countries pledged to double African aid last year, an interview with an angry Mr. Shikwati filled two pages of Der Spiegel, the German magazine.

“For God’s sake, please stop the aid!” he told the magazine."

That is from an excellent story in NYT on how ideas matter on the policy front. Read it here.

The line that I like best is :

“We have to stop looking for other people to save us. We need to look for ways to save ourselves.”

Wong Kai-wai story in the New York Times, yes, you read it right, NYT

"ON a SoHo film set last August, Jude Law and Norah Jones were getting intimate. Repeatedly intimate. To be precise, they had kissed upwards of 150 times in the past three days.

The occasion for this outbreak of passion was “My Blueberry Nights,” the first English-language film by Wong Kar-wai, the maverick Hong Kong director turned avatar of cosmopolitan cool. This particular night was stifling as the crew spilled out of Palacinka, a small cafe on Grand Street that was the principal New York location, preparing for yet another take of the scene known as “the Kiss.”"

Read the whole story here.

Now who said HK film industry is dying? Yes, there may be less locally produced firms. What happens is, in the age of globalization, a task (film-making) is sliced up into finer parts with each of them being made at the location best at doing it.

Other stuff, like clothing has long been produced that way. So if we are not worry about there are less locally made shirts or ties, there is also no reason to sweat over the dwindling number of locally made movies. What is interesting is to investigate what factors account for this new mode of production in the movie business. Is it financial innovation? Is it technological advancement? Or is it some sort of organizational change which makes coordiating the task of making a movie in many different places a far more manageable task?

Milton Friedman on Hong Kong (1998)

"According to the latest figures I have, per capita income in Hong Kong is almost identical with that in the United States.

That is close to incredible. Here we are—a country of 260 million people that stretches from sea to shining sea, with enormous resources, and a two-hundred-year background of more or less steady growth, supposedly the strongest and richest country in the world, and yet six million people living on a tiny spit of land with negligible resources manage to produce as high a per capita income. How come?"

The above is written by M.F. for the Hoover Digest back in 1998. Read the whole thing here.

With the HK government playing with the idea of introducing minimum wage, competition law and a host of other hand-out schemes, and formal abrogation of its long-held "positive non-intervention" economic philosophy, Friedman must be very upset and heart-broken when he wrote this shortly before his death.

Thoughts on M.F.

Here's how David Friedman, son of M.F., remembers his father.

Chicago economist Austan Goolsbee wrote in the NYT:

"When we heard the news at the University of Chicago that he had died, we actually stopped arguing and were quiet for a moment. It was a most extraordinary event for Chicago economists. Each of us seemed to contemplate Mr. Friedman’s legacy for ourselves. After that bit of calm, the argument resumed.

It was, perhaps, just what the old man would have wanted."

Read the whole thing here.

Milton Friedman 1912 -- 2006

Milton Friedman, Champion of Freedom

The Chinese Economy

Barry Naughton at UCSD has done it again, after his 1995 "Growing Out of the Plan", he has offered us students of Chinese economy another comphrensive book entitled "The Chinese Economy".

Bidding Farewell to Chicago School of Economics

HK University of Science and Technology professor of finance K.C. Chan has a piece in today's edition of Ming Pao (in Chinese) pretty much endorsing some sort of light-handed approach to industrial policy (his example is HK government's involvement in luring Disney to come to HK).

And I quote:

"如果我們絕對不容許政府冒風險，官僚因循不變的習性只會變本加厲。所以，政府的參與，關鍵在於有效獲取市場信息，適當地利用市場來達至政策目的，歸根究柢，這是如何增加政府官僚的判斷能力、提高政策執行能力的問題！且這些風險也是可以量化的，舉例說，假如迪士尼投資不像預期的成功，從商業營運的角度看，投資項目有賺有蝕，政府的成敗，也應從整體角度去衡量效益。"

Ooops, I can almost feel George Stigler rolling his grave!

Granted that Chan got his Ph.D. in finance at Chicago, not economics, but still it is hard to believe that with big names like George Stigler and Sam Peltzman at Chicago's graduate school, Chan is not aware of these scholars' views on such matters.

And if you read the piece, you will get the impression that he is not familiar with the cutting edge research in industrial policy as well. Regina Ip, another big fan of industrial policy, does deserve some credit on that score, as research reports put out by her think-tank do refer to the cutting edge research in industrial policy.

Exchange Rate or is it Exchange Rage

A buddy of mine since graduate school told me a joke the other day. Apparently one of the Ph.D. students at his school has exchange rate mispelled as exchange rage on one of her power point presentations.

Notable Books

1. Adam's Fallacy. And it has nothing to do with Adam and Eve.

2. Dynasties. A book on family businesses.

3. The Origin of Wealth. "There are thought-provoking ideas on almost every page...It is unquestionably the most important business book of the year." - John Kay, Management Today.
Read Chapter 1 and more reviews here.

4. The Authentic Adam Smith. Read reviews here and here.

5. And finally, here is Freakonomics, revised edition. Funny thing is, though the book is still listed as unpublished at Amazon, I actually saw a paper back version of it at a book store here in Hong Kong.

師生情

那天在網上看到論文指導老師 Richard Wagner 即將在母校的工作坊上宣讀其撰寫中的新書的其中一章。

把文章讀後馬上把自己的見解透過電郵轉告老師。

老師隔一天便給我回覆，內容主要都是一些客套話。 讀後心裏不知何解有一股屈悶。

數小時後, 老師再發一電郵說留意到我的電郵地址與過往的有分別, 查詢我的近况是否一切安好時，我頓時感到開懷了。

Edmund Phelps on Knight, Hayek, and Polanyi

It is official that Edmund Phelps at Columbia is the latest recipiceint of the Nobel prize in economics.

By now one should have some rough idea of what his contributions to economics are, if not, read this.

One thing probably many pundits have not mentioned, however, is that Phelps recently seems to have rediscovered the work of F. Hayek.

At this year's American Economic Association meeting held in January, Phelps presented a paper entitled, " Further Steps to a Theory of Innovation and Growth – On the Path Begun by Knight, Hayek and Polanyí." The paper can be accessed here.

Phelps is also the Director of the recently formed The Center of Capitalism and Society, part of the Earth Institute led by Jeff Sachs.

The Folly of HK's Minimum Wage Debate

很多人把最低工資視為有效的扶貧手段, 支持者又常以 Card and Krueger 的研究作為支持其主張的理據。

這些人當中，究竟有多少人看過原著？ 木宰羊！My bet is that 99.99 % of them have not.

Read this: The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market. We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers.... an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.

The source? Card and Krueger in Myth and Measurement (p.3).

Hat tip to Bryan Caplan at Econlog for the pointer.

Milton Friedman and George Stigler

I would file this under the best lines I have read today category except that the line comes from letters by G. Stigler to M. Friedman:

"It may merely be prejudice, but I'm inclined to write him [Samuelson] off as an economist."

"Of the many speakers only one was terrible -- shallow and pretentious, Joe Schumpeter."

I got this from the book review of the new book Making Chicago Price Theory: Friedman-Stigler Correspondence, 1945-1957 by Craig Freedman at EH net, read the review here.

Thanks to Peter Klein at Organization and Markets for the pointer.

Another Reason for HK's Decline

HK's deposit insurance scheme will be launched next week, read more here.

Do we need such a scheme now? No.

Reason for your opposition? According to a new World Bank study, cross-country empirical research and individual-country experience confirm that, for at least the time being, officials in many countries would do well to delay the installation of a deposit insurance system. Here is the paper.

Best Line I have Read Today

"I almost died when for a year and a half we had to pretend we were governing...Instead, we lied morning, evening and night."

Ferenc Gyurcsany, Prime Minister of Hungary

Fischer Black

Here is David Warsh on Fischer Black.

This is the best part:

A few months earlier, while having trouble fastening the collar button of his shirt, he had joked with his wife that perhaps the problem was a tumor. Instead of going to doctor, however, he plunged into reading up on the possibilities -- "research," he called it. And when he finally got the diagnosis of the throat cancer that soon would end his life, Mehrling relates, "he burst into spontaneous laughter."

Revealed Preference

"千萬不要去 Sentosa, 那裏連海洋公園都不如。" 一位香港女生對她友人說。

Oh yeah, if she really thinks so negatively about Singapore, why bother? She must be lying.

How do I know? The answer is in the title of this post: revealed preference.

唉，香港的女生。

Sentosa

＂爸, 起飛了, 真刺激" 洋興奮地說。

飛機不但帶我倆離開香港，也撇下抑壓在胸中的一股悶氣。

＂為何不等Anna回來才去？" 岳母帶疑惑地問。

實情是這次 Sentosa 之旅不單為了洋，也為自己。


...to be continued, or may be not.

Best Line I have Read Today

"If only GDP were proportional to literary talent, the Russians would be the richest people on earth."

That is from Econlog's Brian Caplan

Best Lines I have Read Today

"Climate statistics show that, with all the "global warming" hysteria today, our temperatures are still not as high as they were back in medieval times. Those medieval folks must have been driving a lot of cars and SUVs.

Doing 90 percent of what is required is one of the biggest wastes because you have nothing to show for all your efforts. But doing 110 percent of what is expected is one of the smartest investments because it can pay off with a big reputation for just a little more effort.

For university presidents, as for politicians at all levels, one of the most valuable talents for the success of their careers is the ability to say things that make no sense, with a straight face and a lofty tone. "

They are all from Tom Sowell, read more here.

Hat tip to Stationary Bandit for the pointer.

Do Your Math

WSJ wrote: "The nation's math teachers, on the front lines of a 17-year curriculum war, are getting some new marching orders: Make sure students learn the basics.

In a report to be released today, the National Council of Teachers of Mathematics, which represents 100,000 educators from prekindergarten through college, will give ammunition to traditionalists who believe schools should focus heavily and early on teaching such fundamentals as multiplication tables and long division." Read the whole story here.

One motive for this change in the math curriculum is apparently the low scores American kids get in interntational math competition. But the important question is, does it matter? Will the economic might of the US inevitably be eroded because the "wrong" kind of math is taught to its kids ?

If you trust what Gary Becker and Dick Posner have to say on this issue, the bottomline is: It doesn't matter.

Read My Lips

Today's SCMP reported "Donald Tsang Yam-kuen yesterday declared the end of "positive non- intervention", a policy that has previously been hailed as a pillar of Hong Kong's economic success...."Everybody says Hong Kong has a `positive non-intervention policy'. The policy was put forward a long time ago by a financial secretary, Sir Philip Haddon-Cave."

The story continued,"All along, we have never said we'd made it a blueprint for our economic development," Mr Tsang said in response to a question on whether the administration had adjusted the policy."What we have done in practice - and if you remember the direction outlined by former financial secretaries - is adhere to the principles of `big market, small government'. The government will try our best to meet the market's needs." Asked why the policy was still taught in schools, Mr Tsang said: "They teach it wrong." " Read the story here.

Oh really?

Here is Donald Tsang again in his 2000 budget speech (paragraphs 17-19):

"Market-led means that Government does not seek to direct or plan the course that our economy or markets should take. Instead, we believe that investors and entrepreneurs understand markets far better than officials and that private initiatives are a surer way to build Hong Kong's prosperity than any bureaucrat's blueprints.

Our economy has transformed itself several times over the last 50 years. Every time one door closed, a new one opened leading to bigger and better opportunities. Through their own initiatives, our talented and hard-working people have managed to create these new opportunities for growth. The Government has had the good sense not to try to usurp the business sector's role, nor to seek to direct economic developments. Instead, it has confined itself to creating the conditions that allow individuals and businesses to flourish. We started out as a modest trading port, which our people then transformed into a manufacturing centre. They developed global trading links. They ventured into the Mainland. They built Hong Kong into a world-class financial centre. And now, again driven by market forces, they are seizing new opportunities in cyberspace.

None of these successful transformations was the result of government planning or directing the economy. This lesson from the past must be the guiding principle for anyone entrusted with the management of Hong Kong's economic affairs."

Hat tip to Wai-hong Yeung at the Next Media for reminding me of these passages during our conversation.

Collected Works of Armen Alchain

Liberty Fund just announced that it will publish a two volume set of Armen Alchian's scholarly papers later this year.

Armen, of course, is one of the major contributors to the economic approach to property rights, theory of money, theory of unemployment, transaction cost economics, and the theory of the firm. He is also the thesis adviser of Steven N.S. Cheung, another important figure in the development of transaction costs economics.

Believe it or not, my guess is that more students here in Hong Kong have heard about Armen's name than their US counterparts. Why? Because Armen's text (co-authored with Bill Allen also at UCLA) Exchange and Production has been adopted as the required text for economics in our college entrance exams.

When I studied in the US, I was quite surprised when another student of Alchian's at UCLA, Walter Williams used the same book as the text for first year Ph.D. Micro.

Global Financial Warriors

John Taylor, Mary and Robert Raymond Professor of Economics at Stanford and Senior Fellow, Hoover Institution has a new book due out in Jan next year.

The title of the book is "Global Financial Warriors" and more info about the book can be found here.

I would file it under Political Joke of the Day except that...

A couple of weeks back, vice-chairman of the Democratic Party (part of the pro-democracy camp here in HK) Albert Ho was attacked by a few persons. Read the story here. His party's chairman, after visiting Ho, allegedly said "Ho was beaten up like a 'Pig Head"" when describing his colleague's condition to the press. For readers unfamiliar with Cantonese, being called by somebody as "Pig Head" is ususally treated as an insult. If the allegation were true, wasn't it strange that the chairman use that term to describe his colleague?

Just hope that US Vice President Dick Cheney did not call his buddy a "Human Beehive" when he accidentally shot him while hunting. Read it here.

Hong Kong in Decline

While HK is busy with debating whether we need to have sales tax, minimum wage, maximum working hours, more active government involvement in industry...Singapore has quietly stolen HK's place in the World Bank's Doing Business ranking this year.

Read the WB report here.

Apple's Dilemma

No, no, this post has nothing to do with the burning of Apple Computers in Japan as reported in this WSJ story.

I am talking about Apple Daily, one of the most popular local paper here in Hong Kong.

From what I know the circulation of the paper has dropped in recent years (which paper hasn't?), and the paper has tried very hard to reinvent itself in order to lift sales.

The current management seems to think that the right way to reengineer the company and make it more innovative is to move people around (similar to the job rotation practice found in Japanese manufacturers like Toyota) and to get rid of those who are resistance to change (or considered to be old-fashion whatever that means). On top of that, you get a dose of authoritative management as well with the boss himself involving in most of the day-to-day operations. Should that be the way forward?

The short answer is: Nobody knows at this moment. Eventually market test will provide us with the answer.

But from an economic point of view, one can offer two observations:

1) Unless a culture of constant innovation is instilled into the operating routines of the organization when it is first created/composed, it is dubious that simply by moving people around internally, getting rid of some old staff and recruiting new ones will help transform an organization which lacks the "innovative genes/routines" into a more innovative one.

2) The heavy involvement of the boss in daily operations reminds me of central planning...how can one person presumably has all the relevant knowledge to make all those necessary decisions? The boss at Apple Daily is supposedly a follower of F. Hayek. How come he seems to forget the main lessons that are found in one of Hayek's monumental pieces "The Use of Knowledge in Society"?

Will This Guy be the Next US President?

Does he have a good looking face for the next US president? Apparently some US folks do...

Does he have the right credentials...well may be...

Thanks to Alex at Marginal Revolution for the pointer.

Walmart + Communist Party = Capitalism with Chinese Characteristics

Walmart, a post child of what a market economy could deliver for the benefits of many, has now got a Communist Party branch set up in one of its China outlets. What a funny combination!

Here is the story from SCMP.

Financial Globalization

Columbia's F. Mishkin has a new book on financial globalization. Read the first chapter here.

Your Personal Liberty or Your Life

Dick Posner weighed in on the ruling that the National Security Agency's conduct of electronic surveillance outside the boundaries of the Foreign Intelligence Act is illegal in WSJ. Here is the link.

Caltech's Philip Hoffman Reviews A Grief's New Book

Here is the link.

Bottomline:

"Will they all agree with everything Greif says? Perhaps not, but they will have to take him seriously, because his book represents the cutting edge when it comes to the study of institutions. Some readers may perhaps want more quantitative evidence, but they will have to admit that Greif's analytic histories are quite persuasive, and they will have to acknowledge too that appropriate econometric testing of the sort of game theoretical models Greif uses is still in its infancy. Other readers may worry that the historical evidence is perhaps consistent with different game theoretical equilibria and thus with different treatments of Greif's examples. They can certainly make their case, but in the end their accounts are likely to end up complementing Greif's analysis, rather than being a substitute for it."

Is Liquidity the Culprit of China's Alleged Overheating

With the latest investment numbers stronger than expected(read more here), it is expected that another round of macro-policies with the aim of cooling off the red hot Chinese economy is in the works.

Today's edition of SCMP reported that, "Yesterday's strong growth numbers and the excessive liquidity in the economy means the central bank must intensify efforts to drain capital from the financial system. With broad money supply having grown 19.1 per cent year on year in May and new lending having nearly doubled, to 209.4 billion yuan, People's Bank of China governor Zhou Xiaochuan said yesterday that the central bank would "fine-tune liquidity"."

Some commentators blame excessive liquidity as the culprit of the rapid lending growth, implicitly endorsed by Zhou as the above quote shows. Is Liquidity really the source of all evil?

China is still a developing country. That implies, at least at its level of development right now, capital is still a relatively scarce factor of production compared with its vast pool of labor. In other words, all that liquidity can be put to good use if the mechanism that allocates capital works reasonably well. Therefore, liquidity in and of itself should not be viewed as the culprit. By implication then, high investment growth should not worry us too much, again this is important, if the mechanism that allocates capital works reasonably well.

Unfortunately, the mechanism that allocates capital in China does not work reasonably well. The culprit, then, is the mechanism that allocates capital and in China's case, where stock market only plays a secondary role, that pretty much means banks, especially the big 4 state-owned banks.

According to Wen Wei Po (sorry no links, and the story is available in Chinese only anyway), about 50% of new loans made in the first quarter of this year were made by the big 4 state-owned banks. With so much capital allocated through state-owned banks, the quality of those loans are indeed questionable.

Bottom Line: Any measures that do not address the weaknesses inherent in China's capital allocation mechanism would not work in helping to lift the quality of its investments.

Why Workers Spend So Much Time in Office

A Russian lady who worked for a local company here in HK told a TV reporter one of the main reasons why she quitted working for somebody and started a business of her own:

She could not stand her colleagues goofing off for most of the day, and starting to work only when the end of the workday looms.

The situation that the Russian lady refers to seems to happen a lot in offices here in HK. And the question is why given that most white collar workers are not paid by the hour?

Part of the answer may be related to the fact that time serves as a proxy for a worker's contribution to the firm, and so by prolonging the workday and given imperfect monitoring, that kind of behavior would help build one's image in the eyes of the supervisor. In any case, I do not have a full answer.

The Most Touching Blogpost I have Read Today

Sorry folks, in Chinese only.

Here it is:

霍金千遠水路來香港，撞正世界盃，震撼力大減，兼且香港人實際，慣於望地，未有望天。對於講宇宙、談黑洞的霍金，叫座力相信會遜於曹仁超。
　　
那本《時間簡史》，英文版我大學時老早購入，每隻字我都明，串連一齊就有如佛偈，毫無頭緒。但這類經典，總要有一兩本看門口。
　　
講宇宙起源、講時間空間的書，除了是科學讀本，其實是最好的心靈雞湯。
　 　
當你心靈破碎，傷心欲絕，坊間各本騙人的、教你如何振作做人十二守則，對人絲毫無效。你應該拿起一本天文物理的普及讀本，例如霍金這本他用眼寫的小書， 發覺在中環以外，並非倫敦紐約，而是木星土星；再望遠一點，是一個黑暗無盡的宇宙。人生匆匆幾十年，只不過是彈指即過。再讀多幾頁，四度空間的space -time，看見那個漏斗型的圖說，頭昏腦脹，更覺得身邊的瑣事，不值一哂。
　　
再合上書，發覺愈看愈糊塗，看見底頁霍金的照片。洩露天機，慘遭重罰，靈魂被困於軀殼之中，與世隔絕。幸好上天還有憐憫之心，獨留雙眼這扇窗讓你透透氣。你沒有浪費生命，就用這扇窗將你所知的逐點逐點向外透露，要告訴世人，究竟宇宙是什麽一回事。

先有宇宙之大，後有不朽英雄，一本《時間簡史》，清洗心靈惆悵。

That is from Fong C Y's blog.

How much of the rise of Britain to world dominance by 1850 does the Industrial Revolution explain?

Not much, according to professor Greg Clark at UC Davis.

Here is the bottomline:

"Britain's rise to world dominance was a product more of the bedroom labors of British workers than of their factory toil."

Amazing, read the paper here.

Best Line I Have Read Today

"M.B.A. programs train the wrong people in the wrong ways with the wrong consequences."

That is from an interesting story in NYT about the value of having a MBA, read more here.

Does Education Teach Us Anything?

Yes, but not what you would expect though.

According to David Friedman:"Considerable parts of it appear designed to teach people to pretend to intellectual tastes and knowledge that they do not possess and that there is no good reason why they should possess."

If what Dave said were true, that might provide us with a novel explanation of the wage premium earned by workers with a college degree over those who don't have one. College graduates are simply better actors. Is there a way to test this implication of David's claim?

David's claim is also consistent with the signalling theory of education. We don't go through school because of what we are expected to learn there. So it does not matter if all those who go to school only learn about how to pretend to learn about intellectual tastes and knowledge that they don't have. The mere fact that we go through school is good enough to show that the school-goers have certain qualities, presumably valuable to employers, that non-school-goers do not possess.

And the quote from David can be found on his post: Ideas: Condi Rice and Walt Whitman

Is Democracy Needed for Rule of Law?

I had long believed that rule of law alone is sufficient for the maintenance and preservation of personal liberty. I had a long-held suspicion that democracy is not a prerequisite for rule of law to exist. But I was not 100% sure about my belief though, especially in the face of many arguments which claim that rule of law is a by-product of democracy.

That's until I read this yesterday:

"To regard the rule of law, surely one of the most crucial positive externalities an economy can possibly enjoy, as a by-product of democracy is simply erroneous and is belied by history.

The rule of law has prevailed in England from the end of the 17th century onwards. It dominated some aspects of civil and even public life in France under the absolute monarchy of the Bourbons. It established itself in Prussia in the 18th and in Austria-Hungary in the 19th century. None of these countries waited for democracy before submitting to the rule of law.

Democracy may produce a favourable climate for the rule of law to take root. However, it does not always do so, as witness some Latin American countries that adopted universal suffrage and majority voting as their means of choosing governments in the second half of the 20th century. Saying that they are not really democracies because they do not have the rule of law would be to turn the relation of the two into an empty tautology."

Read the whole thing here.

The Best Blog Post I have Read Today

1. Teaching Math In 1960

A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price. What is his profit?

2. Teaching Math in 1970

A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price, or $80. What is his profit?

3. Teaching Math In 1980

A logger sells a truckload of lumber for $100. His cost of production is $80. Did he make a profit?

4. Teaching Math In 1990

A logger sells a truckload of lumber for $100. His cost of production is $80 and his profit is $20. Your assignment: Underline the number 20.

5. Teaching Math In 2000

A logger cuts down a beautiful forest because he is selfish and inconsiderate and cares nothing for the habitat of animals or the preservation of our woodlands. He does this so he can make a profit of $20. What do you think of this way of making a living?

6. Teaching Math In 2010

Un hachero vende una carretada de maderapara $100. El costo de la produccion es $80. om

That's from Eric Ramusen at Indiana University.

How Businesses Fend Off Regulators

Today's edition of NYT has a fascinating story about how eBay helps curb government regulations, read the story here.

Two points are noteworthy about the story...

1) How Government Regulations are Out-of-tuned with Rapid Pace of Technological Change

In Lousiana, which is the focus of the story, those affiliated with eBay who had got their licenses had to go through a course which supposedly would inform them about their trade. What did they got instead?

"Ninety-nine percent of the course had nothing to do with our business...It was about traditional auctioneering, cattle and land and firearms."

2) How Good Intentions May Backfire

Louisiana Auctioneers Licensing Board, the agency which attempted to get eBay affiliates to be licensed, says its mission is to protect the public from "unqualified, irresponsible or unscrupulous individuals."

While the effectiveness of such license is questionable, given eBay's interests to protect its brandname and thus renders the on-line market a self-regulating one, the regulation does have an undesirable unintended consequence: job losses for those affiliated with eBay.

As the story has it: "[M]any eBay sellers do their trading part time or in addition to another job. "If they are overregulated by licensing fees...they will abandon their eBay business."

Hence the irony is this: the regulators kill the very market that it attempts to regulate.

Cooling China's Property Market, More Difficult than You Think

Over the last few months, Chinese government is increasingly concerned about its red-hot property market, and has launched a series of measures (read more here and here) in order to orchestrate a soft-landing.

Now of course a red hot property market is an outcome, a result of the interactions between and among different individuals and groups participating in an economy.

They are played by a set of rules governing their behaviour. So, before we can evaluate whether the problem in the property market can be properly addressed by the latest government policies, we have to figure out what those rules are.

China has a de facto federal system with substantial power, mostly economic, vested at the local level. Under the current fiscal system, land is the major source of revenue for local governments. Economic perfomance of the areas under their rein is one of the most important criteria for evaluating local officials' performance. Combining the two, then it should not be too difficult to understand why it is the interest of the local officials to see a boom in their local property markets.

The central government thinks differently, of course. For it's concern is mainly the stability of the overall economy. In other words, the rules that are now in place (fiscal rules, and those governing how local officials are evaluated) generate conflicting objectives between the local and the central governments.

Unless those rules are altered, it is hard to see how policies annouced by the central government can effectively deal with the red-hot property market.

Would it be Helpful in Keeping a Job if Your Teacher were a Nobel Laureate?

The Washington Post reported:

"Treasury Secretary John W. Snow, who has presided during a period of strong economic growth but at times seemed out of sync with President Bush, has informed the White House that he will resign in the coming days after three years as the nation's chief economic officer, a source close to Snow said..."

Read the story here.

Apparently, being a student of Nobel Prize winner Jim Buchanan back in the 60s at UVA did not help Snow keep his job. Here is an old story which mentions John as Jimmy Buchanan's student.

Marvel of the Market System

F. Hayek once used the word "marvel" to describe the operation of the market mechanism. Too abstract?

Take a look at the T-shirt on the left, read this and I reassure you you will be as impressed by the market as Hayek did decades ago.

And if you want to buy the T-shirt, here is where you should go.

Uncle Bus Goes Global

This is from NYT:

HONG KONG (AP) -- A six-minute film showing a grumpy man scolding a fellow Hong Kong bus rider for interrupting his phone call has become one of the most popular videos online.
''Bus Uncle,'' as the film is commonly known, has been viewed nearly 1.7 million times on the video Web site Youtube.com -- the second most-viewed video on the site in May as of Thursday -- spawning spoofs and new slang drawn from the ranting subject's emotionally charged soliloquy...

Read the whole story here.

See also my previous posts on this theme, here and here.

Game Theory, More Abstract than You Think

Is game theory useful? Yes, you say, at least knowing it got you an A in your graduate micro course. May be, and just may be, working in this area may help you publish in one of those high-fashion magazines (a term coined by UCLA economic professor Axel Leijonhufvud) like JET or Econometrica one day.

OK let me try this, is game theory useful in the real world, like helping us make better business decisions...

Uuuu...Mmmm...Well....Let's see...I am sure that there are examples...but I cannot recall at the moment...

Those are the exact responses of a panel of game theory pros when confronted with such a question, read more here.

HT to Pete Klein for the pointer.

Uncle Bus

I blogged about this the other day, and now the saga continues....read more here.

Corruption: Does Culture Matter?

Brilliant political economist from the Columbia Business School Ray Fisman's answer to that question is YES.

Here is the abstract of his paper:

Corruption is believed to be a major factor impeding economic development, but theimportance of legal enforcement versus cultural norms in controlling corruption is poorlyunderstood.

To disentangle these two factors, we exploit a natural experiment, the stationing ofthousands of diplomats from around the world in New York City. Diplomatic immunity meansthere was essentially zero legal enforcement of diplomatic parking violations, allowing us toexamine the role of cultural norms alone. This generates a revealed preference measure ofcorruption based on real-world behavior for government officials all acting in the same setting.

We find tremendous persistence in corruption norms: diplomats from high corruption countries(based on existing survey-based indices) have significantly more parking violations.

And here is the paper.

Hayek must have this in mind when he coined the term Spontaneous Order

Picture the following scene:

A young guy, a middle-aged man, both riding on a bus. The young guy patted the shoulder of the middle-age guy trying to let him know that he was talking way too loud. The middle-aged man became all worked up, stood up and started yelling at the young guy not knowing that everything was taped by a fellow passenger on the bus...

Pretty lame stuff you say. Sure, but that is exactly the point that I am trying to make here.

How come such a lame movie has so far viewed by more than 2 million pairs of eye-balls?

The reason is that, without anyone doing the planning, a proliferatoin of different versions of the original video is created soon after the original video is uploaded on the net. Now the video has a rap-song version, one with English subtitle...Watching the video has now become an artistic event for fellow internet viewers as a result of this collective creative exercise without a central art director.

That very phenonmenon must be what Hayek has in mind when he coined the term spontaneous order.

For those readers who do not understand Chinese, here is the version with English subtitles. (Warning: Strong language)

Lies, Damn Lies and Statistics

Gerald W. Bracey dug out the source behind three numbers in today's WP: 600,000, 350,000 and 70,000. These are, allegedly, the number of engineers produced in 2004 in China, India and the United States, respectively.

His conclusion:

"Statistics that end up as conventional wisdom even when they're wrong usually become popular by being presented as fact in a highly visible and respected source -- such as a cover story in Fortune or a National Academies report."

Read more here.

But who is to blame?

The news reporters who do not bother to check the accuracy of their numbers. Or the consumers of those numbers, like you and me?

If the responsibility is on us, the consumers, to verfiy the authenticity of the numbers, how much time can we spare each day for doing that? Time constraints imply that we are extremely easy to be misled by such statistics. Our decisions which are based upon at least partially on those statistics will be similarly affected as well.

Will competition among different papers ensure that reporters do their checking but citing statistics? One can only hope so, but I doubt it.

Also puzzling is why reporters are not as diligent in checking their numbers as one would expect.

To build up credibility and reputation (or simply to protect these attributes in the case of renown reporters), one would expect the reporters have the right incentives to do their checking. Is it because a number that is intended to stir up emotions of the readers matters much more in boosting sales than an accurate one? Afterall, the readers have no time to figure out the number's authenticity anyway.

Hobbsian Jungle, Russian Style

"In Russia's early transition days, amid the collapse of authority and resulting lawlessness, organized crime groups wielded great influence. Teams of armed thugs used to carry out takeovers, arriving at a businessman's door with little to back them up but the threat of violence, even murder. Indeed, contract murders reached a frequency of more than one a day in the mid-1990's.

Later, law enforcement, from the tax police to special forces units, played a role in forcing transfers of property in the scramble for assets of the former Soviet state.

In what became known as "masky shows," police officers, their faces often hidden behind ski masks, swarmed into a business to intimidate employees and force concessions from owners. The headquarters of the Yukos oil company, for example, were the scene of a series of high-profile masky shows. .

Now, the trend in business crime in Russia is decidedly white-collar — with the faking of documents, hiring of lawyers or payoff of judges — but no less insidious, Mr. Matthews and other business owners say."

That is from a story in NYT, read more here.

Questions I have:

1) What prompted the change in the form of property takings? Was it endogenous to some other changes in institutions?

2) Why companies did not hire private protective agencies to protect them from predators? One answer might be that only large firms had the resources to do so, but not for most mid and small size concerns...

A Tale of Entrepreneurship and Success

In this fascinating story, the tale of the rise and success of Southwest Airline is told through the recollections of its founders.

Why John K Galbraith Didn't Get the Nobel Prize

"Nobel prizes are sometimes awarded to scholars who are wrong for the right reasons, but almost never to those who are right for the wrong reasons."

Here is Bob Frank on John Kenneth Galbraith.

Ballooning Red Tape

"A report to be released this week by the Mercatus Center at George Mason University and the Weidenbaum Center at Washington University finds that the feds have also been on a regulatory rampage that needs squelching.

From 2001 to 2006, the number of federal regulatory personnel has risen by one-third (or 66,000 more snoopers); regulatory budgets are up by 52% after inflation; and the Federal Register -- which prints all that regulatory verbiage -- has climbed by more than 10,000 pages."

That is from today's edition of WSJ, read more here.

The BOOK

My former teacher Tyler Cowen wrote in his blog:

"If you want to read one book on how the economics profession works, this is it."

Read more here.

The book he is referring to is David Warsh's Knowledge and the Wealth of Nations.

Chicago's Bob Lucas wrote:

"David Warsh does a marvelous job with the story of Paul Romer and the new growth theory. His description of what Paul did is accurate and exciting, and it gives a great sense of the way theoretical economics is done today and of how it contributes to advances on the questions that Adam Smith and David Ricardo posed 200 years ago.”

For more info about the book, check this out.

China's Banks: Safest Place to Put Your Savings

Today's edition of WSJ reported that China is planning to launch a deposit insurance scheme similar to that found in the US, read more here.

Wait a minute you say, aren't Chinese banks already have implicit guarantee of some sort?

Indeed. Afterall, they are all state-owned banks, aren't they?

Hong Kong: A "Premier Knowledge Economy"

I know Hong Kong is fast shaping up as a leading "knowledge economy" when I learn about the following facts yesterday:

A guy with a high school diploma working as a lab technician earns US $ 5,385 dollars per month, and a guy with a Ph.D. in economics from the U.S. earns US $ 5,256 a month.

If such mismatch between talents and jobs can occur in a supposedly free market economy, one cannot even begin to fathom similar losses incurred under a centrally planned economy.

When Government Means Theft

"A new government in Bolivia, anxious to win public support, charges the big foreign oil companies with fraud and confiscates their local properties. The move generates applause among Bolivian citizens and attracts attention throughout Latin America.
The year: 1937.

Seven decades later, Latin America is experiencing another wave of nationalist fervor, fueled by old resentments and rising energy prices. Inspired in part by the economic nationalism of Venezuelan leader Hugo Chavez, new Bolivian President Evo Morales celebrated his 100th day in office Monday with a reprise of 1937: charging foreign oil firms with corruption and sending troops to seize control of the oil and gas fields."

Read more here.

As if Coase's 1960 piece never exists

"It doesn't have to be complicated. Estimate the monetary cost of the negative externalities associated with gasoline use, set the appropriate tax, and then do nothing else. The market price then sends the correct signal to investors about how to take advantage of new opportunities in alternative energy."

No, no, no, I did not take this passage straight out from Pigou's "Economics of Welfare." It is from a post written by economist Andrew Samwick at his blog, read more here.

Frankly, I am shocked by the fact more than 40 years after publication of "The Problem of Social Costs", there are still economists out there who buy into the whole Pigovian taxation approach in dealing with "externalities."

But does the term externality have any economic meaning at all?

Back in the 1970, Professor Steven Cheung wrote in "The Structure of a Contract and a Theory of Non-exclusive Resource", Journal of Law and Economics:

"The process of arriving at a useful concept of analysis is not only slow andpainful, but may also go astray and attain nothing useful. Someone begins withone example or observation, followed by a theory which is intuitively plausible.A theoretical term associated with a vague concept is coined. Examples of aseemingly different type emerge, which call for another theory. The process goeson. As examples and theories continue to accumulate, the different categoriesunder the same heading of analysis serve only to confuse and each associatedtheory becomes ad hoc. Such has been the fate of the concept of ‘externality.'"

That still rings true today!

When an Economist Meets a Politican

"The advice you have given me, sound that it may be, is essentially from the economic point of view, and I have told you, on many occasions, that I cannot always follow this advice as I am a politician and must gamble on the future."

That was what Ghana's Nkrumah told Arthur Lewis, a Nobel Prize winner in economics, while Lewis was the former's economic adviser.

The passage appears in a book on Arthur Lewis entitled "W. Arthur Lewis and the Birth of Development Economics."

Desperate Mickey

Hong Kong Disneyland turns out not to be a tourist magnet.

In a bid to attract more visitors, they have tried almost everything. Yes, I mean everything.

They have gotten rid of senior staff (or they quit on their own depending on whether you are looking at the matter from a shareholder or an employee perspective), they have tried issuing new tickets that allow visitors to use the same ticket to enter the venue twice, they have tried to be nice to the unions (yes, the unions) and now they try to be nice to the cab drivers!

Cab drivers, you ask. Yes, cab drivers I answer.

Here is the latest from SCMP:

"The city's 50,000 taxi drivers were invited to join the free ticket promotion in Tung Chung, Susan Chan Shou-san, publicity director of Hong Kong Disneyland, said yesterday."

Read more here.

Costs of Unanimity

WTO's rules dictate that trade deals have to be approved by all its members. The upside of this decision rule is that nobody gets screwed of course. Unanimity does have its costs however. It generates the possibility of hold-ups.

France is exactly doing this according to this Washington Post story.

Coase vs Demsetz on Externality

"Yet, Coasean analysis of externalities has been the subject of much
confusion, even disagreement. Demsetz (2003) in particular has
pointed to aspects of the Coase approach that, as a matter of both
economics and of government policy, he finds problematic. As a matter
of economics, Demsetz says, Coase’s focus on transaction costs is
not helpful in resolving questions concerning externalities."

This is from Fred McChesney in the latest issue of the Cato Journal. Read more here.

Bittersweet Tune

Every breath you take, Every change of rate,

Jobs you don't create, While we still stagflate,

I'll be watching you.

Every single day, Bernanke takes my pay,

When growth goes away, inflation will stay,

And I'll be watching you.

And:

Oh can't you see, the Fed's where I should be,

How my poor heart aches, at each mistake you make.

Recall the original song on which the lines above are based? The Police's "Every Breath You Take." Read more here.

Cultural Difference

In today's edition of WSJ, there is a fascinating story about how Americans are climbing up the corporate ladder within the big three Japanese carmarkers. One line caught my eye.

"You get on an airplane and the American will get right to work...We Japanese will watch the movie and drink."

Read the piece here.

Conference in Honor of Jack Hirshleifer

A group of renowned economists gathered in March at UCLA to pay their last tributes to UCLA economics professor Jack Hirshleifer. Here is the official website and here is a paper by Harold Demsetz on the development of economics. Professor Hirshleifer passed away in July last year.

Eureka! Or Professor Steven Cheung Got it Right, Again!

In a latest NBER working paper, Yale professor Peter Schott found that:

"China’s export bundle increasingly overlaps with that of more developed countries, rendering it more “sophisticated” than countries with similar relative endowments."

Read the paper here.

Indeed, Professor Steven N.S.Cheung has made similar remarks years ago in his Chinese writings. Hat tip to the Professor Cheung once again for his keen observations on China's economy.

Free Markets in Japan, Finally!

In the Sunday edition of the NYT, there is a story on growing income gap in Japan amid the economy's continued revival after a decade-long slump. Of course, in the eyes of the NYT, income inequality is a big minus.

"Today, in a country whose view of itself was once captured in the slogan, "100 million, all-middle class society," catchphrases harshly sort people into "winners" and "losers," and describe Japan as a "society of widening disparities.""

What brings about income inequality in the first place?

Shouldn't people who are more productive (in the value-creating sense) get higher rewards than those who are less productive? Unless every one is equally productive, the "100 million, all-middle class society" implies that Japan's labor market is not doing its job.

In other words, growing income inequality in Japan means that markets are finally allowed to work properly in Japan. And what's wrong with that!

One Loser SOE + Another Loser SOE = World Class Enterprise

A plan to merge two government-owned entities, MTR (an underground rail corporation) and KCRC (a railway company), has finally got the green light to go ahead. Read the government press release here.

Funny thing is, commenting on the merger, our head of the government said that "The merger will create a world class Hong Kong railway company and consolidate Hong Kong's status as Asia's World City." Read all of his comments here.

Without any plan for full privatization down the road, how the merged entity (which continued to be a state-owned enterprise albeit a giant one) could be transformed into a "world class concern" is a mystery that even Sherlock Holmes would find it tough to figure out.

And if HK really needs to depend on a giant SOE to consolidate HK's status as Asia's World City, we better call Beijing up and tell them: Beijing, Beijing, we have a serious problem!

Problem down the road as I see it. To placate populists in the legislature, the government will try VERY HARD to lower the prices for both the MTR and KCRC. To avoid losses, the government will further distort the local transportation market through additional restrictions on other modes of transport to compete with the new entity.

If you cannot charge a market price to recoup your fixed costs, you have to increase the number of customers by forcing those people who would not ride on the rail if given another option to become new customers. This is so because the railway business has relatively high fixed costs compared with the marginal costs of serving another passenger.

Thomas Friedman: Amateur or Guru?

What makes NYT columnist Thomas Friedman's The World is Flat such a big hit remains a mystery to me....I mean if you want to know about the impacts of globalization, why don't you get a book written by real experts in the field like In Defence of Globalization by J. Bagwatti or Free Trade under Fire by Doug Irwin (who is a student of Bhagwati).

Bagwatti's and Irwin's books are targeted at the general audience so they are written in an accessible language that is free of jargons. If you can get the stuff from the horse's mouth, then why bother with a merchant of second hand ideas like Friedman?

Am I missing something? Does Friedman really has something insightful and important to say on this topic?

Nop, nop, nop...

Read this insightful and negative review of Friedman's book by UCLA trade economist Ed Leamer here.

Quote of the Day

"Warning people about purported free lunches is one reason God put economists on earth."

That's a line from Greg Mankiw's latest post on health care, read it here.

Joe VS Hillary Clinton

Hillary Clinton(HC) : "I think a return to fiscal discipline, living within our means, is essential to our long-term health."

Joe, an Econ 101 student who doesn't use Joe Stiglitz's undergraudate text: That is easy, just ask the government to spend less, waste less and do less.

HC: "It is also critical to whether or not we control our own destiny as a nation. Red-ink fiscal policies will undermine America's competitiveness. We have to ask ourselves whether our taxing and spending policies are in line with our economic goals."

Joe: If she is referring to US as a nation when she mentioned "our economic goals", that is nonsense. For a country, unlike a person, cannot have its own goals. And if she is referring to each and every American citizens, then what she said is nonsense as well. For there is no set of economic policies that would make everybody happy.

HC: "America did not build the greatest economy in the world because we had rich people... We built the greatest economy in the world because we built the American middle class."

JOE: First of all, the market is not something that you build nor create. It emerges. Once you think otherwise, the government will then think that it has the ability to tinker with the operation of the market. Well, if you could create a market, it is only logical for you to have the ability to steer it onto some other path as well.

Second, the operation of the market does not favor any particular class. Yes, not even the middle class. Historically, markets, if unfettered, make the emergence of the middle class possible. But that is different from saying that the market has a bias towards certain class.

If you want to read more on Hillary's thoughts on economic policies, read the Washington Post story here.

Civil Society In China

In a story in NYT, it reported on the increasing effectiveness of NGOs in China in fostering the establishment of a civil society and in changing the direction of government policy.

"Officially, there are about 280,000 of them registered in China, an extraordinary number considering there were virtually none as recently as the early 1990's. Some experts estimate there are now two million to eight million such groups, many of them very small and most of them simply ignoring government registration requirements."

Read the whole thing here.

Who will be the Next Vice-chairman of the Fed?

This story in WSJ reported on who are the likely candidates.

James Buchanan Lecture Series

Deirdre McCloskey delivered the inaugural Jim Buchanan Lecture last week. The title of her paper is: The Hobbes Problem: From Machiavelli to Buchanan. HT to Marginal Revolution for the pointer.

Should Government Intervene when Externalities Occur?

A big problem with the argument that goverment action is justified whenver externalities occur in the market is the implicit assumption of the absence of externalities resulting from that very same government action.

That is the bottom line of this very intelligent post on the topic by Jeff Miron, you have got to read it.

Economic Logic: Casualty of Political Calculation

Here is the latest from WSJ, "French President Jacques Chirac, bowing to intense pressure from students and unions, announced plans Monday to replace a contested employment law that triggered massive protests and strikes across France."

Read the whole story here.

Here is what A. De Jasay has to say about Chirac and the recent riots:

"Many observers, including President Chirac, are convinced that the French are ferocious by temperament and must be treated with kid gloves, for if their violence is met by violence, mayhem and civil war will break out and blood will flow in the gutters.

France has one of the world's largest, and very efficient, riot police, the CRS that, however, is hardly ever used in politically sensitive conflicts for fear that worse might ensue. In his 11 years as president, Mr. Chirac has never faced down street crowds and has been especially quick to capitulate when all too necessary school and university reforms were met, as they always were, with protests by students and their teachers."

Read it here.

We Don't Have Clients; We Have Suspects!

"The US government during the Clinton Administration tried to make various agencies more client friendly. According to anecdote by John Nellis, the response of Customs officials to this initiative was "We don't have clients; we have suspects.""

That is from Bill Easterly's White Man's Burden, and John Nellis is a non-resident fellow at Center for Global Development.

Lords of Poverty

In response to a piece published in Cato Unbound by Bill Easterly, UCLA economist Deepak Lal wrote in response:

"The unpalatable truth for the many well meaning people who are moved by world poverty and want to do something is that, over the years, alleviating world poverty has become a large international business from which a large number of middle class professionals derive a good living.

They have been aptly described by a former East African correspondent of the Economist as the "Lords of Poverty."[2] Easterly's suggestions for making aid effective will merely provide them a new play! The truth is that aid is not only ineffective; it is actually counterproductive. It will be a cruel joke on the Amaretch's of the world if it is now believed that some bureaucratic fix of the aid machinery will get them to school."

Read the whole thing here.


BTW, Lal has a new book that will come out this year on Classical Liberalism. The cover of the book is shown here.

Playing For Real

In 1991, Ken Binmore published his excellent game theory text Fun and Games. Since then, readers like me have been waiting anxiously for him to bring this book up-to-date with recent advances in game theory.

Finally, Oxford U Press will publish the revised edition of the text with a new title Playing for Real. Can't wait to see that.

For those who are unaware of it, Ken has a book out last year entitled Natural Justice in which he uses game theory to analyse moral behavior.

Let Them Eat Cake!

In a negative review of Bill Easterly's book The White Man's Burden, World Bank economist Branko Milanovic wrote, "It is somewhat ironic, I think, that Bill Easterly, who has spent a large part of his life working on issues of growth, poverty and inequality in poor countries and whose knowledge and intellectual capacity is second to none, has written a book that, despite his protestation to the contrary, will be used to set back the agenda of poverty alleviation and provides an argument for those who have long argued that the best policy is to do nothing and ignore the poor world. Let them eat cake!"

Read it here and a short summary of Bill's book here.

The gentleman in the picture is Bill.

Greg Mankiw on the Austrian School

A student of Greg Mankiw asked him if he has read Human Action by Ludwig Von Mises. Here is his response:

"The truthful, if slightly embarrassing, answer is that I have not read the book. Explaining why may be somewhat edifying, however, so let me reflect on the reasons (not excuses) for my ignorance.First, most economists at research universities focus their attention on recent work. Things written more than twenty or thirty years ago are usually assumed to be irrelevant, out-dated, or incorporated into more recent work. We rarely focus on something like the Mises book (written in 1949) for the same reason that physicists don't read Newton in the original.

Second, at the mainstream schools where I have spent my education and career (Princeton, MIT, and Harvard), the economists of the Austrian school like Mises are often viewed as fringe figures. Rightly or wrongly, they rarely show up on reading lists. I am confident that while I was a student at Princeton and MIT, I was assigned not a single article by an economist in the Austrian tradition.That judgment might well be unfair. Another prominent Austrian economist is Frederic Hayek, who won the Nobel prize in economics. Cognizant of my ignorance of his work, a few years ago I read (and assigned in a Harvard freshman seminar) his classic book The Road to Serfdom. I thought it was terrific." Read the rest of his post here.

In case you are curious, read Human Action for free here.

Greg Mankiw on Outsourcing

Here is Greg Mankiw on Outsourcing and here is his blog which he uses to communicate with his students. Posted above is a picture of Greg, a nice one I would say.

Yes, it's George Mason again but not about Basketball

A former student at GMU recalled his fond memories of his education at George Mason in this story in WSJ.

Above is a picture of Enterprise Hall, where the Econ department is located and where I used to have an office with a view of the George's Hall, the site where Center for the Study of Public Choice is located...I sure have good memories of my education as well...GO MASON!

Trade Guru on Immigration

Here is J. Bhagwati's, a Columbia University economist, oped on immigration published in WSJ.

What is Missing in the US's Immigration Debate

The debate on a controversial immigration bill is brewing on the Capitol Hill, read the report here in the Washington Post.

The story said, "A growing body of economic research contends that the recent surge of foreign workers has depressed wages for low-skilled workers, especially for high school dropouts, and has even begun displacing native-born workers. That benefits employers, higher-income consumers and the economy at large, but it may exacerbate the problems of the working class."

The whole issue is framed as a distributional one, employers gain (because of low wages as the supply of unskilled labor surges) at the expense of low-skilled workers.

But let's look at it from another perspective, let's think about the new immigrants would enlarge the size of the US market, and an enlarged market means there are more opportunities for further specialization and division of labor and hence more opportunities for beneficial exchanges are opened up as result.

Jim Buchanan had a nice little book, though not directly addressing the issue of immigration, that touched on the topic of how the enlargement of the market extends the opportunities of specialization and how this will bring fruits to everybody involved.

Game Theory at B-Schools

WSJ reported that game theory is becoming more and more popular in MBA programs, especially with economists getting Nobels for their contribution to the field. Read the story here.

Indeed, there are several excellent game theory texts that have B-school students as their target customers. The most popular one is doubtless Thinking Strategically written by A. Dixit and Barry Nalebuff. Other important ones include Co-Opetition by Adam Brandenburger and Barry Nalebuff and Games, Strategies and Managers by John McMillan.

George Mason U. in Washington Post and WSJ

After GMU's basket ball team got a spot in NCAA's final 4, GMU suddenly becomes talk of the town.

Read the Washington Post story here and the WSJ story here and here.

When Google Goes to Washington

Northwestern University law and economics scholar Fred McChesney wrote a book on how the government, through mere regulatory threats, can solicit rents from businesses back in 1997.

According to professor McChesney, that theory (called rent-extraction theory) explains why we observe less regulations than we would have expected because a credible threat of regulation would be enough to bring about rents without the regulatory threats being actually implemented.

In NYT today, there is a story about how Google has to follow the footpaths of other low-tech firms in building up a strong presence in K street. The story tells another tale of how rent-extraction works in practice. Read the whole thing here.

Price Discrimination in Competitive Markets

"Standard economics has long held that firms can price discriminate only when they have monopoly power. Antitrust authorities and other regulators are thus tempted to use the existence of price discrimination as one indicator that a firm should possibly be subject to government investigation. In this monograph Professor Baumol shows that price discrimination not only exists in competitive markets but sometimes is a crucial feature of them. Baumol concludes by urging regulators to tread carefully when applying theory to policy. "

This is from a monograph written by Bill Baumol, a retired professor at NYU.

Price discrimination in a competitive markets, is that really a "new" discovery?

Professor Steven N.S. Cheung noted as early as 1983 in his What the Tangerine Seller Said, a book of his newspaper columns in Chinese, that his own experience from selling tangerine during the Chinese New Year was that price discrimination was widespread even when your neighboring stores were selling exactly the same things as yours.

Is Democracy a Western Thing ?

This is a question Amartya Sen posed in his WSJ oped, read it here. Sen answered negative to the question.

I am basically in agreement with his argument until he wrote:

"When it is asked whether Western countries can "impose" democracy on the non-Western world, even the language reflects a confusion centering on the idea of "imposition," since it implies a proprietary belief that democracy "belongs" to the West, taking it to be a quintessentially "Western" idea which has originated and flourished exclusively in the West. This is a thoroughly misleading way of understanding the history and the contemporary prospects of democracy."

I beg to differ. To me, "imposition" means something different from what Sen suggested above when applied in the debate on exporting democracy to other non-democratic country.

"Imposing democacy" means introducing democracy to a non-democracy countries without first taking local conditions into account. It is a criticism of the means through which democracy is introduced, not the end it self ie whether democracy should or should not be introduced in the first place.

That is, I suppose, the main lesson that one can draw from Bill Easterly's "The White Man's Burden" as well.

Using Legislation to Sabotage Competitors

NYT's David Leonhardt has written a telling tale on how entrenched airlines companies used the law to stifle competition, read it here.

The Costs of Saying No to Capitalism

French youth took to the street to protest free market policies...Washington Post's Steve Pearlstein does not find it so difficult to understand what caused these kids to take to the street to express themselves: The French see the free market as a villain.

"A telling poll released in January by the Program on International Policy Attitudes at the University of Maryland found that only 36 percent of French respondents felt that "the free enterprise system and free market economy" is the best system. That's the lowest response from any of the 22 countries polled and compares with 59 percent in Italy, 65 percent in Germany, 66 percent in Britain and 71 percent in the United States."

Pearlstein also pointed out, correctly I think, the government is to be blamed in causing such riots as well.

"After all, the supposedly center-right government that pushed through the new youth-employment contract is the same government that adamantly refused to give up subsidies for farmers, stepped in to prevent foreign takeovers of French companies and, just last week, demanded that Apple iPods accept music downloads from iTunes competitors (read: French competitors). But having declared, in effect, that markets cannot be trusted to generate socially and politically acceptable outcomes, the same government is now shocked to find that it doesn't have much credibility when it asks workers to trust markets when it comes to the terms of their employment."

But this is the sad part of the story:

"when you ask French university students who is the Bill Gates of France, they look at you blankly. It's not simply that they can't name one. The bigger problem is that they can't imagine why it matters, or why that has anything to do with why they can't find a good job."

Incentive Pay for Teachers

"A new pay-for-performance program for Florida's teachers will tie raises and bonuses directly to pupils' standardized-test scores beginning next year, marking the first time a state has so closely linked the wages of individual school personnel to their students' exam results.

The effort, now being adopted by local districts, is viewed as a landmark in the movement to restructure American schools by having them face the same kind of competitive pressures placed on private enterprise, and advocates say it could serve as a national model to replace traditional teacher pay plans that award raises based largely on academic degrees and years of experience.

Gov. Jeb Bush (R) has characterized the new policy, which bases a teacher's pay on improvements in test scores, as a matter of common sense, asking, "What's wrong about paying good teachers more for doing a better job?""

Read the whole thing here.

The story also contained responses from "educators" who said that test scores should not be the sole criterion to judge teachers' performance.

The implicit economics in this claim is this: teachers have to perform many different tasks and their efforts in most cases are difficult to evaluate. So by linking incentives to test scores alone, a relatively good indicator of teachers' efforts and their effectiveness, this claim implies that less efforts will be allocated to those other tasks to the detriment of students.

Will this happen? If efforts and their effectiveness are so difficult to measure in those other tasks (inspiring students say), how can we be so sure that teachers will not slack on those other tasks in the first place before the introduction of the pay for performance scheme? Now that with the incentive scheme, at least we will be quite damn sure that more efforts will be put in those tasks that will improve students' test scores.

Go Mason!

It turns out that George Mason has many other nice things to offer other than economics, law and info tech...

LA Times headline wrote: George Mason Brings Down the Champ. Read it here.

Another story also in the Times has this nice description of George Mason:

George Mason is a relatively new university, founded in 1972 as part of the University of Virginia system. Its original goal was to provide education in subjects of importance to the growing community of government workers in Northern Virginia. It has well-regarded schools of public policy and informational technology. It was mainly a commuter school until about 15 years ago.

But now George Mason is the largest university in the state. It has 29,000 students. It has two Nobel Prize winners in its economics department. It has a groundbreaking department of microbiology.