Tuesday, February 28, 2006

Economic Hit Man Gets Hit!

Who would believe that on top of Freakonomics, Confessions of an Economic Hit Man also made it to the NYT bestselling list!

I have never read the book, but I have read a few write-ups of those who did. His thesis strikes me as nothing but a rehash of the first world exploiting the third world kind of theory. What surprises me is a lot of those reviews that I read, however, tend to give a big thumbs up to the book. Until now that is.

The author of the World's Banker, Washington Post columnist S Mallaby on Monday wrote "
The world, says Perkins, is governed by a shadowy "corporatocracy," an invisible empire of wealth and greed that deploys a combination of bribes, assassins and seductive women to enslave the poorest countries... his account of international finance is itself largely a dream...Even if you believe the stories of seducers and assassins, which other journalists have questioned, Perkins's basic contentions are flat wrong."

Read the whole story here.

Monday, February 27, 2006

Would You Rather be a Dog under Such Circumstances?

"This is a country in which dogs can get a hip replacement in under a week and in which humans can wait two to three years," said Dr. Brian Day.

Guess which country Brian is referring to? Would you rather be a dog than a human under such circumstances? No, no, no this is not a war-torn, corrupt, and underdeveloped nation that is hard to locate on the map...it is

Find out here.

Hat tip to Russell Roberts at Cafe Hayek for the pointer.

Sunday, February 26, 2006

Unintended Consequences of Human Action

"Until he was 40, Hobbes was a talented scholar exhibiting modest originality. Versed in the humanities, he was dissatisfied with his erudition, and had little exposure to the exciting new breakthroughs achieved by Galileo, Kepler and other scientists who were then revolutionizing the scholarly world.

One day, in a library, Hobbes saw a display copy of Euclid's Elements opened to Book I Proposition 47, Pythagoras's theorem. He was so astounded by what he read that he used a profanity that his first biographer, John Aubrey, refused to spell out: " 'By G__' Hobbes swore, 'this is impossible!'." He read on, intrigued. The demonstration referred him to other propositions, and he was soon convinced that the startling theorem was true.

Hobbes was transformed. He began obsessively drawing figures and writing calculations on bed sheets and even on his thigh. His approach to scholarship changed. He began to chastise philosophers of the day for their lack of rigour and for being unduly impressed by their forebearers. Hobbes compared other philosophers unfavourably with mathematicians, who proceeded slowly but surely from "low and humble principles" that everyone understood.

In books such as Leviathan, Hobbes reconstructed political philosophy by establishing clear definitions of terms, then working out implications in an orderly fashion. Pythagoras's theorem had taught him a new way to reason and to present persuasively its fruits."

Read the whole thing here.

Friday, February 24, 2006

Why We Need International Trade Statistics?

Arnold Kling asked in his latest blogpost, "Why do International Trade Statistics Matter?"

The puzzle, as Don Boudreaux's article points out, is that such statistics have minimal economic significance in acutuality. My guess is that international trade statistics matter for the reason why we want to collect them in the first place.

1. Tax (customs duties) may be one reason why government would want to collect such statistics.

2. Some countries may decide that they want to promote certain industries, so they would need international trade statistics to help them implement their industrial policies....saying by taxing certain imports or subsidizing certain exports.

3. Another reason may be related to trade laws and the political system. Say if you have a law in place that allows you to seek help from the government when your industry is harmed by "unfair foreign imports". What you first need to do of course is to collect evidence, and the place to start is of course starting to collect international trade statistics.

Thursday, February 23, 2006

Larry Summers

It is official, Larry Summers will quit his job as Harvard's president.

Read the story in NYT here.

The above picture of Larry was taken in mid 1970s at a Brookings event.

Wednesday, February 22, 2006

The Predicament of Homeschooling

In a series of posts at his blog, David Friedman has made a very strong case for homeschooling, read it here, here and here.

I am all for home schooling. Indeed, I had written several pieces in support of home schooling when I was an editorial writer.

Now I am aware that homeschooling has a potential problem and this problem originates from the signalling theory of education.

No one has said it out loud, but it seems one of the implicit assumptions that the signalling theory needs in order for it to work is that schooling that has to be provided by a formal educational institution. It works like an intermediary between potential employers and empolyees, kind of like the relationship between parties who use the bank as an intermedirary for discharging their obligations involved in transactions. They trust the bank, not each other.
(Question: In the case of education, is this one of the reasons why accredidation is needed?)

Such seems also to be the case for education. Homeschooling changes all this. Will going through the same number of schooling at home be treated as the same as that acquired through formal educational institutions? Will the signal sent through home schooling be credible?

I see two possible solutions to solve this predicatment of homeschooling:

(1) One is that as more and more people switch to home schooling, the market for some sort of certification institution will emerge and it will help distinguish between good homeschoolers and bad ones.

(2) In a way, reputation of the home schoolers' parents are already performing this certification function.

Suppose during an interview you chaired, one candidate told you David Friedman taught him for 15 years at home while the other kid said some guy named Gary Shiu taught her at home for the same number of years, which one would you hire?

Sunday, February 19, 2006

Paul Just Doesn't Get it!

In today's edition of the Hong Kong Standard, commenting on whether the government should cut taxes or not, HK Institute of Certified Public Accountants chairman Paul Chan suggested caution with tax cuts. Read it here.

His argument is that "our economy is sensitive to external factors and greatly influenced by the US and the mainland economies, we must be prudent."

Paul, do you mean that money left in the government's vault can help counteract the influences of these external factors then? If so, why do you think the government is better able to spend our money in counteracting the negative effects of these external factors than we do?

Or, do you mean that these external factors will simply go away as long as money is left in the government's vault rather than in our wallets through tax cuts ?

Robert Fogel on China's Growth Potential

I am not allowed to cite this new paper by Chicago economist and Nobel Laureaute Bob Fogel on China, but it is a nice rebutall for all those Chinese doomsayers out there.

Are Your Interests the Only Thing Stockbrokers Care About?

In a NBER paper, the researchers find evidence that:

" An individual analyst will raise his recommendation proportionally to the recommendation that he expects from other analysts. This is intuitive. A given recommendation does not make senses in isolation, but only relative to the recommendations of other analysts. If no one else in the market is issuing recommendations of “market underperform” or “sell”, an individual analysts may give the wrong signal by issuing such a recommendation even if he believes the recommendation is literally true."

Read the paper here.

This paper is important because:

1) Some economists complain about game theory for its lack of empirical content. A good way to defend the usefulness of game theory, as a tool, is to derive implications from the model, and subject them to rigorous testing. This is what the paper does.

2) If peer pressure leads stock analysts to give similar recommendations about stocks at the same time, and buyers tend to follow analysts' advice in their stock picks, then this may very well be one of reasons for why herding behavior is observed in the stock market.

3) The result lends support to Keynes' famous analogy of the stock market as a beauty contest.

4) Further avenue for research is find out whether there is opinion leader in the stock market and if so, what helps establish the status of an opinion leader and what are the implications of such opinion leaders have for the stock market.

Friday, February 17, 2006

This Blog is Listed !

This blog is listed!

Check this out, before I accidently come across this site, I don't even know this thing exists. I do not bet on becoming rich on this though.

Thursday, February 16, 2006

Professor Steven Cheung and Contract Theory

A reader of my earlier post asked: "it seems you have become a blind-follower of him (here the reader is referring to professor Steven N.S. Cheung). He claim[s] to have invented the contract theory. Apparently, this claim is not shared in the profession."

Is it true that professor Cheung, as this reader claims, is the only person in the world who believes that he is the pioneer of the field contract economics?

Dean Lueck at U of Arizona wrote a paper entitled," Yoram Barzel and the New institutional Economics." On page 3, footnote 6, he wrote: "Indeed Cheung (1969) can lay claim to first possession of the idea that share contracts are designed to tradeoff moral hazard against risk avoidance. Stiglitz (1974) is usually thought to be the first and is most often cited as such."

Cheung (1969)of course refers to his book "A Theory of Share Tenancy." Need I say more?

To Lie or Not to Lie, That is the Question

A friend of mine back in the US once told me, in the job market, everybody lies. What she means is that when potential employees go for an interview, they lie about their experiences and abilities.

If employers are rational, they should be able to realize that employees lie at job interviews and so would adjust their assessments accordingly. That is, they will discount the claims of the potential hires. The problem is: in a job market where everybody lies and employers response accordingly, what happens to somebody who does not lie?

That friend of mine does not lie in job interviews, and she has a tough time finding a good job despite execellent credentials. The reason, I guess, is that if 98% of potential employees lie at job interviews, it is only reasonable for the employers to pursue the strategy of discounting what job interviewees have to say no matter what. Even if my "poor" but honest friend does not lie, still her credentials will be appropriately discounted by her interviewer as well. Her credentials, though impeccable, then do not stand out from the rest after discounting.

So should pooling (ie. telling lies at job interviews if most people do) be a dominant strategy then? Are there efficient mechanisms for employers to figure out who is lying and who is not? (Schooling isn't helpful in this case, because job seekers in my friend's case have all got the same number of years of schooling.)

But then I have known someone who also does not exaggerate his abilities but is doing quite well today. One of my teachers Yeung Wai-hong up at Next magazine told me this funny story the other day indicating how prevalent it is for employees to lie about their abilities (even for those who have been hired).

When he first started out, he was invited to a dinner party where a big name in his field was sitting right next to him. At one point during the dinner, the big name suddenly asked him what he thought Hong Kong's economic growth would be next year. After pausing for a few seconds, slowly but firmly and with confidence, Yeung told the big name he had no idea whatsoever. Later on after the dinner party, a colleague of the big name went up to Yeung and said to him," You are the first person I know who has the guts to admit that he does not know something."

Can we say that Yeung's success can be attributed to his honest strategy then?

I doubt it. I think his case is more of an exception rather than the rule. What do you say?

Theory Without Contracts

Professor Steven N.S. Cheung likes to tell this tale that happened in the late 1960s in his Chinese writings.

At a conference on marine fishing in Vancover, attendants were busy discussing ideas of a presenter right after he finished. Suddenly, somebody standing close by the window with a harbor view said in a loud voice, "Look at that, a fishing boat!" All of a sudden, everbody moved over to the window and watched it.

The professor used the story to make a mockery of those economists who do not know how the real world works. Think about it, a bunch of economists specializing in marine fishing had not seen a fishing boat before that day!

Out of curiosity, I flip through the most recent treatise in a field (contract theory) professor Cheung single-handedly invented in the late 60s in his monumental book "The Theory of Share Tenancy". The name of the treatise is called, surprise, surprise, "Contract Theory,"written by two renowned experts P. Bolton at Princeton and M. Dewatripont at ULB published by MIT press last year.

What I find is shocking:

1) A book more than 700 pages long, neither cited nor analyzed one single contract on planet.

2) There is NO acknowledgement of Cheung's contribution to the field! And yes, "The Theory of Share Tenancy" is not cited in the reference.

What has become of scholarship?

Monday, February 13, 2006

When Milton Friedman Talked, We Listened

Here are some excerpts from an interview with Milton Friedman:

Q : The inflation rate in America as well as globally remains historically low, even as oil prices skyrocket. Why?

Friedman: Inflation is a monetary phenomenon. It is made by or stopped by the central bank. There has been no similar period in history like the last 15 years in which you’ve had little fluctuation in the price level. No matter what else happens, this will maintain as long as the US Federal Reserve maintains strict monetary policy and control of the money supply.

Q: China has registered tremendous growth since 1979 through what might be called a “market Leninist” model, or an “authoritarian free-market system” like the Pinochet government you advised in Chile. Can this model last?
Friedman: No. The same thing will happen in China that happened in Chile. Political freedom will ultimately break out of its shackles. Tiananmen Square was only the first episode. It is headed for a series of Tiananmen Squares. It cannot continue to develop privately and at the same time maintain its authoritarian character politically. It is headed for a clash. Sooner or later, one or the other will give.

If they don’t free up the political side, its economic growth will come to an end—while it is still at a very low level.

The situation is not all bleak. Personal freedom has grown greatly within China, and that will provoke ever more points of conflict between the individual and state. There is a new generation that is educated and travels abroad. It knows firsthand the alternatives out there. So, the authoritarian character is softening somewhat.

Hong Kong is the bellwether. If the Chinese stick to their agreement to let Hong Kong go its own path, then China will also go that way. If they don’t, that is a very bad sign. I’m optimistic.

Read the whole thing here.

Kids, Turn on Your TV, Now!

M. Gentzkow and J. Sharpiro, in their new NBER paper, found that:

"Our preferred point estimate indicates that an additional year of preschool television exposure raises average test scores by about .02 standard deviations...

For reading and general knowledge scores, the positive effects we find are marginally statistically significant, and these effects are largest for children from households where English is not the primary language, for children whose mothers have less than a high school education, and for non-white children."

Kids, press the On button, NOW!

Sunday, February 12, 2006

Do Journalists' Overconfidence in Themselves Leads to Media Bias?

I started reading Nassim Taleb's extremely interesting book "Fooled By Randomness" last week and a line in the book caught my eye.

"Why don't most journalists end up figuring out that they know much less than they think they know?"

Trust me, this characterization of journalists' over confidence in themselves is right on. As an editorial writer for a local paper, I was once questioned why I had to quote Milton Friedman's famous line on inflation because he thought the truth of Friedman's statement (about inflation being a monetary phenomenon) is so elementary that it should be known by anyone without any training in economics! If it is indeed so elementary...then why economists like Friedman and Hayek had to fight so hard in alerting people about the inherent inflationary bias inherent in the then fashionable Keynesian economic policies?

Two thoughts:

1) Unlike journalist, a lot of people are really stupid. They cannot see the wisdom contained in the allegedly elementary proposition of Friedman's, so they have to be convinced many times before they can understand that excessive money causes inflation. A related question is: Are the smart people self-select to become journalists?

2) Journalists are just like everybody else. They just think they know more than they actually do as the line quoted above said.

Personally, I think no.2 is very likely to be the reality. And I believe that overconfience on the part of journalists, who think they are better than others, who think they are out there to change the world, is at least one of the major reasons leading to liberal bias in the media.

Thursday, February 09, 2006

Milton Friedman and Modern Macroeconomics

David Laidler, retired professor at the University of Western Ontario and a famous historian of economic thought has recently written a pair of papers on the evolution of macroeconomics. Both are well worth your time in reading them. Enjoy!

The first one is called, "Milton Friedman and the Evolution of Modern Macroeconomics" and the second one is called, "Keynes and the Birth of Modern Macroeconomics."

Tuesday, February 07, 2006

What's Wrong with Conventional Mode of Education?

David Friedman wrote:

"One of the assumptions built into the conventional version of K-12 schooling, private and public, is that there is some subset of human knowledge, large enough to occupy most of twelve years of school, that everyone needs to know. That assumption is false. There is a very short list of skills–reading, writing or typing, and simple arithmetic are the only ones that occur to me–that almost everyone will find worth learning. Beyond that, education involves learning things, but not any particular things. The standard curriculum is for the most part an arbitrary list of what happens to be in fashion–the subjects everyone is required to pretend to learn."

"One observed result is that most children regard education as unpleasant work, to be avoided when possible. Another is that schools spend six years teaching things–arithmetic, say–that the average kid could learn in a year or two. If he wanted to. A third is that we end up with high school graduates many, perhaps a majority, of whom do not actually know many of the things they have spent all those years pretending to learn."

Read the post here.

In public school, the educational bureaucracy imposes the curriculum from above. Hence, the choice of curriculum is made to fit the interests of the bureaucrats rather than the needs of the students. So while the curriculum may make little sense to the students and their parents, hence abitrary as Dave said, it has an internal logic of its own if one looks at the curriculum from the perspective of the bureaucrats.

What about private schools or schools funded through a voucher system, does Dave's comment apply with equal force? What if the whole point of going to school is not to learn something useful, as Dave seems to think it should, but is simply a way of sending a signal.

Incidentally, there is a debate going on at Econlog on whether education is simply a signal, read the relevant post here.

Monday, February 06, 2006

Just When You Think Beauty is Skin Deep

Here is what a new NBER paper said about the impact of beauty on criminal behavior:

Using data from three waves of Add Health we find that being very attractive reduces a young adult's (ages 18-26) propensity for criminal activity and being unattractive increases it for a number of crimes, ranging from burglary to selling drugs. A variety of tests demonstrate that this result is not because beauty is acting as a proxy for socio-economic status. Being very attractive is also positively associated adult vocabulary test scores, which suggests the possibility that beauty may have an impact on human capital formation...

These results suggest two handicaps faced by unattractive individuals. First, a labor market penalty provides a direct incentive for unattractive individuals toward criminal activity. Second, the level of beauty in high school has an effect on criminal propensity 7-8 years later, which seems to be due to the impact of the level of beauty in high school on human capital formation, although this second avenue seems to be effective for females only.

Read the paper here.

Sunday, February 05, 2006

Moral Dilemma

You encounter a handicapped little boy/girl on the street asking for money, and you know as a fact that some parents deliberately have their children's limps chopped off in order to make it more credible that their children deserve your charity.

Choices open to you:

Option one

You give some money to the kid but at the risk of providing help to someone who does not deserve it in the first place. Worse, you may unintentionally encourage more parents to chop off their kids' limps to make a living! (Kind of like the Type II error in statistics)

Option two

You refuse to give money to the kid but at the risk of failing to help someone who really can use some assistance, say the kid lost his/her limps in a car accident. (Kind of like the Type I error in statistics).

Sad fact: the above scenario is not a fake one but one can easily encounter while walking on a busy street in Hong Kong.

What would you do?

Thursday, February 02, 2006

Principled Agents? The Political Economy of Good Government

The title of this post is the name of a forthcoming book by Tim Besley at the London School of Economics. The book manuscript is available here.

Wednesday, February 01, 2006

The Common Factor that Powers Growth in China and India

China's growth miracle has long been explained by economists as the product of a decentralization reform strategy (in terms of the devolution of economic decision making power, not political authority, to the lower level of governments), read a good overview of this thesis here and here.

What I do not know, until now that is, is that the same reform strategy also characterizes India's reform strategy. Read this brand new working paper by Raghuram Rajan and his coauthors from the IMF and find out more yourself.