Build the Road, and the Cars Shall Come

Today's The Standard reported:

"The HK$7.8 billion Hong Kong-Shenzhen Western Corridor is being underused by as much as 89 percent, a government official admitted yesterday... the government had earlier estimated a daily usage of around 29,800 trips on the corridor - the fourth vehicular corridor to enter Shenzhen via Shenzhen Bay Port.

However, actual usage only rose from 1,400 trips in July to 3,256 in September, or about 11 percent of the estimate."

More here.

If a private company wrongly anticipates demand, the company will face financial problem. If the financial problem is severe enough, the company will go out of business. At the minimum, such failure will force the firm to learn from their mistakes and try to avoid the same error the next time around. That's the way the free market ensures that limited resources will be in the hands of those entrepreneurs who better anticipate what their customers want.

Unfortunately, this is not the way the government works. Instead, more infrastruture projects are in the pipeline according to this government document. The government never learns because it does not need to. It can tax and it can inflate.

The Cheung Theorem

"任何行业律师愈多，其权利界定愈有问题。称之为张氏定律吧。"

That's Professor Steven N S Cheung talking. More here.

My translation:

"Property rights delineation will be rendered problematic with the presence of a large army of laywers in a profession".

Should China Adopt a More Flexible Nominal Exchange Rate Regime?

Many people, economists included, have urged China to adopt a more flexible nominal exchange rate regime. (The emphasis is deliberate here)

Reasons for advocating such a nominal exchange rate regime are two-folded:

1) It would help facilitate adjustment in global current accounts;
2) It would enhance the effectiveness of China's monetary policy.

Latest research shows that both claims are way overblown. More here.

Milton Friedman vs Paul Krugman

Paul Krugman is a respected trade theorist. But he does not speak authoritatively on subjects on which he has no expertise. Monetary economics is not his field of expertise. Krugman’s research background does not qualify him as an authority on Milton Friedman’s work.

Krugman’s scholarly publications rarely mentioned Friedman and,when they did,they acknowledged the contributions of Friedman and monetarism in a way that contradicts his (2007a) essay on Friedman. Friedman’s reputation is intact despite Krugman’s deplorable efforts to denigrate him and his contributions.

Damn, here's more from Anna Schwartz, a long time friend and co-author of Milton Friedman.

Here is the target of Anna Schwatz's attack, Paul Krugman's "Who was Milton Friedman?"

Markets for Everything, Japanese Edition

Want to dress like a street corner vending machine? Yes, you can do it in Japan. More here from NYT.

State Failure?

It says that through various activities — extortion, usury, contraband, robberies, gambling and Internet piracy — organized crime accounts for 7 percent of Italy’s gross domestic product.

The "it" above refers to a study conducted by confesercenti, an association of small businesses. More from NYT here.

Next time when you visit Italy, make sure you pronounce the word "pizza" in the right way and not "pizzo" which means protection money given to the mafia.

If you want to learn more about the economics of mafia, start at this classic treatment on the topic.

Masonomist

Years from now, perhaps people will be saying that something big got started recently at the George Mason University department of economics. Maybe if you become a Masonomist now, you will be getting in early on a trend that will soon catch on much more widely .

Read on. Here's more on Masonomist, and more.

Needless to say I am proud to be a Masonomist myself.

Leonid Hurwicz, LSE, and Kaldor

We all know that L Hurwicz just won the Nobel prize in economics. We also know that London School of Economics is an excellent school for learning economics. And finally, we know Nicholas
Kaldor was a famous economist.

I guess not everybody knows that Hurwicz was a student of Kaldor at LSE. It would be interesting to find out whether Hurwicz had studied under Hayek or not as they were both there around the same time in the 1930s.

More on Hurwicz here. Hat tip to David Warsh for the pointer.

China Contemplates Reform on Stake Cap on Banks

The China Banking Regulatory Commission is evaluating whether to raise or lower the stake cap on foreign lenders' holdings in banks.

Chairman Liu Mingkang told The Standard it is now looking into synergies and problems brought about by the 20 percent cap. Any decisions will be announced by the first quarter of next year.

More here.

China should let foreign lenders have higher stakes in Chinese banks, that should be an indispensable way to wean state banks from their dependence on taxpayers' support. More importantly, it will intensify competition among banks and improve credit allocation.

Notable Book

International trade has shaped the modern world, yet until now no single book has been available for both economists and general readers that traces the history of the international economy from its earliest beginnings to the present day. Power and Plenty fills this gap, providing the first full account of world trade and development over the course of the last millennium.

More here.

A Simple Explanation of Mechanism Design

In its current form, mechanism design theory provides a general framework to study any collective decision problem. A mechanism design problem has three key inputs:

· A collective decision problem, such as the allocation of work in a team, the allocation of spectrum for mobile telephony or funding for public schools;
· A measure of quality to evaluate any candidate solution, for example efficiency, profits or social welfare;
· A description of the resources – informational or otherwise – held by the participants.
A mechanism specifies the set of messages that participants can use to transmit information and the decision that will be taken conditional on the messages that are sent.

Once a mechanism is in place, participants effectively “play a game” where they send messages (e.g., a bid in an auction) as a function of their information. The goal is to find a mechanism with an equilibrium decision outcome (sometimes required to be unique) that is best according to the given measure of quality. The strength of mechanism design lies in its generality: any procedure, market-based or not, can be evaluated within a unified framework.

More here.

Best Journal Article I Have Read Today

"As it is, it is one of the great paradoxes of economic science that every act of competition on the part of a businessman is evidence, in economic theory, of some degree of monopoly power, while the concepts of monopoly and perfect competition have this important common feature: both are situations in which the possibility of any competitive behaviour has been ruled out by definition."

From Paul J McNulty, Economic Theory and the Meaning of Competition, Quarterly Journal of Economics, 1968.

Professor Steven Cheung on Hong Kong vs Shenzhen

今天，深圳的人口刚好高于香港的一倍，但政府的支出却倒转过来，香港不知高出多少倍。只看这一点，不用看其它，中国大事开放——像香港那样放，或港深一体化，香港要大事调整的项目实在多，而在这调整期间，香港人会苦不堪言。

That is from Professor Steven Cheung's blog, more here.

Listing Decisions, Chinese Style

From today's Hong Kong Standard:

The Chinese government will support state- owned enterprises to list shares in Hong Kong, contrary to reports that there are directives to limit public floats overseas, the head of the State- owned Assets Supervision and Administration Commission (SASAC) said yesterday.

SASAC chairman Li Rongrong said it was not up to the agency to determine on which market SOEs should list - rather, it is the boards of companies that make those decisions.

More here.

Question:

Now the companies are state-owned enterprises (SOEs), though they have already gone through a corporatization process. I probably can safely assume that the government holds controlling stake in these companies.

If true, presumably I can safely assume that government representatives dominate the boards of these companies. If so, then we have a situation where government officials, as resprenstatives of the state's interests, will determine where government-owned enterprises will list. Do you really believe that they will make that decision based on economic criteria and not on political ones.

If not, what's the difference between delegating the authority to make a listing decision to the board of the SOEs and having it made by your colleagues, Mr Li?

Winners Please....

The Nobel Prize in economics was awarded today to three Americans for their work in mechanism design theory, a branch of economics that looks at the design of institutions in situations where markets do not work properly.

Leonid Hurwicz of the University of Minnesota, Eric S. Maskin of the Institute for Advanced Study in Princeton, New Jersey, and Roger B. Myerson of the University of Chicago shared the award for “having laid the foundations of mechanism design theory,” the Royal Swedish Academy of Sciences said.

More from NYT.

Assorted links and comments from the blogsphere:

Freakonomics Blog; Marginal Revolution, more from the WSJ.

Prominent Labor Economists Said M-Form Soceity Has Arrived in the US

Here's the hypothesis evolving among these and other academics. Technology and globalization are boosting demand for the most-educated workers, those prized for abstract or conceptual skills. Top hedge-fund managers aren't being replaced by computers; they're harnessing them, to their great profit.

By contrast, technology and globalization are eroding demand for workers who do routine tasks in factories and offices, many of whom are high-school or even college grads. The voice-mail system does away with switchboard operators; back-office software eliminates bookkeepers; robots replace assembly-line workers. Or the work is shipped overseas to a foreign factory or an office linked to the U.S. by fiber-optic cables.

But technology and globalization are not eroding demand for personal-service workers. Those tasks can't be done by computer or shipped offshore. The services have to be delivered here in the U.S. -- and in person -- either by natives or by immigrants.

Here's more from WSJ.

FT Reviews Super Crunchers

Here it is. Do buy the book, highly recommended.

What's Wrong with That?

A. A story in the paper indicated that the government would soon announce a tax cut;

B. The stock market index went up on that very same day;

C. An editorial writer at a prestigious international paper attributed the stock market's performance to that story.

What's wrong with that?

Answer: Other factors might have caused the rise in the stock market index, not the news about the possible tax cut.

And the editorial is found in Wall Street Journal. I kid you not.

Read it for yourself here.

Books, More Books

1. The Conscience of a Liberal by Paul Krugman.

2. Memoir of Nobel prize winner Jim Buchanan, a new and expanded version of what used to be called "Better than Plowing".

3. In Defense of Monopoly.

Is It Possible to Explain Human History in 7 Chapters?

Yes, according to a forthcoming book by Nobel prize winner Doug North, Stanford political scientist Barry Weingast and U of Maryland economics professor John Wallis.

Manuscript could be downloaded here. Thanks for Dani Rodrik for the pointer.

海盜經濟學

林行止專欄今天提到學弟 Peter Leeson 有關海盜經濟學的研究，有興趣的讀者可上他的網站下載論文。

The Tyranny of the Market?

When fixed costs are substantial, markets provide only products desired by large concentrations of people. As a result, people are better off in their capacity as consumers when more fellow consumers share their product preferences.

Small groups of consumers with less prevalent tastes, such as blacks, Hispanics, people with rare diseases, and people living in remote areas, find less satisfaction in markets. In some cases, an actual tyranny of the majority occurs in product markets. A single product can suit one group or another. If one group is larger, the product is targeted to the larger group, making them better off and others worse off.

The above is from Joel Waldfogel's forthcoming book The Tyranny of the Market. (有看林行止專欄的對 Joel 應不會陌生，他就是批評聖誕節交換禮物的傳统是浪費的那位經濟學家。)

Questions to Joel:

1) I just fail to see how the fact that others' wider product range compared with mine will affect my welfare. For that to go through, it seems you need to have a very specific kind of utility function.

2) Wouldn't there be incentives in the market to lower those fixed costs so that more consumers with preferences at the tail end could be served?

Best Book Review I Have Read Today

In the same interview, Ms. Klein also tellingly remarked, "I believe people believe their own bulls---. Ideology can be a great enabler for greed."

When it comes to the best-selling "Shock Doctrine," that is perhaps the bottom line on what Klein herself has been up to.

That's from a book review on Naomi Klein's Shock Doctrine by my former teacher Tyler Cowen in the New York Sun. More here.

A New Phase of Financial Globalization?

No, yes? Read it for yourself here.

"Econometrics is in deep Trouble"

This line pretty much summaries McCloskey and Ziliak's position on the current usage of signifinant tests in econometrics:

"If McCloskey and Ziliak are right—that merely “statistical,” Fisherian significance is scientifically meaningless in almost all the cases in which it is presently used, and that economists don’t recognize this truth of logic, or act on it—then econometrics is in deep trouble."

The paper is part of a (an on-going?) debate between McCloskey/Ziliak and Kevin Hoover/Siegler.

I like this bit of the paper best (on the response of the academic elites to the McCloskey/Ziliak thesis) :

One eminent econometrican told us with a smirk that he agreed with us, of course, and never used mechanical t-testing in his own work (on this he spoke the truth). But he remained unwilling to teach the McCloskey-Ziliak point to his students in a leading graduate program because “they are too stupid to understand it.”

Another and more amiable but also eminent applied econometrican at a leading graduate program, who long edited a major journal, told us that he “tended to agree” with the point. “But,” he continued, “young people need careers,” and so the misapplication of Fisher should go on and on and on.

Bill Easterly on ABD

Highlights:

-- United Nations Conference on Trade and Development, a body that has long distinguished itself by promoting all the bad ideas that stifle both trade and development.

-- But any Asian leader who hasn't already figured out that trade should be mainstream after Asia's world-historical trade explosion is past the point of rescue anyway.

-- Successful trade booms (and the accompanying infrastructure demand) come about through letting free market entrepreneurs run wild to find things foreigners want rather than consulting ADB bureaucrats on designing a "national development strategy."

-- All of which goes to show that the ADB's fundamental problem is that it needs advice from successful Asian countries more than they need advice from it.

More this WSJ oped.

Chicago, MIT, George Mason University

[A]t Chicago, they say "Markets work well. Let's use markets."

At MIT, they say "Markets fail. Let's use government."

At GMU, they say "Markets fail. Let's use markets."

More here.

China's Alleged Pro-FDI Bias

The hypothesis of the existence of such pro-FDI bais in China originated from MIT professor Huang Yasheng.

Now some reseachers garner evidence indicating that such a bias does not exist:

"Recent arguments that China's FDI inflow is inefficiently large because weak institutions deter domestic investment while special initiatives attract FDI are thus either unsupported or not unique to China."

Read the paper here.

Terracotta Army

This is a very nice photo of terracotta army taken by Chris Lee up at HK Digital Vision. Check it out here.

The Economics of Private Army

The private security firm Blackwater is again on the news, here is a recent NYT headline story.


Are private security contractors really trigger happy cowboys as some pundits choose to believe they are?

Finally an insider says no. And this insider pretty much spells out the logic of why private security personnel is far more economically than formal military personnel.


Bottomline:

"[C]ontractors are cost-effective. Blackwater contractors, for example, are generally paid $450-$650 a day. More important, unlike U.S. servicemen, they usually receive no benefits and are paid only for the days they work."

Here is the story.

Question: I am curious whether the contractors or the companies which hire them pay for the ammunition used in the war zone. Who pays for ammunition, holding other factors constant, surely would determine the trigger pulling behaviour of the frontline private security contracters.