Monday, December 21, 2009
That's from Stanford's John Taylor on Rose Friedman, read it here.
Thanks Milton and Rose for their unfailing efforts to promote the cause of free markets. In times like this, where everyone thinks Keynes is the economist to turn to, we free market economists need to follow the footsteps of Milton and Rose in resisting the temptation to let the government take over affairs which should remain in the private domain.
Who said this?
Wong May-wan, wife of newly minted Nobel Lauerate (Physics) Charles Kao. The line is taken from this story.
For those who do not read Chinese, let me try to translate this line:
Sunday, December 13, 2009
Sunday, December 06, 2009
Ronald Coase: My Once and Future Mentor
Steven N.S. Cheung
I arrived in Chicago in the fall of 1967 to take up a Post Doctoral Fellowship in Political Economy. Soon after settling down at the I-House, I went and knocked on the door of Ronald’s office. Rather timidly I introduced myself: “My name is Steve Cheung, a student of Armen Alchian. I spent three years reading your paper on social cost.” Having said so I noticed how Ronald’s office was immaculately clean and tidy, with everything arranged on the shelves like the Tiananmen parade this past October 1. My heart began to beat faster when I noticed that right there, on one of the shelves, were all eight editions of Marshall’s Principles lined up in order.
Ronald was sitting and reading a book, and the desk had nothing on it except the one book. I was standing there staring at the Marshall editions, trying to see where the order may have been misplaced. It took some time because the various editions were indicated in Roman numerals. Deciding that there everything was on order, I heard Ronald ask, still reading: “What is my paper on social cost about?” I was taken aback by such a warm response from a man who was ‘up there’, paused a few seconds, and replied: “Your paper is about the constraints subject to which market contracts are made.” He looked up, then slowly stood up, smiled, shook my hand, and mumbled something to the effect that at long last someone understood his paper. He asked whether I already had lunch, and would I join him for lunch. Of course I had not had lunch.
That was the beginning of a fruitful friendship. We often walked the Chicago campus to discuss ideas and the proper directions economics should take. In and out of the economics profession Ronald is the most firm-minded man I have ever met. This firmness inspired me as it rendered a feeling of strangeness in dimension, but we had no difficulty finding subjects of common interest to talk about. He was the master, and I was the student seeking to become a master. I was revising my doctoral thesis on sharecropping for the U of Chicago Press at the time and was expanding a paper on the choice of contracts. Ronald strongly supported what I was doing. We both thrived on intuition. We shared the view that we must investigate what is going on in the real world, that economics must be capable of being applied if it is to be of interest, and Ronald endorsed my insistence in keeping the theory simple while digging deep into the facts. From Armen I gained a thorough understanding of demand, and from Ronald I learned how to handle cost. It is essentially a combination of the law of demand and the concept of cost that have underlined all my economic writings ever since, supported by details of facts whenever possible.
In December 1980, at the AEA meeting in Detroit, Ronald urged me with his usual firmness to return to teach in Hong Kong. He said China was opening up, and that my knowledge of economic systems, combined with my command of the Chinese language, made me the only qualified person to explain to Beijing about economics if they wanted. It was perhaps too ambitious a task to attempt. Years later, apparently unhappy about the development of economics, Ronald urged me to advance our kind of economics in China. Again, an ambitious task! I never expected to achieve any measurable results. I am no reformer, but I took Ronald’s advice, results or no. Almost 30 years have gone by, during which time I published some 1,600 articles in Chinese. A search on the Chinese Internet suggests that the results are astonishingly measurable. Of course I know that a lot of what happens on the Internet does not count, but ripples there have been aplenty, and some results seem like waves. There is no smoke without fire, I presume.
I have had the honor to acknowledge my intellectual debt to Coase on two public occasions. First, for Ronald’s retirement from the editorship of the Journal of Law and Economics in 1983, I published a piece entitled “The Contractual Nature of the Firm.” I started thinking about the subject when discussing things with Ronald in 1968: this was followed by an in-depth investigation of piece-rate contracts in Asia, but the accumulated ideas did not see the light until 15 years later. This article is still being cited quite a bit today. A second tribute, which I composed with pride and anticipation, was when the New Palgrave invited me to write on “Ronald Harry Coase.” Years later people told me the piece was submitted to Stockholm.
Wednesday, December 02, 2009
A noteworthy paper on Coase and Neoclassical Economics is written by Harold Demsetz for this conference. I have read it and would blog more about it later.
Monday, November 23, 2009
I met Mario once when I was attending the FEE Austrian seminar, a real scholar and gentleman. It was also at FEE where I met Israel Kirzner for the first time.
Speaking about Austrian Economics, my teacher Richard Wagner would have a new book on the subject due out in early next year entitled, "Mind, Society and Human Action."
Saturday, November 21, 2009
Friday, November 20, 2009
Cutie Economics: A Review of Superfreakonomics
Suppose you were an economics professor. Let's say you run into a colleague down the hall and start commenting on how cute his economic research is, your eyes would most likely turn black as soon as you done talking. Your colleague most likely would reciprocate your praise with jabs straight to your face. The reason for the violence is simple: you just don’t describe an economist's work as cute. It would be treated as an insult, period. After all, have you ever heard anyone describing John Maynard Keynes' or Milton Friedman's work as cute? Even just once?
Economists have used their skills to answer some real hard answers. During World War II, Milton Friedman used technical economics to find out the optimal size of fragments of an anti-aircraft shell to maximize its effectiveness. Another Nobel Laureate Tom Schelling applied game theory to the armament race between the US and the Soviet Bloc during the cold war era. One could label such novel applications of economic theory as cool, but certainly not cute.
Some economists did try to write books that attempted to project a different image about economics, to “cutify” economics so to speak. "New World of Economics" written by economists Dick McKenize and Gordon Tullock, came to mind as a prime example of that genre. The result, nevertheless, could hardly be described as a big and lasting success.
That changed in 2005. Steven Levitt, a professor of economics at University of Chicago paired with New York Times writer Stephen Dubner hit it big with their new pop economics book entitled “Freakonomics” that year. Their formula of success? Well, let's just say they successfully project an image of economics that no authors before them have done before or dare to do so. They make economics looks cute. Four years later, Levitt and Dubner do it again with a sequel called “Superfreaknomics.”
The message of the new book is clear: Incentives matter. With that message, it immediately follows that people would choose the least costly way to achieve their goals given a menu of alternatives. In many real life situations, however, it simply is hard for the untrained eyes to figure out what the least cost action is. Now what is so intriguing about the book and what makes it such a good read is the authors' ability to walk the reader through a maze of seemingly impenetrable facts and render them comprehensible. It is Sherlock Holmes at his best. An example might help illustrate what I am talking about here. Combing through accident statistics, the authors convincingly reveal the counter intuitive result that it is actually safer to drive home drunk than to walk home drunk. In other words, the expected cost of driving home drunk in terms of the chances of losing one’s life in accidents is actually smaller than that of walking home.
Similar style of analysis is also at the heart of the controversial Chapter 5. This chapter, dealing with topics on global warming and possible solutions to the problem, draws fire from all quarters including Nobel Laureate Paul Krugman. To its critics, this chapter portrays an inaccurate picture of the urgency of global warming and makes exaggerated claims of the potential effectiveness of eco-engineering. There are other environmental issues covered in the book that critics also find wanting. I think these criticisms miss the mark. The message in that chapter, as in others, is that we need to do some hard thinking whether the current ways of dealing with global warming are indeed the least cost methods of doing so. Nothing more, nothing less.
Further elaborations and extension of material already covered in the book could have made it a better one. In Chapter 1 on prostitution, for instance, the authors report that customers who purchase prostitutes' services pay an extra 16 US dollars if they have to go through a pimp (p.38). The authors then go on to point out that those customers who use the pimps as middlemen also tend to purchase more expensive services.
Now the authors could have further explored the relationship between paying extra for a pimp’s services and getting more expensive services from the prostitutes. Two economics professors Armen Alchian and Bill Allen have pointed out decades ago that if a fixed charge per unit is applied to both cheap and expensive variants of a good, the expensive variant becomes relatively cheaper. As an implication of the Law of Demand, a larger quantity of the more expensive variant of the good would be sold. Economists call this the “Alchian and Allen Theorem." A wide range of phenomena like why relatively more expensive apples are exported relatively to cheaper ones can be explained by this theorem. This theorem seems to apply with equal force in the market for prostitutes' services.
Similarly, the authors could have used the story with regard to the police's effort to arrest pimps (p.40) as a real world example of rent dissipation. A rookie cop who tried to crack down on prostitution thought arresting pimps an effective means of achieving his ends. His acts backfired. For once the original pimps were put behind bars, the value of being a pimp was then up for grab. The ensuring competition to be the next pimp turned brutal, and the value associated with the vacant pimp job was competed away.
But those are minor quibbles of an otherwise freaky book. As an added bonus, if you care to read about "the first instance of monkey prostitution in the recorded history of science," there it is on P. 215. And no, I like the book not because my favorite economist Professor Steven N. S. Cheung's work (the paper they cited is "The Fable of the Bees: An Economic Investigation," Journal of Law and Economics, April 1973) is cited on p. 175 when the authors discuss the problem of externality. Go get it and prepared to be freaked out.
Wednesday, November 18, 2009
Monday, November 16, 2009
Thursday, November 05, 2009
Organizational efficiency cannot be established simply by knowing the properties of organizational forms...The second erroneous notion is that the efficiency of an organizational form can be determined by transaction cost considerations.....(p.9)
My quick response to the first point:
Now what professor Demsetz refers to in his first point is that exogenous conditions may render it efficient to have commons in one location while private property in another...so one cannot make a judgement on the efficiency properties of an institutional arrangement by looking at the organizational form and its properties alone (ie commons vs private ownership).
The key word here is alone. Even if professor Demsetz's point is valid, ie one has to examine exogenous conditions which govern/dictate an organizational form, there might still be choices to be made by economic agents. For instance, while both commons and private property are organizational forms which would help individuals to tackle their day to day problems under a set of given exogenous transactions, one organizational form might still be better than (less costly to maintain and operate) the other. Hence, the properties of the organizational forms might still matter even if we pay heed to professor Demsetz's point.
Or do we really have to?
Once a given set of exogenous conditions are set/given, by implication of the maximization postulate, wouldn't the least cost organizational form be automatically taken up by individuals? If so, why bother with the properties of the different organizational forms at all? Because we know that whatever properties the ultimate choice of organizational form would have (common vs private property), they would be optimal in any case. What is, is efficient.
Let us call this point "Organizational Properties Irrelevant Theorem", what do you think?
Wednesday, October 28, 2009
One is never prepared for such things in life. Think of it this way. As an free market economist, you talk about how a person's separation from his job only means that other jobs might be waiting for his application..bla bla bla....It may take some time, but he would find his match anyway if he or she searches hard enough. You say all this in a cool and almost cold-blooded manner.
But now imagine this. What if that person is your best pal? your spouse? your best graduate school room mate? your brother? Can you tell him straight in the face: no problem, what you are encountering is only a transitory phenomenon, and the labor market soon or later would come up with a job to match your skills.
No, I cannot. Hence, I did not say a word to my friend when I first heard the bad news.
My role, then, I realize, is not to be an economist. I am his friend. I am only a listener.
Then it hits home to me that, may be, just may be, every economist who does not believe in free market might have similar experiences of what I have just said above. It is thus not surprising to me at all that some economists hold such skeptic views on the market. They start blaming the free market for their loved ones' plight. Their personal experiences might have clouded their view.
Adam Smith, in his Theory of Moral Sentiments, did mention something like a person is more likely to care about his little finger than the sufferings of peoples thousand and thousands of miles away. But I don't know whether he went on to examine how this could affect peoples' perception of the free market.
But here is the real puzzle: Why others who share similar experiences of what I have encountered today stick to their original free market beliefs despite the bad experiences? How could they? Can they tell their loved ones what I did not dare to say to my friend. Answer is, I don't know. But do you?
This is a really bad day.
Wednesday, October 21, 2009
This is from Nathan Myhrvold former Chief Technology Officer at Microsoft.
The line refers to the controversies stirred up by Chapter Five of the sequel to Freakonomics, Superfreakonomics. Read more for yourself here.
I will soon write up a book review for a local paper here in Hong Kong (and yes it will be in English), hopefully soon. And yes I have read it already. My bottomline assessment: better than the last one.
Tuesday, October 13, 2009
And yes, I still think that Professor Steven N S Cheung has a shot at the prize.
Wednesday, September 30, 2009
Tuesday, September 29, 2009
The biggest issue of course is how to resolve the credible committment problem:
That is, how to prevent the government of the developing country to renege on its promise to allow a foriegn set of institutions to be implemented on its territory.
In this interview, Paul nicely addressess this issue. The piece is interesting throughout, but I like this bit especially:
"Economists seem to think that we should propose things that are acceptable and that political systems will pursue, but that we should avoid proposing or even discussing things that are controversial or politically incorrect.
I think we’d do our jobs better if we just said what’s true without trying to be amateur politicians. "
Thursday, September 24, 2009
Friday, September 18, 2009
Sunday, September 13, 2009
The lament is made by LSE's Willem Buiter, read more here.
Monday, August 31, 2009
This is from Professor Steven N S Cheung's column (in Chinese) today. Read more here.
Wednesday, August 12, 2009
"Rather than wait to be forced into caloric transparency, Yum! Brand is embracing it. The Louisville company, owner of KFC, Taco Bell, Pizza Hut, Long John Silvers, and A&W, has pledged to post calorie counts at its 3163 corpoate-owned locations nationwhile by 2011..."
Why Yum! Brand active attitude towards mandatory calorie disclosure, you ask.
Well, the answer is this:
"Yum is also helping to lead a lobbying effort in Washington to extend any federal law to stand-alone restaurants."
And why is this bad?
The story goes on to reveal the answer:
"The National Restaurant Assn. says calculating calories may be too costly for small restuarant owners."
In other words, Yum's lobbying effort would help raise its rivals' costs and drive them out of the businesses not because Yum is better at what it should be good at, delivering good food at lowest possible cost. But because Yum is far better in lobbying than its rivals.
The whole story is here.
Tuesday, July 28, 2009
Monday, July 27, 2009
Thursday, July 16, 2009
Now, Hong Kong's economy has consistently been ranked as one of the freest economies, if not the freest economy in the world.
Economic theory tells us that the presence of competition renders it impossible for exploitation to occur. As Professor Steven N S Cheung said in his latest column:
七十多年前英国的鲁宾逊夫人（Mrs. Joan Robinson）推出雇主剥削劳工的可能性，但只可以在缺乏雇主竞争的情况下出现。 (Gary's translation: Seven decades ago, Mrs J Robinson pointed out the possibility of labor exploitation in the absence of competition among employers)
Intense competition among firms should be one of the main characteristics of a Hong Kong's free market economy. If that is the case, there should not be exploitation. And if there is no exploitation, why the government is rushing to introduce minimum wage? Something is seriously wrong here.
Wednesday, July 15, 2009
Sunday, July 12, 2009
The gist of Cowen's argument is this:
But what if those institutions (Gary's note: big banks) start to arise naturally, from market forces, as indeed they will at some point? Should they be discouraged or shut down or somehow taxed at disproportionate rates?
Yes or No?
The answer can be find in this book, and this is a recent profile of one of the authors the book. And yes he is from Chicago's Business School.
Thursday, July 09, 2009
What amazes me is the kind of argument that has been used to support the construction of Mickey Land in the first place and now its extension. The argument for building Micky Land, as least as it appears to me, is the following:
1. Build it (means Micky Land) first, and visitors would come!
Couple of years down the road, not that many visitors show up, the argument for extension relies on this:
2. Not that many people turn up because the park is too small. Build a larger park and visitors would come.
Amazing indeed. My sense is that if the whole enterprise is fully funded by the parent company of the local Micky Land, it would have been shut down a while ago. Amen.
Sunday, July 05, 2009
What interests me is whether, with a fixed charge of 50 cents per bag, and say if you are contemplating to buy just one item(suppose you need a bag for this, otherwise the constriant is not binding anyway), a customer would pick a relatively more expensive item than he or she would without the plastic bag charge. The reason for this is that the relative price of the more expensive item should fall with the introduction of the plastic bag charge.
I do not invent this line of analysis of course, this is only one application of the Alchain-Allen Theorem.
Friday, July 03, 2009
But there is a deeper conceptual issue here. One that goes to the heart of traditoinal welfare economics. It is the presumed existence of a social planner whose objective function embodies the interests of all members of the society. In other words, the social planner chooses the best course of action which maximizes the society's welfare function. Think about this. Other than implicitly assuming that there is an alternative, optimal consumption pattern which maximizes the welfare of society, how could one lament that the actual pattern of consumption involves over-consumption?
But this way of looking at the problem of overconsumption is wrong headed as Jim Buchanan long pointed out in the 1950s. There is no such social planner. To think there is is to commit the error of the fallacy of composition, that if at the individual level, the chooser picks among alternative choices within constraints, then this must also be true for the society as a whole.
There is another way to think about overconsumption and that relates to incentives. And that is the modern way of thinking about over-consumption. Individuals' might under-consume or over-consume if the consumption of a good generates externalities. (Over-consumption if the externalities are negative and vice-versa) Obesity is a good example. A lot of people lament that more and more people are eating too much resulting in a rising number of obese adults (or even children). The lament usually follows with the complaint that public health resources are being diverted and re-allocated to cure illnesses that are caused by obesity, implicitly ranking those other uses the public health resources are previouly devoted higher than the current ones (used in curing illnesses which result from obesity). In this sense one can then conclude that when people make consumption decisions, they do not take into account the consequences of resources being redirected to cure illnesses resulting from their decisions. Over-consumption thus results.
But let's think beyond this stage. Why I do not take those health consequences into account when I make my consumption decision? Is it because public health services are offered by the government? How can one fail to incorporate such negative health consequences resulting from over-eating if one were to shoulder all medical expenses?
From this perspective, over-eating can only occur with the backdrop of a particular institutional set up, here a public health care system. And if the health care system is privately provided, over-eating stops to be a problem. In other words, in the second way to look at over-consumption as an incentive problem, whether the claim makes sense or not depends on the institutional set up within which individuals make decisions. With private health care, individuals internalize the health consequences of their eating decisions, and over-eating as one manifestation of the phenomenon of over-consumption becomes irrelevant as a public policy problem.
Wednesday, July 01, 2009
A line on page 157 caught my eye:
"Galbraith(Gary's note: he is referring to Harvard economist John Galbraith)...likened American corporate executives to Soviet apparatchiks: the bureaucratic administrators of a vast system geared toward overconsumption and waste."
Galbraith of couse is concerned about the bigness of some American enterprises. But it is totally wrong-headed to compare such large corporations in the US with those giant sized SOEs found in the former Soviet Union. To see where Galbraith went wrong, just think that the size of a firm in the US is a result of competition, not imposed from above as some divine order by the planners at the top of the Soviet government. To miss this point leads one to question Galbraith's understanding of basic economics.
More generally, the Institutionalists of which Galbraith belong worry that economic theory which has been built upon a period where firm sizes are small would not be applicable to a situation where firm sizes are large. So they are worry about the divergeent of interests between managers and shareholders. True. But if they just go a step further, based upon the economic theory the applicability of which they questioned, they should see the conflict between managers and shareholders also implies an opportunity for someone to figure out a profitable way to resolve such conflict. There is a five dollar bill on the sidewalk as they say. Indeed, the emergence of the market for corporate control and institutional investors where shares of publicly listed firms are once again concentrated in a few hands are attempts to resolve such conflict in a profitable manner.
I have always found the attack on capitalism for its encouragement of over-consumption puzzling?
Who set the dividing line beyond which consumption becomes excessive? God? Or John Galbraith or some other government official? And what's wrong with over consumption? If the person in question places a higher value on the stuff he or she consumes than the rest of the society, what's wrong if her or his consumption level exceeds the dividing line? Of course, I realize there are a lot of objectives other than attaining the best use of resources, but those ain't and should not be part of the research focus of economists in my humble opinion.
Tuesday, June 30, 2009
So what should we do about it? I bet Mr Fung is going to say that we need more resources to be devoted to building new public housing, to buying better medical equipment as well as employing more medical staff, and more jobs for building roads to nowhere, tennis courts where no one uses, railways where utilitzation rate stays low....
Does he understand that more of these things require that we have less of other things? Who is going to pay for these things? And why? How can he tell the things we get as a result of giving up other things are more valuable than those things that we have (or are forced) to give up?
Monday, June 22, 2009
It is ranked above:
Indiana U, Bloomington, ranked 91;
U of Washington, Seattle, ranked 100;
George Washingtonm, ranked 130.
HT to Greg Mankiw for the pointer.
Thursday, June 18, 2009
Very last thing. What would you say to someone starting graduate study in economics? Where do you think the big developments in modern macro are going to be, or in the micro foundations of modern macro? Where does it go from here and how does the current crisis change it?
[Samuelson's response]: Well, I'd say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that's the raw material out of which any of your conjectures or testings will come.
And I think the recent period has illustrated that. The governor of the Bank of England seems to have forgotten or not known that there was no bank insurance in England, so when Northern Rock got a run, he was surprised. Well, he shouldn't have been. But history doesn't tell its own story. You've got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.
Tuesday, June 09, 2009
Here is a bio of Larry in Wiki, and here is Larry's dissertation, "Free Banking in Britain" available free for download courtesy of IEA in England.
I met Larry a couple of times back in my graduate school days, twice when I visited the campus of U of Georgia where Larry used to teach, and once when I was attending a FEE Austrian Economics Seminar up in New York with my fellow classmate Wayne. Larry is a softspoken gentleman, and a graduate of UCLA.
HT to Taking Hayek Seriously for the pointer.
Monday, June 08, 2009
This is from Professor Steven N S Cheung's latest column, more here.
Several implications follow:
1. In situation where the problem of information asymmetry is serious, and where the government intends to intervene , we should expect more officials to act in ways that contravene public interests, like soliciting bribe, defining rights in such a way which would benefit their supporters...etc
2. It cautions against those who automatically ask for the visible hand to step in when information asymmetry prevents the market from discharging its ususal function.
The same asymmetry information which negatively affects the operation of the market also encourages or provides a better cover for officials to benefits themselves instead of working for the public interests. So the results generated by government intervention might be worse than that delivered by the market.
Furthmore, even if the incentive problem articulated by Professor Steven Cheung is resovled, say all officials are Angels, you would still encounter the Hayekian type knowledge problem. For officials would need to know exactly when to intervene and how to intervene. As the Professor mentioned, "但他们要懂得分辨哪些工作他们要做，哪些应由市场处理". We differ on this point because the Professor thinks the officials would do a pretty good job in this area if the incentive problem articulated by him could be ignored. I am far less sanguine about the officials' ability to resolve the knowledge problem.
Wednesday, June 03, 2009
Tuesday, June 02, 2009
Now Bryan Caplan has offered another answer in addition to that offered in Hayek's work:
[A]ll successful politicians are big liars by the absolute standard we routinely apply to the people we personally know.
You can read a condensed version of The Road to Serfdom here for free.
Sunday, May 31, 2009
Saturday, May 30, 2009
More here. Blows again are exchanged between Columbia's Jeff Sachs and NYU's Bill Easterly.
Tuesday, May 26, 2009
"Besides, the sight of two middle-aged white men mud-wrestling on African aid may entertain the audience."
Read more about their latest exchanges here.
the negative health consequences of being overweight and even obese will generally be significantly lower for children than for adults. The reason is that aside from very extreme obesity, the really harmful effects to overweight children will not usually kick in for another 25 or more years when they are in their forties or older. However, one can reasonably expect sizable progress during the coming decades in the development of drugs, such as lipitor, that will reduce the health consequences of high cholesterol and excess weight for heart conditions, diabetes, and some cancers. From that perspective, perhaps even ignorant and impulsive children are not acting so stupidly by indulging themselves in their eating since the future will likely see the development of drugs that will alleviate many serious medical conditions.
I see an externality being generated here. Say if the kids do not eat so much junk food or drink that much soda, they would not get overweight or even obese...then resources that would have been dedicated to cure illnesses which are byproducts of being overweight and obese could be used for something else. Afterall, scarcity rules. No?
BTW, as I have moved to a new job, and the position I am in does not allow me to freely comment on whatever stuff I like, hence the non-frequent up-dates of this blog, but I will try. So stay tuned.
Tuesday, April 07, 2009
Friday, March 27, 2009
Before Americans — or Canadians — put too much stock in this imaginary future, however, they should ask if a regulator could recognize excessive risk and fragility as it began to emerge, could spot the point at which a boom that delivered socially productive innovation became a destructive bubble and subsequently design measures to halt the transformation without also discarding productivity gains. And they should ask how this wisdom would be translated into regulations that could be understood, followed and enforced by ordinary human beings in an environment where disagreements about how to interpret them will inevitably arise, and where decision makers’ own interests are affected by regulations’ interpretation.
The crucial point, which must not be missed in a populist rush to re-regulation, is that today’s financial systems in the U.S. and elsewhere are not the product of an unregulated market, but of a long history of interactions between regulatory interventions and private innovations in response to them.
The above is from the extremely wise Canadian monetary theorist, a student of the late Milton Friedman I believed and a retired professor at U of Ontario, David Laidler.
There are other bits in the piece where Secretary Geithner should pay attention, like this one:
First, as the U.S. financial system reconfigures, its evolution may be no more satisfactory under a newly minted set of rules designed to prevent past accidents than it would be if the process were driven by piecemeal, profit-seeking trial and error on the part of the private sector.
Regulators and the politicians who oversee them must remember that the profit motive is ever present, and that those who found ways to make money under past regulatory models will seek to do so under the next regime, too. The trick will be to design incentives so individuals’ behaviour stabilizes the system, rather than undermines it.
Read the whole thing here. And a list of David Laidler's works could be found here.
Thursday, March 26, 2009
All workers decide to take a long vacation at the same time.
That is what I learn as part of the then State of the Art Macroeconomics. Seriously hope that those economic gurus who are at the helm power do not subscribe to that view.
If you were the President, imagine what your response would be if you senior staff told you, "you know what, my former professor told me that the current downturn has nothing to worry about, high unemployment only reflects workers have similar preferences with regarding to their leisure/labor choice." Amen!
Tuesday, March 10, 2009
It's a story about Quants, yes the math genius/nerds (delete whatever is appropriate) that have some commentators blamed them for indirectly causing the current financial mess through their math models which help create all the complex financial products.
But if math geeks and their models were indeed the source of the current problem, how reliable would it be now that governments all over the world are using similar models created by the same geeks to help assess whether banks are viable (the US Treasury is stress testing the major banks as I type and I know as a fact that HKMA, the local banking sector watchdog, asks local banks to perform such stress test all the time).
Monday, February 23, 2009
The unanimous opinion among The Thugz was that you must base your work around a time-tested law of ghetto capitalism: losers must die in full view. What? This doesn’t make sense. O.K., well, let me explain. Your first mistake (more accurately, your predecessor’s error) was to mix the bad apples (banks) with the good (banks).
By doing so, you forgot what makes capitalism so much fun: winners win at the losers’ expense, and everyone gets to watch and laugh. Sort of like public hangings, except reported on the financial pages. Otherwise, why read The Wall Street Journal? (my emphasisi in bold)
The moral is: don’t ever take the joy of death away from the public. Because if you don’t see losers in pain, you begin to think the game is rigged.
Read the whole thing here.
Friday, February 20, 2009
2. The Science of Fear by Daniel Gardner. I am more and more interested in the behavioral aspects of economics, though I do not necessarily suscribe to their policy prescriptions.
3. Bernanke's Test by the same guy who wrote a book on Chicago School of Economics.
Here is one of the chapters. (Scroll down the page and you will see it, Larry is presenting the paper at the NYU market process seminar)
Here are the best bits:
What exactly is Nouriel Roubini's economic philosophy? "I believe in market economics," he says, with some emphasis. "But to paraphrase Churchill -- who said this about democracy and political regimes -- a market economy might be the worst economic regime available, apart from the alternatives.
"I believe that people react to incentives, that incentives matter, and that prices reflect the way things should be allocated. But I also believe that market economies sometimes have market failures, and when these occur, there's a role for prudential -- not excessive -- regulation of the financial system. The two things that Greenspan got totally wrong were his beliefs that, one, markets self-regulate, and two, that there's no market failure."
How could Mr. Greenspan have been so naïve, I ask, hoping to get a rise. "Well," says Mr. Roubini, "at some level it's good to have a framework to think about the world, in which you emphasize the role of incentives and market economics . . . fair enough! But I think it led to an excessive ideological belief that there are no market failures, and no issues of distortions on incentives. Also, central banks were created to provide financial stability. Greenspan forgot this, and that was a mistake. I think there were ideological blinders, taking Ayn Rand's view of the world to an extreme.
Wednesday, January 28, 2009
I got this line from this post up at Cafe Hayek.
Thursday, January 22, 2009
That's Mike Boskin from Stanford talking in today's WSJ, more here.
Saturday, January 10, 2009
much of it is likely to be counterproductive. My longtime colleague, George Stigler, was famous for his argument, buttressed by empirical evidence, that regulators are eventually captured by the regulated. As a result, regulation often has results opposite those intended.
---- That's Chicago Business School's Gene Fama talking
Correct me if I am wrong, I think Hong Kong's financial sector czar Dr Chan Ka-keung was Gene Fama's student. Wonder what he thinks of his mentor's thoughts on the matter.