Coordination Problem

Sports as the Spice of Life

As mentioned Pete and I just returned from London.  The hottest news on the TV was the upcoming World Cup in Soccer and whether or not one of Britain's star players would be healthy enough to play.  This got more air time and page space in the news than the meeting between Blair and Bush, or the daily bombings in Iraq.

Let me be clear I am not complaining about this.  Sports are both great teachers of life lessons (to the young) and great distractions from the troubles of life (to the old).  Sports are in this sense a sanctuary that much of the world turns to.  I don't share the love of soccer that is evident throughout the world, but I do appreciate how the World Cup will be the preoccupation of millions over the next few weeks.

My college tennis team just won their conference championship for the 16th year in a row and my college tennis coach continues to amass a record that is among the elite of NCAA coaches.  Congratulations to Coach Joe Walters.

On the tennis front, the French Open is currently taking place and will be followed in 6 weeks with Wimbeldon and then roughly two months after that the US Open.  So this is one of the great times of the year to be a tennis fan.

My AAU/YBOA basketball team has been playing in tournaments since March.  We have had the opportunity to play against some very strong teams (e.g., DC Assault, and Boo Williams) and hopefully it has been a great experience for the boys.  We play this weekend in the Virginia state championships for YBOA and enter the tournament ranked 4th in the state.  If we hold to our seeding we will qualify for the YBOA National Championships in Florida at the end of June.  But we will have several players missing due to conflicts with school.  And of course there is always the problem in tournament play of stringing together 4 or 5 good games in a row.  We will see.

The NBA playoffs are coming down to the wire.  Miami Heat look very strong at the moment.

Not only do I enjoy sports as a fan and as a participant, but also an intellectual exercise.  Malcolm Gladwell has some recent columns addressing the statistical analysis of sports.  Following the Moneyball phenomena, various individuals have sought to come up with statistical measures that assess the value of athletes in a different way than the conventional wisdom and in a way that would actually help teams win games when those conventional measures would mislead.  Now Moneyball actually did raise a puzzle and provide an answer --- how could a small market team like the Oakland A's compete with big market teams like the Yankees?  The answer was to be found in finding undervalued athletes.  And conventional baseball statistics overlook certain key categories of performance on the field that lead to winning games and yet since they are not captured in these traditional statistics lead to undervaluing them.

In basketball, great coaches such as Dean Smith of UNC, developed elaborate statistical measures to caputre these intangibles long along in developing systems to measure player efficiency.  One of the most striking non-captured statistic is the pass that leads to the assist.  Another is deflected passes.  Yet another is boxing out that might not result in your rebound, but an easier rebound for your teammate. And finally there is of course the ability to set hard picks that free up teammates.  Basketball is a team game played by individuals and as such it is full of both individual sacrifice for the good of the team, and individual brilliance.  Obviously the conventional wisdom of triple doubles might lead us astray in assessing the value of any one player, but the various intangibles have always been looked at by the great coaches from Claire Bee to Bobby Knight, or Adolf Ruff to Mike Krzyzewski.

Back to Bauer -- A Report from the LSE Conference on Freedom and Development

It was a great opportunity to be part of the LSE conference on Freedom and Development in Honor of P.T. Bauer.  The conversation reflected high quality academic discourse and presentations were made by some of the leading contemporary scholars in the field --- e.g., Ester Duflo who spoke on gender and development, Robert Bates who spoke on putting the politics back into economic development, Barry Weingast on market preserving federalism and development, John Roemer on Equal Opportunity and development, and James Robinson on colonial origins, institutional development and economic performance.  The conference organizers were Tim Besley, Robin Burgess, and Ravi Kanbur.

The conference was bookended by presentations by Anne Krueger and Andrei Shleifer.  Krueger spoke on the importance of openness for economic development.  In the context of her critique of government efforts to orchestrate development she highlighted the importance of small-scale trade as did P.T. Bauer.  Her guideline for further regulation was simple --- pursue only those economic regulations which are (a) reasonable, and (b) uncapturable by interest groups.  Once stated so clearly the debate then becomes what regulations could meet that standard.  Andrei Shleifer concluded the conference with a discussion of the failures of foreign aid.  He started with the great Bauer quote that foreign aid is the process of taking money from the poor in rich countries and giving it to the rich in poor countries.  Shleifer explained foreign aid is ineffective due to the corrupt diverting of funds, and that the incentives for efficient use of funds that do get to the projects are low-level.  He argued that there are three possible responses: (1) the Bauer response of abolition, (2) the World Bank redirection on 'doing business' and the push to streamline regulation and bureaucracies in the less developed world and (3) the cynical view that we shouldn't worry --- foreign aid is a small part of our budget, it is mainly for show in the West, and while it doesn't fix the problem there is some marginal effectiveness.  Shleifer rejected the Bauer response (as I believe everyone at the conference other than Pete Leeson and myself would) and instead opted from some mix between (2) and (3).  But in making this move, I believe that Shleifer (who as usual was amazingly impressive throughout the conference) failed to consider two points that were raised during his talk --- one by him and one by Tim Besley.  First, Shleifer reported on a paper forthcoming in the Journal of Economic Perspectives on the effectiveness of HIV/AIDS initiatives.  This paper argues that in terms of saving lives, that preventative measures (condoms, penicillin for other STDs, etc.) are at least 10 times more effective than treatment measures for HIV/AIDS (retro viral drugs, etc.).  This highlights that intending to do good is not the same as doing good in public policy, yet much of the debate in public policy is about intending to do good.  Politicians as part of the show beat their chest over who is intending to do more good and little feedback comes back to  signal whether intentions are being met.  Tim Besley raised the second point when he asked Andrei whether or not Bauer was right that foreign aid prevents the institutional developments that would be necessary to generate lasting economic development.  Another important point was made by Besley and Ravi Kanbur that the incentives for donor countries to put binding conditions on recipient countries are not that strong because the real incentive is to disburse the funds regardless because that is how one will be judged.

Anyway, the evidence weighs toward Bauer even if the conclusion violates are 'ethical sensibilities'.  Foreign Aid as a 'moral show' is extremely costly --- the unintended undesirable consequences are not trivial in terms of human suffering.  As Andrei asked: "Do we have an answer on how we could spend large sums of money from the West to provide poverty alleviation in LDCs?"  And as he answered: "No." Once it is stated that way, we are back to Bauer.

Bauer's main criticism of modern economics is that styles of thought have enabled economists to get caught in an intellectual trap of the cycle of poverty --- poor countries are poor because they are poor.  In response Bauer argued we should go back to basic economics --- supply and demand analysis and an examination of incentives.  Once we do that, Bauer thought we will see the perversity's of foreign aid programs, the wealth creating opportunities that follow from small-scale trading behavior and the capital accumulation it affords, and the silliness that some intellectual developments in modern economics lead brilliant and well meaning individuals to adopt.

Does Google Scholar Capture Influence? And other perplexing questions

As reported, Pete Leeson and I are in London for a conference at the LSE.  As we were walking around yesterday we got in a discussion about who were the top economics since 1975 whose ideas have had an influence yet who were not published in the AER, JPE or QJE.  We were discounting papers and proceedings of the AEA, so papers in the AER from the meetings were not counted.  Instead, you had to think of economists who were unable to place their papers in the top journals due to an intellectually conservative bias in the refereeing process yet were able to influence the intellectual culture of economsts down the road. Buchanan, Coase, Kirzner, North, and Olson are some of the names we came up with.  We will have to investigate further and also check our premises on the names already listed.  Who would you nominate?

The question started when Pete asked me a question about my early career at NYU, and I told him about my experience in comparative and Sovietology.  Basically I argued that I decided to write primarily books in that field because I was questioning too many conventional assumptions at the same time for journal articles to work out.  When writing a journal article you are usually permitted to question 1 or perhaps 2 conventional assumptions at a time, but if you question too many I argued you cannot get through the journal refereeing process.  This is why I contend that Austrian economics remained a "book culture" through the 1980s and 1990s when the rest of the economics profession had become primarily a "journal culture" by 1950.  On the other hand, in the 1990s journals in the field of history of economic thought and methodlogy provided outlets for work in those fields and I did publish in HOPE, JHET, JEM, etc.

Early this morning I looked up Google Scholar to see if it accuratedly reflected influence.  Douglass North's Institutions, Institutional Change and Economic Performance comes up with over 5000 citations; James Buchanan's Calculus of Consent has over 900, but his other books get in the 500 to 900 range; Mancur Olson's Logic of Collective Action received over 2000 citations; Ronald Coase's "The Problem of Social Costs" has over 3000 citations; and Israel Kirzner's Competition and Entrepreneurship has 841.

Now how do these guys compare?  Paul Samuelson -- 950 for his "Pure Theory of Public Expenditure"; Robert Solow -- 2849 for his paper on growth; Ken Arrow -- 2548 for Social Choice and Individual Values.  F. A. Hayek gets 1647 for "The Use of Knowledge" and 800 for The Constitution of Liberty.  Miton Friedman gets 1496 for Capitalism and Freedom and 1046 for "The Role of Monetary Policy."  John Maynard Keynes's General Theory comes in at 2753. Adam Smith's Wealth of Nations only picks up 1978 citations, and Karl Marx's Capital comes in with 875.  Andrei Shleifer (the most cited economist in the past decade), however, comes in with over 2000 citations for his paper on "Law and Finance" but also has several other papers earning close to, or more than 1000 citations per paper.

Compare this with paltry numbers of 50-60 citations that are earned by my books on the history and collapse of the Soviet system.  My citation numbers are in line with Cowen, Garrison and Hoppe, White and Selgin do better in the field of free banking, and Caldwell does well in the field of history of thought and methodology, but Rizzo does worse in the field of law and economics as is the case with Salerno and Block in their respective fields.  Lavoie's Rivalry and Central Planning, Caldwell's Beyond Positivism and White's Free Banking in Britain are the most cited over 100 citations each. But it is obvious that our generation of Austrians is falling way behind in the race for scholarly influence even as measured on the web.  The best and most influential writers get in the 100-150 range, but not above for any one work.  We should aspire to be as influential as Kirzner or Hayek.  Even Mises, who many think is ignored still received over 300 citations for Human Action and over 100 citations to his "Economic Calculation in the Socialist Commonwealth."

Obviously, topic and placement of the original article or book matters greatly for subsequent influence.  With the increase in the number of potential outlets it is probably important to stress to young scholars to not settle for easy outlets but to keep bucking the refereeing system and work hard to place articles in as highly recognized outlets as possible.  Otherwise, people may continue to have little to no impact despite publishing.  In addition, one should utilize the tools emerging on the web to highlight papers and books that find a physical published outlet in a less prestigious outlet.  As Tyler Cowen has stressed --- the internet is changing the entire certification relationship between author and publisher.  One most always ask the question who is certifying who -- if it is the author who is lending his/her name to the journal or publisher, or is it the publisher who is certifying the author.  With blogs, let alone SSRN and other scientific advertisement of research now available, perhaps even obscure outlets can still reach a wide audience.  But in the end I am reminded of an incident at NYU during my 8 year stay.  A junior faculty was going to earn tenure --- only 2 were granted tenure during my time there out of 10 candidates.  During the debate over the successful tenure bid a letter was written by a major economist that said the following (paraphrasing since I cannot quote exactly): "The candidates work in economic theory is among the best of his cohort.  Only about 5 people in the profession read his work, but those 5 really matter."  I remember myself thinking at that time that there was something wrong. But now I appreciate the point.  The internet might expand readership, but unless your work is reaching certain people and more importantly certain TYPES of people who are in turn using your work to advance their work (i.e., you become a productive input into the scholarly production function of others) then don't expect scholarly influence.

Use all the tools at your disposal to promote your work, but remember that your first goal should be to do high quality work that you can place in as high profile a scientific outlet as possible.  If you succeed in doing that, the promoting of your work across a wide body of readers will follow.

Two-Tiered Entrepreneurship and Economic Development

To view the paper that Pete and I are presenting at the LSE conference on freedom and development, go here:

http://www.peterleeson.com/Two-Tiered_Ent.pdf

Off to London

I am heading to the LSE for a conference on Freedom and Economic Development.  Other presenters include Joseph Stiglitz, Andrei Shleifer, Daron Acemoglu, Anne Krueger, Robin Burgess and Tim Besley.  Pete Leeson and I are delivering a paper titled "Two Tiered Entrepreneurship and Economic Development" and the basic point made in the paper is that there is positive relationship between entrepreneurship and economic development provided the rules of the game are such that they encourage productive entrepreneurship (arbitrage and innovation), but there is also entrepreneurship over the rules of the game to minimize the opportunities for predation by private and public actors.  The form of entrepreneurship over the rules governing social interaction has been overlooked to a considerable degree --- especially the private mechanisms of enforcement in underdeveloped economies that emerge in the small-scale trading behavior of individuals.  The paper by Pete and I build on the great work of P.T. Bauer, who is being honored at this meeting.

 

Responding to Claims of Market Failure

There are several ways to respond to claims of market failure: definitional, institutional, entrepreneurial, and comparative analysis.  Economists can show that terms such as externality, public goods, monopoly, and macro-instability have conceptual difficulties and that by clarifying terms the critique of the market economy fades away.  In The Economic Way of Thinking, for example, the ambiguity associated with the term monopoly is explored --- if you define the relevant market broadly enough no monopoly is evident, but if your definition is narrow then every good will exhibit monopolistic characteristics.  In Rothbard's Man, Economy and State externalities and public goods are also called into question as well as monopoly.  However conceptually correct this response is, it tends to dismiss critics of the market out of hand.  And while it doesn't necessarily lead to this, it has the potential of cutting the discussion off too early so that the failure of government and the power of the market are not explored in their full details.

Another response is institutional.  If property rights are clearly defined and strictly enforced than market failures also fade away.  Externalities result, for example, due to conflicts over property rights, clarify the property rights and the so-called externality is internalized.  Market failures are really legal failures.  Again, however correct this intellectual exercise may be it results in missing out on explaining the reasons for government ineptness and market robustness.

An understanding of government ineptness results from an examination of government efforts to serve as a corrective to so-called market failures.  Government decision-making is prone to certain systemic perversities that public choice theory has exposed. But public choice theory begins with recognition that markets may indeed fail, but that government 'cures' may be worse than the identified 'disease'.

On the other hand, the entrepreneurial perspectives sees the market as an on-going process of adjustment to changing circumstances.  Today's inefficiency represents profit opportunities for those individuals who can act to eliminate them.  Admitting the existence of 'market failure' sets up the analysis of entrepreneurial responses.  By admitting the frictions in the market, the economists can see the way that market participants respond to ease those frictions and realize the gains from trade and technological innovation.

There is a new book out by Brian P. Simpson, Markets Don't Fail that pursues the definitional-conceptual path to great effect. Brian is a professor at the National University in CA, and a product of our PhD program at GMU.  Brian wrote his thesis under Richard Wagner, but I was fortunate to be on his committee as well.  Brian is an Objectivist and in particular follows closely the work of George Reisman.

In the pecking order of effective responses to claims of market failure I do believe that the entrepreneurial response is the most powerful followed by the public choice critique and institutional analysis.  However, correct the conceptual points are they are not as persuasive to the trained economist as the others.  Still it is important to insist on definitional and conceptual clarity.  Simpson's book does an excellent job of pushing that line and insisting on consistent and persistent applications of terms such as voluntary. Congratulations Brian and wishing you continued success in your teaching and writing career.

Sweatshop-Intensive Countries and International Labor Standards

A few days ago I posted on my forthcoming paper with Josh Hall on international labor standards and economic development in the Journal of Labor Research. Our analysis of countries in Sub-Saharan Africa found that not a single nation in this region of the developing world has satisfied the development threshold the highly developed world satisfied when it when it introduced various labor standards. This is true for every major labor standard in place in the U.S. The average Sub-Saharan country is between 100 and 300 years from reaching this threshold, depending upon the standard one considers.

Josh and I have just added some additional work in this paper, considering the same question for so-called "sweatshop-intensive" developing countries--developing nations believed to be home to the largest concentrations of child sweatshops on the globe. The results of our study confirm our findings for Sub-Saharan Africa: increased labor standards for these nations are also highly premature.The average sweatshop-intensive country is between 35 and 100 years from the development-appropriate threshold for various labor standards.

Of particular interest for these countries are labor standards prohibiting child labor. We find the average sweatshop-intensive country is 35 years from satisfying the threshold for this standard. Only one such country in this sample has currently satisfied the threshold--Costa Rica. The others are between 9 (Brazil) and more than 1000 (Honduras) years from doing so.

You can access these findings through the new version of the paper available here. It may take a minute to load, as the new tables are quite large.

Dusting Off the Old Books

The Economist in its 'Economic Focus' column argues that there are at least two arguments for dusting off the old Austrian books when it comes to understanding the fragility of the modern economy.  Financial liberalization has increased the chances of credit induced boom-bust cycles, and changing international conditions have in turn changed the monetary transmission mechanisms and thus made some of the old measurement techniques obsolete as guides for monetary policy.

In Case You Missed It — 3 Cheers for Price Gouging

John Stossel 20/20 was great again last night, and he relied for his story on price gouging on my colleagues Russ Roberts and Vernon Smith (as well as Gary Becker and Milton Friedman).  Russ, especially, gave a wonderful discussion of the smoothing of consumption brought about by price hikes and the signal to alternative suppliers to come to the market that results.  Great job Russ!!!  If I was teaching principles of economics this fall I would get a copy of this show and make sure that my students understood this basic point about price adjustments.

In fact, when I taught ‘Economics for the Citizen’ besides using Paul Heyne’s The Economic Way of Thinking, I also used the Stossel in the Classroom sets that were developed by Bob Chitester, as well as Milton and Rose Friedman’s PBS series Free to Choose (also developed by Bob Chitester).  These teaching tools, in my opinion, do a much better job communicating the basic logic of economic analysis and its scope and its importance than Freakonomics (though I do appreciate Steve Levitt’s creativity and imagination).

International Labor Standards and Comparative Development

The international labor rights movement, led by the International Labour Organization (ILO), is at the center of a heated debate over labor standards in the developing world. The ILO argues that developing countries are currently ready for the more stringent labor standards in place in developed countries, like the U.S. The resistance of developing countries to such standards has lately led the ILO to push for a formal linkage between itself and the WTO as a means of imposing higher standards on developing countries.

In a recent paper, "Good for the Goose, Bad for the Gander: International Labor Standards and Comparative Development,"  forthcoming the Journal of Labor Research, Josh Hall and I investigate the ILO's claim by examining the timing of labor standard adoption in highly developed countries. These nations were all once as poor as today's developing countries and made the tradeoff between labor standards and income in the past. Their experience therefore suggests a safe income threshold for adopting similar labor standards in the developing world.

Using current GDP per capita levels and growth rates in Sub-Saharan Africa, we determine how far these developing countries are from achieving the development threshold the highly developed world reached before it created various labor standards. We find that every ILO-proposed labor standard is highly premature for Sub-Saharan Africa. These countries are between 100 and 300 years from reaching this threshold. ILO-proposed policy is exactly backward. A substantial relaxation of labor standards is the appropriate labor policy for this part of the developing world.