Coordination Problem

Does Culture Matter for Economic Development?

CATO Unbound has a discussion going on about the "culture matters" thesis in economic development.  Lawrence Harrison kicked off the conversation with an essay and responses were provided by the economic historian Gregory Clark, political scientists James Robinson, and me.

Russ Roberts interviews Milton Friedman

Check Russ Roberts’s touching article on his last encounter with Milton Friedman. Russ’s podcast interview with Friedman can be found here. Friedman was almost 94 at the time of the interview, but he was still sharp and quick to respond. It is a delight to listen to him.

In the first part of the interview on money, Friedman explains how his book A Monetary History of the United States has influenced the thinking on central banking around the world. He explicitly mentions New Zealand as the first place in the world to adopt fully rules that rest on the idea that inflation is a function of money supply (explicitly turned into legislation in the 1989 Reserve Bank Act).

Friedman explains that Don Brash in New Zealand was the most important central banker of his time (the 1988-2002 period). He used inflation targeting and launched the current era of low inflation and minor recessions in the West. While Friedman is perhaps a bit unfair to the roles Paul Volker (Fed) and Karl Otto Pöhl (Bundesbank) played, he is right in saying that Don Brash developed the art of central banking more than anyone else. Pete and I met Don Brash during our trip to New Zealand last August. He is an outstanding gentleman.

Thanks Russ for this great interview.

In Cities We Trust

I mentioned in my (not so) recent post on the Lifetime Achievement Award given to Israel Kirzner that Sanford Ikeda gave the 2006 Society for the Development of Austrian Economics presidential address. Let me say a few words about it, as Sandy’s address was very good.

Sandy's address was a synthesis of the research he has carried out for the past decade, opening up the field of Austrian economics to new inquiries. As he sees it, Sandy took the work of Kirzner and used it to better illuminate the insights of Jane Jacobs. In other words, “Kirzner meets Jacobs” has been his research motto. And it’s been very fruitful. Since his address will be published in the Review of Austrian Economics, we can’t post it on this blog. However, I can share with you a few passages that show its depth.

Sandy uses an interesting analogy between the role of real time in economics and that of what he calls “action space”:

Just as we are now careful to distinguish real time from causally inert, or "Newtonian time," we should take care to distinguish action-relevant space, or "action space" for short, from simple physical dimensionality, or what we might call "von Thűnen space." 

Sandy continues:

Once we recognize that human action and social cooperation are place-dependent, the question arises as to what are the most efficacious places in which social cooperation can occur.  I suggest that the non-trivial answer is “cities.”

Sandy puts forward the idea that the emergence of markets is intimately linked to the development of urban centers. This is a very Jacobsian idea. Jacobs always claimed that cities came first (not the countryside). (One could perhaps surmise that cities grew out of tribal settlements.) As Sandy puts it:

(1) most economic processes and market institutions are inherently urban in nature, and that this seems to have rubbed-off on the concepts of early economists; (2) we can view the trend of economic thinking in the Walras-Marshall-inspired mainstream during the 20th Century as a movement away from an urban-based approach, toward a decidedly non-urban formalism, essentially devoid of meaningful institutions and processes; and (3) much of the progress in Austrian economics, as evidenced by some interesting recent developments, can be seen as an urbanizing, or a re-urbanizing, of economic theory, toward an economics of place as well as real time.

In other words, Sandy’s work shows that markets, the division of labor, and the division of knowledge originate in cities. Many abstractions that we study in economics are spatially related to the development of urban centers. The existence of trust and its link to the development of market relationships is also crucially dependent on the emergence of cities. Moreover, as Jacobs said, cities are to be seen as incubators for new ideas, i.e. entrepreneurship. Only cities offered the mix of institutions, social capital, and networks that would enable individuals to discover and exploit opportunities for investment and trade.

Sandy also developed in his address the ideas of “plantation economics” and that of “the re-urbanization of economics.” He further showed how his research on trust dwells with his work on cities. This is very impressive and insightful work. Congratulations Sandy for your research and your address!

PS: Pierre Desrochers and Peter Gordon are two other talented scholars who have also worked on these issues.

A tribute to Kirzner

Sorry for the silence ... crazy two weeks since the SEA meetings.  Follow the link to my introductory remarks on Israel M. Kirzner's award from the SDAE.

Download november_19_introduction_of_kirzer.doc