October 2007 – Page 3 – artdiamondblog.com

Latin America Discourages Entrepreneurs

Source of table: online version of the WSJ article cited below.

(p. A18) Economist Joseph Schumpeter (1883-1950) may be best known for his innovative work showing the link between entrepreneurial discovery and economic progress.

But as Carl Schramm, president of the Kauffman Foundation of Entrepreneurship has pointed out, Schumpeter’s insights about risk-takers didn’t make him an optimist.

In a speech last year to European finance ministers in Vienna, Mr. Schramm explained Schumpeter’s fears: He "worried that entrepreneurial capitalism would not flourish because the bureaucracies of modern government and big corporations would dampen innovation — the process of ‘creative destruction’ would be too ungovernable for a modern, Keynesian-regulated economy to tolerate." As a result, Mr. Schramm said, Schumpeter thought that "the importance of entrepreneurs would fade over time as capitalism sought predictability from governments who would plan economic activity as well as order social benefits."

Mr. Schramm’s comments caught my attention because they so accurately describe Latin America. There the entrepreneur has been all but run out of town by the bureaucracies that Schumpeter feared. Growth has suffered accordingly.

The World Bank’s annual "Doing Business" survey, released last week, demonstrates the point. The 2008 survey, which evaluates the regulatory climate for entrepreneurs in 178 countries, finds that Latin America and the Caribbean was the slowest reforming region this year and that it "is falling further behind other regions in the pace" of reform.

. . .

The most important lesson for Latin America from the World Bank’s report is that its competitors around the world are working to unleash entrepreneurial spirits, and doing nothing is not an option. As Mr. Schramm told his Vienna audience, "Schumpeter saw what a century of evidence would prove: Socialism has not sustained economic growth." Now, if only more Latin American policy makers would catch on.

For the full commentary, see:

MARY ANASTASIA O’GRADY. "THE AMERICAS; No Room for Entrepreneurs." The Wall Street Journal (Mon., October 8, 2007): A18.

(Note: ellipsis added.)

Suing the Pants Off Private Enterprise: Illustrating the Case for Tort Reform

The Dry Cleaners that was sued for $67.3 million dollars, to compensate a Washington, D.C. judge for a lost pair of pants. Source of the photo: online version of the NYT article cited below.

WASHINGTON, June 12 — Roy L. Pearson Jr. wanted to dress sharply for his new job as an administrative law judge here. So when his neighborhood dry cleaner misplaced a pair of expensive pants he had planned to wear his first week on the bench, Judge Pearson was annoyed.

So annoyed that he sued — for $67.3 million.

The case of the judge’s pants, which opened for trial in a packed courtroom here on Tuesday, has been lampooned on talk radio and in the blogosphere as an example of American legal excess. And it has spurred complaints to the District of Columbia Bar and city officials from national tort reform and trial lawyer groups worried about its effect on public trust in the legal system.

“I don’t know of any other cases that have been quite this ridiculous,” said Paul Rothstein, a professor of law at Georgetown University.

. . .

“You are not a we, you are an I,” Judge Bartnoff said in one of several testy exchanges with Judge Pearson, 57, who is representing himself. “You are seeking damages on your own behalf, and that is all.”

Later, while recounting the day he says the cleaners tried to pass off a cheaper pair of pants as his, Judge Pearson began to cry, asking for a break and dabbing tears as he left the courtroom.

For the full story, see:

ARIEL SABAR and SUEVON LEE. "Judge Tries Suing Pants Off Dry Cleaners." The New York Times (Weds., June 13, 2007): A13.

The Korean immigrant owners of the dry cleaners who were being sued for $67.3 million dollars. Source of the photo: online version of the NYT article cited below.

Thales of Miletus Lives

Source of book image: http://store.43folders.com/books-3-1400063515-The_Black_Swan_The_Impact_of_the_Highly_Improbable

This is part entertaining rant and part serious epistemology. I’ve finished 9 of 19 chapters so far–almost all of my reading time spent smiling.

Historians of Greek philosophy used to tell the story of one of the first philosophers, Thales of Miletus, that he once was watching the stars, and fell into a well. The citizens of Miletus made fun of him being an impractical philosopher. To prove them wrong, he used his knowledge to corner the market in something, and made a fortune.

Not a very plausible story, but appealing to us philosophers. (Like Thales, we like to think we could all be rich, if we didn’t have higher goals.)

Well apparently Taleb is the real Thales. He wanted to be a philosopher, got rich on Wall Street using his epistemological insights, and is now using his wealth to finance his musings on whatever he cares to muse on.

Beautiful!

Here’s an amusing sentence that broadened my grin. (It was even more amusing, and profound, in context, but I don’t have time to type in the context for you.)

(p. 87) If you are a researcher, you will have to publish inconsequential articles in "prestigious" publications so that others say hello to you once in a while when you run into them at conferences.

Reference for the book:

Taleb, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable. New York: Random House, 2007.

Buchanan on Hayek, Rawls and Nozick

Sandy Peart talking to James Buchanan. Source of photo: me.

In an earlier blog entry, I mentioned a comment on disagreeing with journal referees, made by James Buchanan in conversation at the closing dinner of the 2007 Summer Institute for the Preservation of the History of Economics.

Hayek also came up at the dinner with Buchanan. Buchanan mentioned that he was not as enthused about Hayek’s later work, including The Fatal Conceit, and Law, Legislation and Liberty—he thought the best might have been The Constitution of Liberty.

He mentioned that some foundation had funded a couple of conferences in Europe of top free market scholars to offer advice to Hayek. They told Hayek that his manuscript was a mess, and that it would be an embarrassment to him to publish it. But he said he was already under contract. (I think this comment referred to The Fatal Conceit.) So someone (Bruce Bartlett?) helped Hayek clean it up.

Buchanan also spoke highly about Rawls. I think I mentioned that Hayek had said that his approach was similar to Rawls. I think Buchanan said he did not think that comment was surprising.

I also believe I remember Buchanan saying that he thought more highly of Rawls than of Nozick.

Sherwin Rosen Approves a Positive Review of Rosenberg’s Book

Another of Sherwin Rosen’s minor acts of methodological delinquency, this time in his role as co-editor of the Journal of Political Economy, was his asking me to review Alexander Rosenberg’s criticism of the economics profession for drifting further and further into irrelevant mathematical puzzle-solving. My review was basically favorable to Rosenberg, and my memory is that Rosen was quite content with my review.

The reference to my review is:

"Review of: Alexander Rosenberg’s Economics–Mathematical Politics or Science of Diminishing Returns?." Journal of Political Economy 104, no. 3 (June 1996): 655-659.

Global Warming is No Threat to North Atlantic Current

A view of part of the Greenland ice sheet. Source of the photo: online version of the NYT article quoted and cited below.

(p. D3) OSLO — Mainstream climatologists who have feared that global warming could have the paradoxical effect of cooling northwestern Europe or even plunging it into a small ice age have stopped worrying about that particular disaster, although it retains a vivid hold on the public imagination.

The idea, which held climate theorists in its icy grip for years, was that the North Atlantic Current, an extension of the Gulf Stream that cuts northeast across the Atlantic Ocean to bathe the high latitudes of Europe with warmish equatorial water, could shut down in a greenhouse world.

Without that warm-water current, Americans on the Eastern Seaboard would most likely feel a chill, but the suffering would be greater in Europe, where major cities lie far to the north. Britain, northern France, the Low Countries, Denmark and Norway could in theory take on Arctic aspects that only a Greenlander could love, even as the rest of the world sweltered.

All that has now been removed from the forecast. Not only is northern Europe warming, but every major climate model produced by scientists worldwide in recent years has also shown that the warming will almost certainly continue.

“The concern had previously been that we were close to a threshold where the Atlantic circulation system would stop,” said Susan Solomon, a senior scientist at the National Oceanic and Atmospheric Administration. “We now believe we are much farther from that threshold, thanks to improved modeling and ocean measurements. The Gulf Stream and the North Atlantic Current are more stable than previously thought.”

. . .

“The ocean circulation is a robust feature, and you really need to hit it hard to make it stop,” said Eystein Jansen, a paleoclimatologist who directs the Bjerknes Center for Climate Research, also in Bergen. “The Greenland ice sheet would not only have to melt, but to dynamically disintegrate on a huge scale across the entire sheet.”

The worst imaginable collapse would likely take centuries to play out, he said. Any disruption to the North Atlantic Current — whose volume is 30 times greater than all the rivers in the world combined — would thus occur beyond the time horizon of the United Nations climate panel.

For the full story, see:

WALTER GIBBS. "Scientists Back Off Theory of a Colder Europe in a Warming World." The New York Times (Tues., May 15, 2007): D3.

(Note: ellipsis added.)

Source of the map: online version of the NYT article quoted and cited above.

When Sherwin Rosen Stunned the Fifth World Congress of the Econometric Society

I remember hearing Sherwin Rosen speak to a good-sized auditorium of technical economists at a plenary session of the Fifth World Congress of the Econometric Society in 1985.[i] Rosen was proceeding in his typically bemused style, when he suggested to the stunned audience that they might benefit from re-reading Alfred Marshall. I remember him saying that there are some things in Marshall that we don’t talk about any more, but that we should still talk about. I specifically remember him mentioning that Marshall had said that the success of the institution of contract depended on the correct expectation of a certain level of ethical behavior among the participants in the economy. I wish I could remember the specifics better, but Rosen’s auditors were visibly dismayed, and I supposed that they were thinking something like: ‘read Marshall?, here was the sad sight of a once proud theoretician, going soft and senile.’

[i]I remember a large auditorium-like venue for the session, but could not remember any other session details, so I dug out a copy of the program for the meetings. The only plenary session participation listed for Rosen, was his serving as a discussant for Oliver Hart and Bengt Holmstrom’s “Theory of Contracts” paper, which was delivered on August 19, 1985 (see: “Program . . .,” 1986, p. 471). In searching through Rosen’s publications, I cannot find any evidence that his comment was ever published. In an email response (email dated Nov. 19, 2006) to my inquiry, Bengt Holmstrom has replied: “I know that his comment was not published.”

"Program of the Fifth World Congress of the Econometric Society.” Econometrica 54, no. 2 (March 1986): 459-505.

David Warsh on Paul Romer’s ‘Triumph of Formalism’

David Warsh prepares to speak as Sandra Peart introduces him at the HES meetings at George Mason. Source of photo: me.

David Warsh in his plenary address to the History of Economics Society on June 9, 2007, recounted a version of the account that he gives in his 2006 book Knowledge and the Wealth of Nations. (A key part of this story was also told in an article in the Sunday magazine section of The New York Times.)

Here I concentrate on the plenary lecture presentation.

Warsh said that he is the first to give Romer his due; that Romer has managed to alienate the economists both at Chicago and at MIT. (Well, maybe, but Tom Friedman sure gives Romer a lot of attention and praise in his best-selling The World is Flat.) Warsh also said that he (Warsh) has been accused of writing a hagiography of Romer.

Warsh identifies the key contribution of Romer as being that he identifies the key properties of knowledge, namely that it is nonrivalrous and nonexcludible. He claims that Romer was the first to see this, and so is responsible for beginning the crucial field of the economics of knowledge.

Further, Warsh claims that the economics profession only achieved this insight when Romer found a way to incorporate knowledge in his formal models.

This story, Warsh says, is a triumph of formalism; only through formalism could such an important advance have been made.

At this point in the presentation, I became rather annoyed—I had my hand up during most of the question session, but Warsh chose not to call on me. (In fairness, I was seated on his far left, though at the front, so it is possible that he did not see me.)

What I told Warsh afterwards was that the lesson from this episode is the exact opposite of the one he claims—it is not an example of the triumph of formalism, but rather an example of the shame of formalism.

Long before Romer, others had pointed out the nonrivalry and nonexcludibility of knowledge. E.g., Arrow briefly in a famous essay (1962), and Harry Johnson at greater length in an obscure essay (1972).

The requirement that serious knowledge requires formalization before it is taken seriously, meant that economists ignored for several decades, what had been nonformally known. It is to the shame of formalism that for decades useful issues were ignored.

And even more strongly, to say that Romer is responsible for founding the economics of knowledge is to add insult to injury to the economists who had actually founded this field: economists such as Richard Nelson, Nathan Rosenberg, Zvi Griliches and Edwin Mansfield.

Not only was their work largely ignored for decades, but a leading advocate and exemplar of the formalist methodology responsible for the ignorance, is himself given credit for their achievements.

The reference to Warsh’s book, is:

Warsh, David. Knowledge and the Wealth of Nations: A Story of Economic Discovery. New York: W. W. Norton & Co., 2006.

For further information on the founders of the economics of science and technology, one could consult:

"Economics of Science." In Steven N. Durlauf and Lawrence E. Blume, The New Palgrave Dictionary of Economics, 2nd ed., forthcoming, 2008, Basingstoke and New York: Palgrave Macmillan, reproduced with permission of Palgrave Macmillan. This article is taken from the author’s original manuscript and has not been reviewed or edited. The definitive published version of this extract may be found in the complete New Palgrave Dictionary of Economics in print and online, forthcoming, 2008.

"The Economics of Science." Knowledge and Policy 9, nos. 2/3 (Summer/Fall 1996): 6-49.

"Edwin Mansfield’s Contributions to the Economics of Technology." Research Policy 32, no. 9 (Oct. 2003): 1607-1617.

"Zvi Griliches’s Contributions to the Economics of Technology and Growth." Economics of Innovation and New Technology 13, no. 4 (June 2004): 365-397.

The full reference on the Arrow article, is:

Arrow, Kenneth J. "Economic Welfare and the Allocation of Resources for Inventions." In Richard R. Nelson, ed., (National Bureau of Economic Research), The Rate and Direction of Inventive Activity: Economic and Social Factors. Princeton: Princeton University Press, 1962, pp. 609-625.

The full reference on the Harry Johnson article, is:

Johnson, Harry G. "Some Economic Aspects of Science." Minerva 10, no. 1 (January 1972): 10-18.

Mugabe Driven by Quest for Power, More than from Paranoia, or Marxism: More on Why Africa is Poor

No one outside of Mr. Mugabe’s inner circle, of course, can say with certainty why he has pursued policies since 2000 that have produced economic and social bedlam. For his part, Mr. Mugabe says Zimbabwe’s chaos is the product of a Western plot to reassert colonial rule, while he is simply taking steps to fight that off.

Among many outside that circle, however, the growing conviction is that Zimbabwe’s descent is neither the result of paranoia nor the product of Mr. Mugabe’s longstanding belief in Marxist economic theory. Instead, they say, Zimbabwe is fast becoming a kleptocracy, and the government’s seemingly inexplicable policies are in fact preserving and expanding it.

. . .

Mr. Mugabe’s government declares currency trading illegal, but regularly dumps vast stacks of new bills on the black market, still wrapped in plastic, to raise foreign exchange for its own needs, business leaders and economists say.

The nation’s extraordinary hyperinflation, last pegged by analysts at 10,000 percent a year, is an economic disaster that, by all accounts, the government needs to address. Yet after it ordered merchants in July to slash their prices, cadres of policemen and soldiers moved into shops to enforce the new controls, scoop up bargains and give friends and political heavyweights preferential access to cheap goods.

. . .

Mr. Mugabe’s 25-bedroom mansion in Borrowdale, the gated high-end suburb of Harare, the capital, is the locus of a boomlet that has spawned luxury homes for government and party officials. (Mr. Mugabe said his mansion was built with goods and labor donated by foreign governments.)

Mr. Mugabe arrived to open Zimbabwe’s Parliament this month in a Rolls-Royce. Equally telling, the legislature’s parking lot was crammed with luxury cars.

Such riches have been accompanied by a steep decline in living standards for just about everyone else. The death rate for Zimbabweans under the age of 5 grew by 65 percent from 1990 to 2005, even as the rate for the world’s poorest nations dropped. Average life expectancy here is among the world’s lowest, according to the United Nations.

For the full commentary, see:

MICHAEL WINES. "News Analysis; Zimbabwe’s Chaos: The Powerful Thrive." The New York Times (Fri., August 3, 2007): A8.

(Note: ellipses added.)