Category: Books

Michael Powell Provides Support for the Capture Theory of Regulatory Agencies

 

The following brief story would seem highly compatible with the "Capture Theory of Regulatory Agencies" that is associated with the names of economist George Stigler, and historian Gabriel Kolko.  That theory suggests that regulatory agencies are frequently captured by the industries that they are intended to regulate.

One kind of evidence for the theory is that members of regulatory agency boards often are recruited from the industry, and often return to working for the industry after their terms are over.

 

The efforts of federal regulators to curtail cronyism on corporate boards have led to some odd outcomes. The case of Michael K. Powell, a new director of Cisco Systems, is a prime example. 

Mr. Powell, the former chairman of the Federal Communications Commission, happens to be a son of Colin Powell, the former secretary of state. Cisco happens to have paid the senior Mr. Powell more than $100,000 to deliver two speeches in 2005.

Under guidelines established by the Nasdaq stock market, that connection disqualifies the younger Mr. Powell as an independent director, so he cannot sit on the company’s audit, compensation or governance committees. But by the same definition, Richard M. Kovacevich, the chairman of Wells Fargo, is an independent director of Cisco, even though his company has promised to lend Cisco $120 million.

The difference is that Cisco’s line of credit is deemed too small a part of Wells Fargo’s overall business to present a conflict of interest, while the payments to the senior Mr. Powell exceeded the allowable annual limit of $100,000 to any family member of an independent director.

 

Source of story: 

PATRICK McGEEHAN.  "$100,000? Too High. $120 Million? Fine."  The New York Times, SundayBusiness Section (Sun., September 30, 2007):  2.

 

The key Kolko book is: 

Kolko, Gabriel. Railroads and Regulation, 1877-1916.  W. W. Norton & Company, 1970.

 

Pulling Teeth Slowly

 

   Source of book image:  http://mitpress.mit.edu/images/products/books/0262113023-f30.jpg

 

Many years ago, I read János Kornai’s The Road to the Free Market, which gave Kornai’s advice on how Eastern Europe could best make the transition from communism to the free market.  What I remember most from the book, is his discussion of whether it is more humane for the transition to be quick or gradual.  He answers the question by asking another:  if you need to have a tooth pulled, is it more humane for it to be pulled quickly or gradually?

 

(p. B15) . . .,  Mr. Kornai’s books and lectures in Europe, North America and Asia established him as one of the leading scholars of socialist economics and an expert on the difficult transitions that many countries face when they move from socialism to a more democratic and capitalist system.   . . .

At one point in 1974, under the more relaxed rule of János Kádár, when Hungary was the "most cheerful barrack in the camp," Mr. Kornai and his wife decided to build their own home. Over the course of several months, they personally confronted the corruption, endemic shortages and shoddy construction materials that were so common in Eastern Europe. A year later, on a trip to India, Mr. Kornai was faced by idealistic young Maoists whose concern for the desperately poor reinforced their support for socialism. Mr. Kornai responded to them by arguing, as he puts it here, that "rationing systems that spread misery equally may assuage feelings of injustice for a while, but they will not solve anything."

 

For the full review, see:

JOSHUA RUBENSTEIN.  "BOOKS; Critic Behind the Curtain."  The Wall Street Journal  (Tues., January 30, 2007):  B15.

(Note: ellipses added.)

 

The book reviewed, is: 

János Kornai.  By Force of Thought.  (MIT Press, 461 pages, $40)

 

The earlier book by Kornai, that I read and liked, is:

Kornai, Janos. The Road to a Free Economy: Shifting from a Socialist System, the Example of Hungary. New York: W.W. Norton, 1990.

 

Johnston Book to Expose More Government Subsidies to Wealthy

 

  Source of book image:  http://ecx.images-amazon.com/images/I/51Zc90x8GDL._SS500_.jpg

 

Several days ago, I ran an entry that quoted a revealing and upsetting article showing how a lot of tax dollars are being used to susidize golf holidays for wealthy businessmen. The author of the article was New York Times Pulitzer Prize-winning reporter David Cay Johnston.

In response to my entry, Johnston emailed me to let me know that he has a forthcoming book that will expand on the subject of his NYT piece.

If Johnston’s article is any guide, his book should be of interest. Clicking on the reference below, will take you to the the Amazon page where the book can be pre-ordered in advance to its expected December 27, 2007 release:

Johnston, David Cay. Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill).  Portfolio, 2007.

 

Entrepreneurial Capitalism is the Good Kind

 

   Source of book image:  http://ec1.images-amazon.com/images/I/41WVH9PAR3L._SS500_.jpg

 

. . .  capitalism as practiced in the U.S. is different from the capitalism practiced in, say, Singapore or Saudi Arabia. "Capitalism…takes many forms, which differ substantially…in their implications for economic growth and elimination of poverty," three economists write in "Good Capitalism, Bad Capitalism." The book identifies four strains of modern capitalism and argues the U.S. version is particularly well-suited to creating and exploiting innovations that boost living standards.

. . .

The book was written by William Baumol, an eclectic New York University economist impressively energetic at 85 years old; Carl Schramm, president and research director of the Kauffman Foundation and a recovering health economist and insurance executive; and Robert Litan, an economist-lawyer who was a budget and antitrust official in the Clinton administration. (Disclosure: I recently spoke at Kauffman’s Kansas City, Mo., headquarters.)

. . .

Along the way, the economists make a point often missed in the romanticism about "small business." They aren’t talking about all small businesses — the corner dry cleaner, for instance — or all the self-employed. Their entrepreneurs are entities that provide a new product or service or develop methods to produce or deliver existing goods and services at lower cost.  . . .

It all sounds great — and compelling. A capitalism that cannot spur innovation and/or display flexibility to reorganize itself cannot be a model. In their book, though, the three touch too lightly on an issue about which Mr. Litan has written previously. As he puts it in an interview: "An entrepreneurial society is going to be more of a high-risk society."

The strengths of U.S.-style capitalism are apparent. No place in the past quarter century has better mixed the ingredients of talent, imagination, education, science and capital. But the risks are apparent, too: workers who lose jobs and find new ones that pay far less and lack health insurance, widening disparities between economic winners and losers, challenges posed by stiffening competition from low-wage, increasingly skilled workers abroad, and schools that aren’t improving as fast as the economy is changing.

Preserving the strengths of American capitalism requires finding a way to reduce the anxiety and harm posed by such risks without losing the entrepreneurial vigor. That’s the hard part.

 

For the full commentary/review, see:

DAVID WESSEL. "CAPITAL; By Capitalism’s Vigor May Hinge On Confronting Its Risks."  The Wall Street Journal  (Thurs., May 10, 2007):  A2. 

(Note:  ellipses added.)

 

Business Should Stop Apologizing for Creating Wealth

 

   Source of book image:  http://hoeiboei.web-log.nl/photos/uncategorized/atlasshrugged.jpg

 

David Kelley’s op-ed piece, excerpted below, was published in the WSJ on October 10, 2007, the 50th anniversary of the publication of Ayn Rand’s greatest novel.

  

Fifty years ago today Ayn Rand published her magnum opus, "Atlas Shrugged." It’s an enduringly popular novel — all 1,168 pages of it — with some 150,000 new copies still sold each year in bookstores alone. And it’s always had a special appeal for people in business. The reasons, at least on the surface, are obvious enough.

Businessmen are favorite villains in popular media, routinely featured as polluters, crooks and murderers in network TV dramas and first-run movies, not to mention novels. Oil company CEOs are hauled before congressional committees whenever fuel prices rise, to be harangued and publicly shamed for the sin of high profits. Genuine cases of wrongdoing like Enron set off witch hunts that drag in prominent achievers like Frank Quattrone and Martha Stewart.

By contrast, the heroes in "Atlas Shrugged" are businessmen — and women. Rand imbues them with heroic, larger-than-life stature in the Romantic mold, for their courage, integrity and ability to create wealth. They are not the exploiters but the exploited: victims of parasites and predators who want to wrap the producers in regulatory chains and expropriate their wealth.

. . .  

. . .   At a crucial point in the novel, the industrialist Hank Rearden is on trial for violating an arbitrary economic regulation. Instead of apologizing for his pursuit of profit or seeking mercy on the basis of philanthropy, he says, "I work for nothing but my own profit — which I make by selling a product they need to men who are willing and able to buy it. I do not produce it for their benefit at the expense of mine, and they do not buy it for my benefit at the expense of theirs; I do not sacrifice my interests to them nor do they sacrifice theirs to me; we deal as equals by mutual consent to mutual advantage — and I am proud of every penny that I have earned in this manner…"

We will know the lesson of "Atlas Shrugged" has been learned when business people, facing accusers in Congress or the media, stand up like Rearden for their right to produce and trade freely, when they take pride in their profits and stop apologizing for creating wealth.

 

For the full commentary/review, see: 

DAVID KELLEY. "Capitalist Heroes."   The Wall Street Journal  (Weds., October 10, 2007):  A21. 

(Note:  ellipsis in Rearden quote was in original; the other two ellipses were added.)

 

A Toast to the Feisty Old Lady Entrepreneur Who Fought the Government, and Won

(p. B10) When Virginia-based vintner Juanita Swedenburg discovered Prohibition-vintage laws prevented her from mailing cases of wine to customers in New York, she decided to make a federal case of it.

"I was furious, never so cross, as cross as I can get," Ms. Swedenburg told the Washington Post in April 2005. A month later, the Supreme Court ruled 5-4 in Swedenburg v. Kelly that a New York law preventing wine sales across state lines was unconstitutional.

. . .

To Ms. Swedenburg, it was a matter of principle, not peddling more vino, says her son, Marc Swedenburg. She shut down her mail-order business when she filed suit in 2000, to ensure she wasn’t violating the law. The family winery still does very little mail-order sales.

Ms. Swedenburg’s day before the nation’s high court was set in motion in the early 1990s, when lawyer Clint Bolick of the Institute for Justice, a Washington D.C.-based libertarian law firm, stopped by her Middleburg, Va., tasting room. There, he discovered "a chardonnay with the toastiest nose I can remember," Mr. Bolick wrote in his book "David’s Hammer" (2007), which includes Ms. Swedenburg’s story in an anthology of David vs. Goliath tales. Mr. Bolick and Ms. Swedenburg got to talking, he writes, "When I told her that, among other things, I challenged regulatory barriers to entrepreneurship, she exclaimed, ‘Have I got a regulation for you!’ "

. . .

Ms. Swedenburg expressed regret that her husband didn’t see her constitutional arguments prevail. "He never made fun of me for doing something as foolish as this. Some men would say, ‘What are you getting into all this foolishness for?’ Not him," she told the Washington Post. "He would always be very quiet when I’d go off on my rampage about the situation." The decision in her favor was rendered on May 16, 2005, the first anniversary of his death. Ms. Swedenburg was still bouncing around on her tractor days before her death at age 82 on June 9 in Middleburg.

 

For the full story, see:

STEPHEN MILLER.  "REMEMBRANCES; Juanita Swedenburg (1925 – 2007); Passionate Winemaker Won Fight To Sell Product Across State Lines." The Wall Street Journal (Sat., June 16, 2007):  A6.

(Note:  ellipses added.)

 

The reference for the Bolick book, is:

Bolick, Clint. David’s Hammer: The Case for an Activist Judiciary. Washington D.C.: Cato Institute, 2007.

 

  Source of book image:   http://images.barnesandnoble.com/images/12270000/12274961.jpg

 

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.

 

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.

 

Searching for Schumpeter in Amazon

 

Econ Journal Watch, a fresh innovative online journal, just published a paper of mine where I document the large number of books included in Amazon.com’s "Search Within the Book" feature, that mention Schumpeter.  The nature of the mentions vary, but many relate to Schumpeter’s process of creative destruction.  The focus on creative destruction is especially pronounced in business books. 

The fact that many business practitioners find "creative destruction" to be a fruitful concept in understanding capitalism, speaks well of the concept, and speaks well of Schumpeter.

 

The citation for my paper is:

Diamond, Arthur M., Jr. "Thriving at Amazon: How Schumpeter Lives in Books Today." Econ Journal Watch 4, no. 3 (September 2007): 338-44.

 

My paper has been highlighted at: 

http://organizationsandmarkets.com/2007/09/10/content-analysis-using-amazoncom/

(Thanks to Kevin Rollins for alerting me to this blog entry.)

 

Dinner with Hayek

 

Recently (6/10/07) at dinner with a group of foreign graduate students at George Mason University, I learned that one of the students was from Venezuela, and so I mentioned to her that one of my friends during my graduate student days at the University of Chicago had been from Venezuela, and that he had been responsible for bring F.A. Hayek to speak at the University.  When I said his name was “Cartea,” she said that she had had a professor named Cartea who was an admirer of Hayek, but who had unfortunately died in an accident a few years ago.

This was surprising and distressing news.

Cartea had charisma, and was not afraid to use it.  He was not always a model of responsible behavior, but he had such child-like enthusiasm, that it was hard to be mad at him for long.  One of his main weaknesses is that he loved books.  Often he would bring me his latest purchase from the Seminary Co-op Bookstore, hold it up, and say in his inimitable accent and cadence:  “Pure Gold!”    

In Chicago, I had a car, and Cartea did not.  He asked if I would drive him to pick up Hayek and Hayek’s wife at the airport.  When we got to the airport, Cartea was hungry and wanted to stop and get a hamburger.  I thought it was not prudent to take the time to do this, but Cartea was insistent, and we stopped. 

We ended up getting to the gate just barely by the time of the Hayeks’ scheduled arrival (these were the innocent pre-terrorism days when you could actually meet guests at their gate).  But to our dismay, we learned that the flight at arrived early, and apparently Hayek had grabbed a cab to the University.

So we drove to the Center for Continuing Education where the Hayeks were staying.  There we learned that they had headed to the then-best restaurant in Hyde Park, called something like the “Courtyard.” 

At some point along the way, while still in the airport I think, Cartea purchased a single rose.  We walked into the restaurant, and found the Hayeks.  And then, with a charm that I could admire, but not imitate, he flamboyantly presented the rose to Mrs. Hayek, to her obvious delight.  (I do not remember what he said, or how he explained-away our absence from at the airport—I do remember that the word “hamburger” did not pass his lips.

The pleased Hayek invited us to join them for dinner.  We did.  It was just me, Cartea, and the Hayeks, and it stuns me to think that of the four, only I am still alive.

I would like to be able to report that some deep issues of classical liberal political theory were discussed, but if they were, I have no memory of that.  My memory is that the discussion was mainly of a personal, small-talk variety.  For example, one or both of the Hayeks had long wanted to view a solar eclipse, so they had recently flown to somewhere in the world where such an eclipse had occurred.

And I remember Hayek teasing Mrs. Hayek for delaying their being together by marrying someone else before Hayek, and I remember her teasing him back that he should have made his intentions clear earlier.  (This was the second Mrs. Hayek; at some point I learned that he had divorced the first Mrs. Hayek.)

I only have a couple of other memories of this visit of Hayek to Chicago.  One was when (the next day?) Cartea had me drive Hayek to a press conference downtown.  Hayek thought I was going the wrong way, and was annoyed.  I was pretty sure I was going the right way (and it turned out I was right), but it was stressful for a graduate student to be disagreeing with an insistent, and highly admired, Nobel-prize-winner.

Another disjointed memory is that sometime during the visit I asked him to sign my copy of the first volume of Law, Legislation, and Liberty.  This he did with a disdainful frown, seeming to be annoyed that I would bother him with such a foolish request.

 

(Note one:  I do not remember when the dinner described above occurred, although it could be learned; I bet David Theroux of the Independent Institute would remember.  I was at the University of Chicago from the fall of 1974 through the spring of 1981; and I think the Hayek visit occurred sometime during the latter half of this period.)

(Note two:  this was not the first time I had encountered Hayek.  I drove down to St. Louis with Joe Cobb and another libertarian Chicago student whose name I regrettably cannot remember.  I believe that it was on this occasion that I had a good talk with Phylis Schlafly’s son, who made an articulate economic argument against patents; I think he even gave me an article by someone to bolster his case.  Ben Rogge introduced Hayek.  What I remember about the introduction was that in part of it, Rogge made a polite, but strong, swipe at Ayn Rand, saying I think, that Hayek’s thinking was a much sounder grounding for a libertarian philosophy.  Rogge knew I was a strong Rand enthusiast, so I imagined that he was making the comment mainly for my benefit.  Before the introduction, Rogge offered to take me over to introduce me to Murray Weidenbaum, who was at the event.  I regret that out of some temporary shyness, I declined the offer.  Anyway, on the way back from St. Louis, the discussion was so intense and interesting that I neglected to attend to the gasoline indicator, and we ran out of gas in some small town in Illinois.  I managed to get us to the town gas station, but it was closed because the owner, and all employees, were attending some local social function.  We ended up having to stay overnight in this God-forsaken berg.  Joe was very mad at me.)

(Note three:  the blog entry above was written on 6/11/07.)