Economics – Page 187 – artdiamondblog.com

A Marshmallow Now or an Elegant French Pastry Four Years Later

Source of book image: http://images.amazon.com/images/G/01/richmedia/images/cover.gif

(p. 19) Growing up in the erratic care of a feckless single mother, “Kewauna seemed able to ignore the day-to-day indignities of life in poverty on the South Side and instead stay focused on her vision of a more successful future.” Kewauna tells Tough, “I always wanted to be one of those business ladies walking downtown with my briefcase, everybody saying, ‘Hi, Miss Lerma!’ “

Here, as throughout the book, Tough nimbly combines his own reporting with the findings of scientists. He describes, for example, the famous “marshmallow experiment” of the psychologist Walter Mischel, whose studies, starting in the late 1960s, found that children who mustered the self-control to resist eating a marshmallow right away in return for two marshmallows later on did better in school and were more successful as adults.
“What was most remarkable to me about Kewauna was that she was able to marshal her prodigious noncognitive capacity — call it grit, conscientiousness, resilience or the ability to delay gratification — all for a distant prize that was, for her, almost entirely theoretical,” Tough observes of his young subject, who gets into college and works hard once she’s there. “She didn’t actually know any business ladies with briefcases downtown; she didn’t even know any college graduates except her teachers. It was as if Kewauna were taking part in an extended, high-stakes version of Walter Mischel’s marshmallow experiment, except in this case, the choice on offer was that she could have one marshmallow now or she could work really hard for four years, constantly scrimping and saving, staying up all night, struggling, sacrificing — and then get, not two marshmallows, but some kind of elegant French pastry she’d only vaguely heard of, like a napoleon. And Kewauna, miraculously, opted for the napoleon, even though she’d never tasted one before and didn’t know anyone who had. She just had faith that it was going to be delicious.”

For the full review, see:
ANNIE MURPHY PAUL. “School of Hard Knocks.” The New York Times Book Review (Sun., August 26, 2012): 19.
(Note: the online version of the article is dated August 23, 2012.)

The full reference for the book under review, is:
Tough, Paul. How Children Succeed: Grit, Curiosity, and the Hidden Power of Character. Boston, MA: Houghton Mifflin Harcourt, 2012.

Economists Have “the Tools to Slap Together a Model to ‘Explain’ Any and All Phenomena”

(p. 755) The economist of today has the tools to slap together a model to ‘explain’ any and all phenomena that come to mind. The flood of models is rising higher and higher, spouting from an ever increasing number of journal outlets. In the midst of all this evidence of highly trained cleverness, it is difficult to retain the realisation that we are confronting a complex system ‘the working of which we do not understand’. . . . That the economics profession might be humbled by recent events is a realisation devoutly to be wished.

Source:
Leijonhufvud, Axel. “Out of the Corridor: Keynes and the Crisis.” Cambridge Journal of Economics 33, no. 4 (July 2009): 741-57.
(Note: ellipsis added.)
(Note: the passage above was quoted on the back cover of The Cato Journal 30, no. 2 (Spring/Summer 2010).)

Economists Optimistic that Economy Can Adapt to Climate Change

Source of book image: http://www.bibliovault.org/thumbs/978-0-226-47988-0-frontcover.jpg

(p. 222) Efficient policy decisions regarding climate change require credible estimates of the future costs of possible (in)action. The edited volume by Gary Libecap and Richard Steckel contributes to this important policy discussion by presenting work estimating the ability of economic actors to adapt to a changing climate. The eleven contributed research chapters primarily focus on the historical experience of the United States and largely on the agricultural sector. While the conclusions are not unanimous, on average, the authors tend to present an optimistic perspective on the ability of the economy to adapt to climate change.

For the full review, see:
Swoboda, Aaron. “Review of: The Economics of Climate Change: Adaptations Past and Present.” Journal of Economic Literature 50, no. 1 (March 2012): 222-24.

Book under review:
Libecap, Gary D., and Richard H. Steckel, eds. The Economics of Climate Change: Adaptations Past and Present, National Bureau of Economic Research Conference Report. Chicago: University of Chicago Press, 2011.

Macaulay Argues that a Limited Government that Protects Property Will Promote Economic Growth

Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.

Source:
Macaulay, Thomas Babington, Lord. “Review of: Robert Southey’s “Sir Thomas More; or, Colloquies on the Progress and Prospects of Society”.” In Critical and Historical Essays Contributed to the Edinburgh Review. London: Longman, Green, Longman, and Roberts, 1830.
(Note: the quote above appeared on the back cover of The Cato Journal 30, no. 1 (Winter 2010); Macaulay’s full review, including the quote, can be viewed online at: http://www.econlib.org/library/Essays/macS1.html )
(Note: the online version does not give page numbers, but gives what I think are “screen” numbers. The passage quoted is all of “SC.96” which appears at the very end of the essay.)

Information Technology Enables Massive Process Creative Destruction

(p. 2) . . . I want to argue that something deep is going on with information technology, something that goes well beyond the use of computers, social media, and commerce on the Internet. Business processes that once took place among human beings are now being executed electronically. They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn’t seem particularly consequential — it’s almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one.
. . .
(p. 5) Now this second, digital economy isn’t producing anything tangible. It’s not making my bed in a hotel, or bringing me orange juice in the morning. But it is running an awful lot of the economy. It’s helping architects design buildings, it’s tracking sales and inventory, getting goods from here to there, executing trades and banking operations, controlling manufacturing equipment, making design calculations, billing clients, navigating aircraft, helping diagnose patients, and guiding laparoscopic surgeries. Such operations grow slowly and take time to form.
. . .
(p. 6) Is this the biggest change since the Industrial Revolution? Well, without sticking my neck out too much, I believe so. In fact, I think it may well be the biggest change ever in the economy. It is a deep qualitative change that is bringing intelligent, automatic response to the economy. There’s no upper limit to this, no place where it has to end.
. . .
I think that for the rest of this century, barring wars and pestilence, a lot of the story will be the building out of this second economy, an unseen underground economy that basically is giving us intelligent reactions to what we do above the ground.

Source:
Arthur, W. Brian. “The Second Economy.” McKinsey Quarterly, no. 4 (Oct. 2011): 90-99.
(Note: ellipses added.)
(Note: I first saw the passages quoted above on pages 243-244 of Timothy Taylor’s “Recommendations for Further Reading” feature in The Journal of Economic Perspectives 26, no. 1 (Winter 2012).)

Mitt Romney on Innovation and Creative Destruction

Source of book image: http://mittromneycentral.com/uploads/No-Apology1.jpg

(p. 108) Innovation and Creative Destruction

The key to increasing national prosperity is to promote good ideas and create the conditions that can lead them to be fully exploited–in existing businesses as well as new ones. Government is generally not the source of new ideas, although innovations from NASA and the military have provided frequent exceptions. Nor is government where innovation is commercially developed. But government policies do, in fact, have a major impact on the implementation of innovative ideas. The degree to which a nation makes itself productive, and thus how prosperous its citizens become, is determined in large measure by whether government adopts policies that stimulate innovation or that stifle it.
The government policy that has the greatest effect on innovation is simply whether or not the government will allow it. It’s sad but true: Government can and often does purposefully prevent innovation and the resulting improvement in productivity. Recall my hypothetical example of a society in which half the farming jobs were lost due to innovation in the use of a plow? Some nations accept and encourage such “creative destruction,” recognizing that in the long run it leads to greater productivity and wealth for its citizens. But other nations succumb to the objections of those in danger of becoming unemployed and prevent innovation that may reduce short-term employment.
Two centuries ago, more than three-quarters of our workforce actually did labor on farms. Over the succeeding decades, innovations like irrigation, fertilizer, and tractors were welcomed, and eventually large farming corporations were allowed to prosper, despite protests from family farmers and the often heart-wrenching dislocations that accompanied consolidation of farmlands. The result was the disappearance of millions of agricultural jobs and the large-scale migration of Americans from rural regions to our cities. Once there, they provided the labor that powered America’s new industrial age. And at the same time, because farming innovation and productivity were allowed to flourish, America became the leader in agriculture education, research, and industry. Innovations from these sources have enabled us to produce sufficient food to feed not only our growing population but other parts of the world as well.

Source:
Romney, Mitt. No Apology: The Case for American Greatness. New York: St. Martin’s Press, 2010.
(Note: bold in original.)

Failed Entrepreneurial Firms that Signal New Markets Are “Optimistic Martyrs”

(p. 260) Colin Camerer and Dan Lovallo, who coined the concept of competition neglect, illustrated it with a quote from the then chairman of Disney Studios. Asked why so many expensive big-budget movies are released on the same days (such as Memorial Day and Independence Day), he replied: Hubris. Hubris. If you only think about your own business, you think, “I’ve got a good story department, I’ve got a good marketing department, we’re (p. 261) going to go out and do this.” And you don’t think that everybody else is thinking the same way. In a given weekend in a year you’ll have five movies open, and there’s certainly not enough people to go around.
The candid answer refers to hubris, but it displays no arrogance, no conceit of superiority to competing studios. The competition is simply not part of the decision, in which a difficult question has again been replaced by an easier one. The question that needs an answer is this: Considering what others will do, how many people will see our film? The question the studio executives considered is simpler and refers to knowledge that is most easily available to them: Do we have a good film and a good organization to market it? The familiar System 1 processes of WYSIATI and substitution produce both competition neglect and the above-average effect. The consequence of competition neglect is excess entry: more competitors enter the market than the market can profitably sustain, so their average outcome is a loss. The outcome is disappointing for the typical entrant in the market, but the effect on the economy as a whole could well be positive. In fact, Giovanni Dosi and Dan Lovallo call entrepreneurial firms that fail but signal new markets to more qualified competitors “optimistic martyrs”– good for the economy but bad for their investors.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Overly Optimistic Entrepreneurs Seek Government Support for Projects that Will Usually Fail

People have a right to be overly-optimistic when they invest their own money in entrepreneurial projects. But governments should be prudent caretakers of the money they have taken from taxpayers. The overly-optimistic bias of subsidy-seeking entrepreneurs weakens the case for government support of entrepreneurial projects.

(p. 259) The optimistic risk taking of entrepreneurs surely contributes to the economic dynamism of a capitalistic society, even if most risk takers end up disappointed. However, Marta Coelho of the London School of Economics has pointed out the difficult policy issues that arise when founders of small businesses ask the government to support them in decisions that are most likely to end badly. Should the government provide loans to would-be entrepreneurs who probably will bankrupt themselves in a few years? Many behavioral economists are comfortable with the “libertarian paternalistic” procedures that help people increase their savings rate beyond what they would do on their own. The question of whether and how government should support small business does not have an equally satisfying answer.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Decouple Learning from Credentialing

“JOHN HENNESSY: ‘There’s a tsunami coming.’ [At left] . . . , John Hennessy & Salman Khan.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. R8) Is there anything to be done about the rising price of higher education? That was the question posed to John Hennessy, president of Stanford University, and Salman Khan, founder of Khan Academy, a nonprofit online-learning organization. They sat down with The Wall Street Journal’s Walt Mossberg to discuss how technology might be part of the solution.

Here are edited excerpts of their conversation.
. . .
MR. MOSSBERG: You have a lot of money at Stanford. I’ve been, until recently, a trustee of Brandeis University. It’s a very good university. It charges about what you do. But it doesn’t have your money, and there are a lot of colleges like that.
MR. HENNESSY: Agreed, and if you look at the vast majority of colleges in the U.S., there are way too many that are [dependent on tuition to fund their budgets]. That is not sustainable. We have to do something to bend the cost curve, and this is where technology comes in.
MR. KHAN: On the sustainability question, I agree. I think the elites will probably do just fine, but for the bulk of universities, nothing can grow 5% faster than inflation forever. It will just take over the world, and that’s what’s happening now.
There is a fundamental disconnect happening between the providers of education and the consumers of education. If you ask universities what they are charging the $60,000 for, they’ll say, “Look at our research facilities. Look at our faculty. Look at the labs and everything else.” And then if you ask the parents and the students why they are taking on $60,000 of debt, they’ll say, “Well, I need the credential. I need a job.”
So one party thinks they’re selling a very kind of an enriching experience, and the other one thinks that they’re buying a credential. And if you ask the universities what percentages of your costs are “credentialing,” they say oh, maybe 5% to 10%. And so I think there’s an opportunity if we could decouple those things–if the credentialing part could happen for significantly less.
MR. MOSSBERG: What do you mean by the credentialing part?
MR. KHAN: If you think about what education is, it’s a combination. There’s a learning part. You learn accounting, you learn to write better, to think, whatever. Then there is a credentialing part, where I’m going to hand you something that you can go take into the market and signal to people that you know what you’re doing.
Right now they’re very muddled, but this whole online debate or what’s happening now is actually starting to clarify things. At Khan Academy we’re 100% focused on the learning side of things. And I think it would be interesting [if credentials could be earned based on what you know and not on where you acquired that knowledge].

For the full interview, see:
Walt Mossberg, interviewer. “Changing the Economics of Education; John Hennessy and Salman Khan on how technology can make the college numbers add up.” The Wall Street Journal (Mon., June 4, 2012): R8.
(Note: bracketed words in caption, and ellipses, added; bold and italics in original.)

Revolutionary Entrepreneurs Need “Unbridled Confidence and Arrogance”

(p. B1) Will there be another?
It’s a bit absurd to try to identify “the next Steve Jobs.” Two decades ago, Mr. Jobs himself wouldn’t even have qualified. Exiled from Apple Inc., . . . Mr. Jobs was then hoping to revive his struggling computer maker, NeXT Inc. . . .
But just as Mr. Jobs followed Henry Ford and Thomas Edison, there will some day be another innovator with the vision, drive and disdain of the status quo to spark, and then direct, big changes in how we live.
. . .
“You have to try the unreasonable,” says Vinod Khosla, a co-founder of Sun Microsystems Inc., who, as a longtime venture capitalist, has seen thousands of would-be revolutionaries. Two key characteristics, Mr. Khosla says: “unbridled confidence and arrogance.”

For the full story, see:
SCOTT THURM and STU WOO. “Who Will Be the ‘Next Steve Jobs’?” The Wall Street Journal (Sat., October 8, 2011): B1 & B3.
(Note: ellipses added.)

Romney Right that Culture Matters for Economic Success

Source of book image: http://photo.goodreads.com/books/1172699090l/209176.jpg

In the piece quoted below, and in much of the TV media coverage, the story is spun as being that Romney offended the Palestinians. But that is not the story. The story is that Romney courageously highlighted an important, but politically incorrect, truth—culture, generally, does matter for economic performance; and Israeli culture, specifically, has encouraged economic growth.
Romney referred to an important book by the distinguished economic historian David Landes. Last school year, one of the students in my Economics of Technology seminar gave a presentation on a related Landes book. That presentation can be viewed at: http://www.amazon.com/review/R2GLBAMFCS5PXH/ref=cm_cr_pr_perm?ie=UTF8&ASIN=0521094186&linkCode=&nodeID=&tag=
I recently read another relevant book, Start-Up Nation, that directly supports Romney’s specific claim, by making the case that Israeli culture is especially congenial to entrepreneurial initiative and success.

(p. A1) JERUSALEM — Mitt Romney offended Palestinian leaders on Monday by suggesting that cultural differences explain why the Israelis are so much more economically successful than Palestinians, thrusting himself again into a volatile issue while on his high-profile overseas trip.
. . .
In the speech, Mr. Romney mentioned books that had influenced his thinking about nations — particularly “The Wealth and Poverty of Nations,” by David S. Landes, which, he said, argues that culture is the defining factor in determining the success of a society.
“Culture makes all the (p. A14) difference,” Mr. Romney said. “And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things.”
He added, “As you come here and you see the G.D.P. per capita, for instance, in Israel, which is about $21,000, and compare that with the G.D.P. per capita just across the areas managed by the Palestinian Authority, which is more like $10,000 per capita, you notice such a dramatically stark difference in economic vitality. And that is also between other countries that are near or next to each other. Chile and Ecuador, Mexico and the United States.”
The remarks, which vastly understated the disparities between the societies, drew a swift rejoinder from Palestinian leaders.

For the full story, see:
ASHLEY PARKER and RICHARD A. OPPEL Jr. “Romney Trip Raises Sparks at a 2nd Stop.” The New York Times (Tues., July 31, 2012): A1 & A14.
(Note: ellipsis added.)
(Note: the online version of the story has the date July 30, 2012.)

The Landes book discussed by Romney is:
Landes, David S. The Wealth and Poverty of Nations. New York: W.W. Norton & Company, 1998.

The book on Israeli entrepreneurship, that I mention in my comments, is:
Senor, Dan, and Saul Singer. Start-Up Nation: The Story of Israel’s Economic Miracle. hb ed. New York: Twelve, 2009.