artdiamondblog.com – Page 418 – Art Diamond's web log

Progress of Economic Science on Central Banking

The passage below is a comment by former head of the Fed, Paul Volcker.

(p. 25) . . . I recently commented to some of my economist friends that I’m not aware of any large contribution that economic science has made to central banking in the last 50 years or so.

Our ability to forecast is still very limited. The old issues of the relative role of fiscal and monetary policies are still debated. Markets are certainly more complex, and some of the old approaches toward monetary control seem less relevant. Recent events have certainly illustrated limitations in our understanding of the economy.
The advent of floating exchange rates, which partly reflects a shift in academic thinking, has certainly been important, but the underlying problems of policy seem familiar.

Stern, Gary H., interviewer. “Paul A.Volcker in Conversation with Gary H. Stern.” The Region (September 2009): 18-29.
(Note: ellipsis added.)

Isaacson’s “Steve Jobs” Tells Us Much About the Innovative Project Entrepreneur

Source of book image: http://www.internetmonk.com/wp-content/uploads/walter-isaacson-steve-jobs1.png

Steve Jobs is one of my favorite examples of what I call the “project entrepreneur.” Walter Isaacson has written a fascinating biography of Jobs, full of memorable examples for any student of the innovative entrepreneur.
During the next few weeks, I will occasionally add entries that quote some of the more important or thought-provoking passages.

The book under review is:
Isaacson, Walter. Steve Jobs. New York: Simon & Schuster, 2011.

Business Cycles May Arise from “the Summation of Random Causes,” Rather than from Creative Destruction

The Slutsky result summarized below would seem to imply that you can explain business cycles without fingering creative destruction as the culprit, as Schumpeter had seemed to do. The costs of creative destruction are thus reduced, and the case for creative destruction strengthened.

(p. 232) Phil Davies and Joe Mahon investigate “The Meaning of Slutsky.” “A middleaged professor working at a Moscow think tank, [Eugen] Slutsky was virtually unknown to economists in Europe and the United States when he published his landmark paper on cyclical phenomena in 1927. In a bold statistical experiment, Slutsky demonstrated that random numbers subjected to statistical calculations similar to those used to reveal trends in economic time-series formed wavelike patterns indistinguishable from business cycles. The implication was that a similar stochastic process–‘the summation of random causes,’ as Slutsky described it–might be at work in the actual economy, causing prosperity to ebb and flow without the agency of sunspots, meteorological patterns or other cyclical forces. ‘That was a hell of an idea,’ said Robert Lucas, a University of Chicago economist who pioneered modern business cycle theory, in an interview. ‘It was just a huge jump from what anyone had done.’

Source:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 24, no. 2 (Spring 2010): 227-34.
(Note: bracketed name in original.)

The published version of the article summarized by Taylor is:
Davies, Phil, and Joe Mahon. “The Meaning of Slutsky.” The Region (Dec. 2009): 13-17, 42-46.

Garcia “Wanted to Get an Education and Get Out of” the “Sustainable” Life

“In a straightforward sense, Mr. García, 44, is a Mexican ecologist. More broadly, though, he is a self-appointed emissary from the land once known as Pimería Alta, an interpreter of its culture, plants and people.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. D6) Over the weekend, Mr. García would be driving back to his family seat in the mission town of Magdalena de Kino, Mexico. In a way, his personal mission is to recreate the orchards he knew there. He has started with dozens of seedlings in the backyard of the small ranch house that he shares with his girlfriend, Dena Cowan, a Spanish-language interpreter and videographer. (The couple recently produced a documentary, in Spanish and English, about the Kino Heritage Fruit Trees Project called “Tasting History.”)

Yet he remembered the orchards with something other than simple nostalgia.
As a child, he packed boxes of fruit to load onto his uncle’s truck. “My father had this farm that he was renting, probably two acres,” Mr. García recalled. By necessity, “the only things we bought from the store were salt, sugar, coffee and kerosene,” he said. “Everything else we produced.”
“Our mother, she made our underwear out of the wheat sacks,” he continued. “My father used to make these homemade shoes for my brothers: leather, with used tires on the sole. They would hide them in the river on the way to school and then go to school barefooted.” Better that, he recalled, than let classmates see their privation.
By the time Mr. García reached junior high, his older sister has become a teacher and the family’s lot had improved. They installed indoor plumbing, for a start. There was nothing trendy about what he ironically calls their “sustainable” years. “I got the tail end,” Mr. García said. “But I got enough to realize how hard work it is. I learned enough to realize I wanted to get an education and get out of that life.”

For the full story, see:
MICHAEL TORTORELLO. “Seeds of an Era Long Gone.” The New York Times (Thurs., November 22, 2012): D1 & D6.
(Note: the online version of the article was dated November 21, 2012.)

Online Employers Treat Workers More Honestly and Fairly than In-person Employers

(p. 233) John J. Horton surveys “The Condition of the Turking Class: Are Online Employers Fair and Honest?” Amazon Mechanical Turk is a “marketplace for work,” as explained at <https://www.mturk.com/mturk/welcome>. Employers post “Human Intelligence Tasks,” which can be tasks like writing keywords that accompany photos or writing bogus product reviews, and workers anywhere in the world can sign up to do them. Horton used Mechanical Turk to survey 200 respondents, who were paid 12 cents apiece for responding to a survey. Of the respondents, 111 were Americans, 58 from India, and the others from other countries. When asked what percentage of employers in their home country treat workers honestly and fairly, the average answer was 64 percent; in comparison, when asked what percentage of Mechanical Turk Requestors treated them (p. 234) fairly, the median answer was 69 percent.

Source:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 24, no. 2 (Spring 2010): 227-34.
(Note: ellipses in original.)

The published version of the article summarized by Taylor is:
Horton, John J. “The Condition of the Turking Class: Are Online Employers Fair and Honest?” Economics Letters 111, no. 1 (April 2011): 10-12.

DaVita Threw Out Medicine and Billed Taxpayer: Huge Medicare Fraud

I saw this clip broadcast on Wolf Blitzer’s “Situation Room” broadcast on 11/29/12 (if memory serves–it might have been the day before).
The clip shows the magnitude of the fraud, but also emphasizes that there were significant incentives for those who knew about the fraud to keep their mouths shut.
This is one huge case of over-billing, but over-billing happens all the time. Taxpayers could have used that money for other purposes. The opportunity cost is huge.

A link to the clip posted on CNN, is:
http://ac360.blogs.cnn.com/2012/11/29/company-accused-of-giant-medicare-fraud/?iref=allsearch
(Note: I believe the November 29, 2012 date in the image above is the date that Drew Griffin posted the clip to the CNN blog, not necessarily the date of the broadcast.)

Personal DNA Data, Smart Phones, and the Social Network Can Democratize Medicine

(p. 236) With the personal montage of your DNA, your cell phone, your social network—aggregated with your lifelong health information and physiological and anatomic data—you are positioned to reboot the future of medicine. Who could possibly be more interested and more vested in your data? For the first time, the medical world is getting democratized. Think of the priests before the Gutenberg printing press. Now, nearly six hundred years later, think of physicians and the creative destruction of medicine.

Source:
Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.

Rajan Hired to Open India to Entrepreneurship

“Raghuram G. Rajan criticized Indian policy makers during a speech in April at the Indian School of Business. In August, the Indian government offered him a job.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B3) NEW DELHI — In April, the economist Raghuram G. Rajan gave a speech to a group of graduating Indian students in which he criticized the country’s policy makers for “repeating failed experiment after failed experiment,” rather than learning from the experiences of other countries. A week later, he assailed the government again, this time in a speech attended by Prime Minister Manmohan Singh.

But instead of drawing a rebuke from India’s often thin-skinned leaders, he got a job offer. In August, Mr. Singh, who has frequently sought Mr. Rajan’s advice, called and asked him to take a leave from his job as a professor at the University of Chicago to return to India, where he was born, to help revive the country’s flagging economy. Within weeks, he was at work as the chief economic adviser in the Finance Ministry.
Analysts say the appointment of an outspoken academic like Mr. Rajan, along with the recent push by New Delhi to reduce energy subsidies and open up retailing, insurance and aviation to foreign investment, signal that India’s policy makers appear to be serious about tackling the nation’s economic problems.
. . .
Mr. Rajan said he would like to focus his efforts on three big themes: liberalizing India’s financial system; making it easier to do business, particularly for entrepreneurs and manufacturers; and fixing India’s dysfunctional food distribution system, which wastes a lot of food even as many of the country’s poor are malnourished.

For the full story, see:
VIKAS BAJA. “As Its Economy Sags, India Asks a Critic to Come Home and Help Out.” The New York Times (Sat., October 6, 2012): B3.
(Note: ellipsis added.)
(Note: the online version of the article was dated October 5, 2012.)

Entrepreneurial Capitalism Offers the Best Chance “for a Life of Engagement and Personal Growth”

(p. 228) Edmund S. Phelps explores “Refounding Capitalism.” “One has to conclude that ‘generation of wealth’ is not special to capitalism. Corporatist economies are quite good at that. . . . A merit of a well-functioning capitalism (again: I do not mean free-market policy: low tax rates, etc.) is the economic freedoms it offers entrepreneurs, managers, employees and consumers–freedoms that socialist, corporatist and statist systems do not provide. . . . Ordinary people, if they are to find intellectual growth and an engaging life, have to look outside the home: these (p. 229) things can be found only at work, if anywhere. And for these rewards to be available for large numbers of people, the economy must be modern. And as a practical matter, that requires that it be based predominantly on a well-functioning capitalist system. Thanks to the grassroots, bottom-up processes of innovation, capitalism at its best can deliver–far more broadly than Soviet communism, eastern European socialism, and western European corporatism can–chances for the mental stimulation, problem-solving, exploration and discovery required for a life of engagement and personal growth.”

Nobel-Prize winner Edmund Phelps as quoted in:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 24, no. 2 (Spring 2010): 227-34.
(Note: ellipses in original.)

The original source of the Phelps quotes is:
Phelps, Edmund S. “Refounding Capitalism.” Capitalism and Society 4, no. 3 (2009).

American Innovators Created Synergies and Interchangeable Parts

Source of book image: online version of the WSJ review quoted and cited below.

(p. A13) . . . the post-Civil War industrialization had an important and largely overlooked predecessor in the first decades of the 19th century, when, as Charles Morris writes in “The Dawn of Innovation,” “the American penchant for mechanized, large-scale production spread throughout industry, presaging the world’s first mass-consumption economy.” It is a story well worth telling, and Mr. Morris tells it well.
. . .
Whole industries sprang up as the country’s population boomed and spilled over into the Middle West. The rich agricultural lands there produced huge surpluses of grain and meat, especially pork. The city of Cincinnati–whose population grew to 160,000 in 1860, from 2,500 in 1810–became known as “Porkopolis” because of the number of hogs its slaughterhouses processed annually.
Mr. Morris does a particularly good job of explaining the crucial importance of synergy in economic development, how one development leads to another and to increased growth. The lard (or pig fat) from the slaughterhouses, he notes, served as the basis for the country’s first chemical industry. Lard had always been used for more than pie crust and frying. It was a principal ingredient in soap, which farm wives made themselves, a disagreeable and even dangerous task thanks to the lye used in the process.
But when lard processing was industrialized to make soap, it led to an array of byproducts such as glycerin, used in tanning and in pharmaceuticals. Stearine, another byproduct, made superior candles. Just in the decade from the mid-1840s to the mid-1850s, Cincinnati soap exports increased 20-fold, as did the export of other lard-based products. Procter & Gamble, founded in Cincinnati in 1837 by an Irish soap maker and an English candle maker who had married sisters, grew into a giant company as the fast-rising middle class sought gentility.
Mr. Morris goes into great detail on the development of interchangeable parts–the system of making the components of a manufactured product so nearly identical that they can be easily substituted and replaced.

For the full review, see:
John Steele Gordon. “BOOKSHELF; The Days Of Porkopolis.” The Wall Street Journal (Tues., November 20, 2012): A13.
(Note: ellipses added.)
(Note: the online version of the article was updated November 19, 2012.)

The book under review, is:
Morris, Charles R. The Dawn of Innovation: The First American Industrial Revolution. Philadelphia, PA: PublicAffairs, 2012.

Progress Will Slow If Consumers Wait for Doctors to Creatively Destroy Medicine

(p. 195) . . . it remains unclear whether there is adequate plasticity of a plurality of physicians to embrace the digital world and acknowledge that the era of paternalism is passé. My sense is that young physicians who are digital natives will be likely to assimilate but that it will be quite difficult for the vast majority who are in practice and inculcated with an older idea of how medical care should be rendered. Eventually there will be enough digital native physicians to take charge, but that will take decades to be accomplished. In the meantime, consumers are fully capable of leading the movement and contributing to medicine’s creative destruction. And so they must.

Source:
Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.
(Note: ellipsis added.)