Archive for the ‘economics’ Category
A question for my brothers and sisters in the economics profession: Why do very different private colleges charge roughly the same tuition? For example, a full blown elite research 1 school like the University of Chicago charges about $42k per year. Harvard charges about $39k if you add tuition and the required health fee together. An elite liberal arts college like Swarthmore charges about $40k a year. A much less well known private college like DePauw charges $38k a year. Colgate charges about $45k per year.
The big savings come from going to tiny schools (e.g. Coe charges $33k a year, or Notre Dame of California charges $24k a year). Why is the price/prestige curve flat except for tiny liberal arts colleges? If you believe the Dale/Krueger paper on college choice and income (e.g., doesn’t matter which college you go to, for the most part), then these prices merely reflect that colleges are just selling a generic job market certification that any institution can provide. Other explanations?
Guest blogging for Megan McArdle at the Atlantic, Garrett Jones summarizes a new paper in the American Economic Review showing that books sales predict business cycles:
She [Michelle Alexopoulous] found that books really do predict booms. In her paper looking at new books from 1955-1997, she found that new technical books predicted between 1/6 and 1/5 of all medium-term changes in business capital investment. Total GDP and (to a more modest extent) hours of work moved together with new tech books, usually with a lag of a couple of years.
Further, she found that a good economy didn’t predict more tech books, and a bad economy didn’t predict fewer. So reverse causation isn’t the story.
Finally, as a placebo, she checked to see whether years when lots of history books were published tended to precede economic booms. They didn’t. Alexopoulos made a good effort of kicking the tires on this hypothesis. And remember: She only looked at technical books: There are surely a lot of other new ideas in fields like management, biotech, and accounting that matter for business productivity, and they also seem to come in waves.
In other words, as people get ready to create wealth, they require new knowledge, a search indicated by book sales. Nice paper.
Our friend and guest blogger emeritus, Gabriel Rossman, has an article in the Atlantic on the subject of piracy. Gabriel uses piracy as an opportunity to talk about the strengths and weaknesses of traditional economic explanations. The key point is that people will often rely on ideas of what is “fair” versus an application of price theory.
Although the discipline of economics has many valuable things to teach us about how markets work, especially in the long-run, the subjective experience of someone bargaining does not necessarily reflect thinking through how a rational actor would apply price theory (competitive markets) or game theory (monopolistic markets) to the situation. Rather people take moralized approaches to exchange and seem to apply various relational models to exchange, which includes not only market exchange but also gift exchange, patron-client ties, and primitive communism. Moreover, even when people accept that a situation is one of market exchange it does not come naturally to think of price like modern economists think of it, as “market clearing.” Rather much as people intuitively expect physical objects to behave by Buridan’s impetus rather than Newton’s inertia, people’s intuitive notions about price can have less to do with how economics thinks of it than how Aristotle, Aquinas, and Marx thought of it, as “just price” or “fair price.”
On the Atlantic blog, former orgtheory guest blogger, Gabriel Rossman, runs through the complications in deriving the price pirates should ask for a hostage.
[M]uch like how most people who haven’t studied statistics balk at the idea that the ratio of sample size to population size is irrelevant to statistical inference, people seem to have a strong intuition that the “market price” is relevant to a bilateral monopoly even though the whole idea of a bilateral monopoly is that there is not really a market but only a series of discrete one-off transactions. In the absence of substitutability, “comparable” transactions are irrelevant as they don’t imply opportunity cost. This is the main thing I found so fascinating about the Planet Money episode, over and over again the hostage’s party balked at the pirates demands as unreasonable in being out of line with the “market price.” We only get the pirates’ story second hand, but apparently at no point did they explain to the hostage’s party that “market price” doesn’t really exist in a bilateral monopoly. (Maybe Mogadishu University needs a better econ department).
There are two ways, which are only partially incompatible, to look at why people insist that there is a market price. The simple model is to see us as making Bayesian inferences about the price the other party is willing to accept. If a pirate asks me for $10 million when I know that previous ransoms for similar hostages from similar pirates were about $1 million, I face two possibilities. It may be that I’m facing an usually greedy or unreasonable pirate and $10 million really is the price from which he will not budge. However it seems more likely that I’m dealing with a regular pirate, who like most pirates in the past will ultimately settle for about $1 million but who is just floating a high initial figure in case I’m especially bad at this. In this sense the distribution of prices for similar transactions may not be directly relevant in the sense of providing opportunities for substitution (or the credible threat to avail myself of them) but it is still relevant as information about the zone of possible agreement. This is consistent with the Planet Money story in that Filipinos are cheaper to ransom than Europeans by an order of magnitude.
I’m amazed that pirates negotiate at all. Doesn’t this diminish their control? Do kidnappers do the same thing? Given that all of my knowledge of kidnapping scenarios is based on movies, my sense is that kidnappers try to avoid negotiation as this just seems to be a tactic used by law enforcement to ferret out their position. Why wouldn’t pirates operate by the same code?
This post is another criticism of extreme economic models of human behavior, where people act selfishly and only respond to rewards and punishments. You may think that this is a bizarre model, but it’s the default model in a lot of economic analyses. For example, when analyzing voting, the economic prediction is that no one should vote because the probability of influencing an election is very small.
The response, I’ve always thought, is that extreme rational actors represent a specific personality type. Sure, some people will think only about rewards and punishments, or you can set up an experiment where people act selfishly, but others will think of social norms and reciprocity. This isn’t to say that people are massive altruists. Rather, the social world makes a lot more sense if we assume that some big chunk of the human population is filled with modest cooperators who are not strictly selfish. If you accept that, all these “puzzles” about free riders and moral hazard make sense.
Here’s a very simple and profound example: survey prepayment. If you run a survey, you can not pay, pay before and wait for the survey to come back (“prepayment”) or pay after you get the survey (“postpayment”). The extreme rational actor models predicts that prepayment would be a horrible idea. People have the money and no personal connection to the surveyor. There is no way to get the money if they don’t do the survey. We simply trust people to do the survey. This is a great real world example of where selfishness should be the dominant strategy. Prepayment should suppress survey response rates.
What does the public opinion literature show? The complete opposite – giving away money and trusting people results in higher survey response rates than non-payment and post-payment. I was surprised to discover this, as it goes back to studies in the 1970s and it is still reported in the literature as of 2011. And it works with populations as varied as doctors, managers, and teachers, as well as random samples. Prepayment also boosts responses in panel as well as cross sectional studies. There are exceptions. For example, college students don’t do well with prepayment.
What’s the lesson here? I think it’s simple. Human beings have a baseline level of moderate cooperation. This can be triggered in a variety of ways, such as being nice to them. It’s probably evolved, as group life would be hard if we didn’t have some generalized reciprocity going on, at least with other group members. The selfish actor, while easy to model, is really misleading.
Over at Evil Twin, Nicolai Foss gently chides Bloom and Van Reenen for publishing a paper in the AER proceedings called “New Approaches to Surveying Organizations.” The issue is the validity of survey data versus other types of data:
As a rule register data are not available that can be used to address numerous interesting issues in organizational economics, labor economics, productivity research and so on. Scholars working on these issues have to resort to those softy surveys and interviews that have been the workhorses of business school faculty for decades. This is a new recognition in economics. Case in point: A recent paper by Nicholas Bloom and John Van Reenen, “New approaches to surveying organizations.” There is absolutely nothing, I submit, in this short, well-written paper that would surprise virtually any empirically oriented business school professor (i.e., virtually all bschool professors) to whom this would not be anything “new” at all, but rather old hat.
This is not a critique of Profs. Bloom and Van Reenen at all (on the contrary, it is excellent that they educate their economist colleagues in this way). It is just striking and a little bit amusing, however, that we have had to wait until 2010 until empirical approaches that have been mainstream in management research for decades reach the pages of the American Economic Review.
I agree. In the comments, Bloom argues that he didn’t find any papers addressing these issues. This is odd, a lot of the suggestions for surveys make sense and many are well discussed in the literature on surveying individuals. For example, did they consult Dillman’s works? There are also handbooks discussing surveying organizations. There’s a huge industry of people who study survey bias.
A few additional comments: I have heard multiple economists express survey skepticism. The correct response is that reliability of survey responses varies and some questions are better than others. For example, people seem to be pretty good at reporting health, while they outright lie about attending church. Surveys by themselves aren’t good or bad, but individual questions can be high quality or low quality. Also, a lot of our most important data is from self-reports – like the Census, CPS, HRS, etc. I don’t see people ditching the Census.
Second, the real problem in survey research in organizations isn’t bias. It’s response rate. There’s all kinds of tricks to boost response rates for people, but getting people to respond at work (or about work) is really, really hard. And it’s miserable for longitudinal work. If Bloom and Van Reenen can produce a solution to low response rates from orgs, I’ll be really impressed.
O&M’s Nicolai Foss delivering a lecture on Austrian Capital Theory. And, here’s O&M’s Peter Klein discussing their joint book “Organizing Entrepreneurial Judgment.”
Finally, we arrive at the end of the book forum on David Graber’s Debt. Here, I’ll summarize the last section and then wrap up with a few comments and critiques.
1. Debt has a few main goals. First, it is an attack on the theory that money is a necessary economic institution. Second, Debt tries to persuade us that money actually embodies violent forms of domination and is used to create servitude.The third section provides nothing less than a world history, with money and currency as its focus.
Before I get to a few of the empirical claims, it is worth noting that Debt’s last chapter is nothing less than audacious. It is ambitious for someone to argue that the world’s majors institutions – states, religions – are made possible by currency. One might say this is a monetized history of the world.
Ok, so let’s get the bottom line. Graeber’s big claim is that world history, as it played out in Europe and Asia, can be viewed in three phases. An early phase occurs when currency is invented to manage large temples. This currency is then expropriated by states, used, and expanded for war fare. That leads to empires. The second phase is when this system of currency-minting and empire building comes to an end. The system collapses, old systems of debt and currency are wiped away. Then we get to modernity. Where currency comes back, states create massive systems of debt to finance development and make sure that people can get locked into the system of debt.
2. So, is world history just the story of debt slavery? I think a lot of sociologists might agree, given the popularity of Tilly’s argument that state making, taxes, and war go hand in hand. Also, I think that Graeber is likely correct that coinage was the social technology that made empire building possible, and even necessary for early European and Asian empires to continue growing.
There are other parts of the story that don’t add up for me. For example, Graeber argues that the Middle Ages weren’t as bad as one might imagine. Slavery was abolished and there was a general skepticism toward debt. True enough, but the European Middle Ages had other forms of domination and repression as well. The Middle Ages have positive traits, but I don’t think I’d imagine it as a mass liberation from the debt systems of antiquity.
Graeber tries to make everything is debt related. In the last chapter, he tries to tie every problem to debt. For example, he rightly notes that college debt is now extreme. But is that really due to the sorts of processes of state building and debt issuing that Graeber talks about? I agree with Graber’s ethical point – college debt is a form of peonage, but I disagree with the explanation. I’m more likely to note that college financing varies greatly and the extreme peonage we see today is not endemic. I’m more likely to ascribe it to certain recent public policies than the system of exploitation described by Graber.
3. What should we take away from Debt? A few lessons. First, we should be highly skeptical of functionalist explanations of economic institutions. Generalized reciprocity is the “natural” state of economic interaction, other institutions are deviations. Second, and Graeber is not unique in this, debt is sticky and exploitative. Third, debt makes possible wars and other nasty state behavior. Even if we were to argue over specific cases, or even the overall thrust of the book, there remains a lot of value.
Two related questions:
1. What is the standard citation that addresses the difficulty in identifying when business cycles begin or end?
2. Is there a literature that describes when people think there are in a recession/recovery? For example, does public opinion follow technical definitions of how economists measure the health of the economy?
Bonus: Before we had Federal statistics on employment, did average people sit around and say “we’re in a recession?”
There’s a nice feature about Scott Stern who studies the behavior of scientists. There’s a quote from guest blogger emeritus Pierre Azoulay, as well, who knows Stern:
“There is already a whole cohort of us for whom Scott was an essential part of our graduate educations,” says Pierre Azoulay, an associate professor at Sloan, who as an MIT doctoral student had Stern as one of his advisers.
The write up has some nice summaries of Stern’s research, in which he examines the trade offs that scientists make, such as taking a pay cut in private firm jobs in exchange for more control over how the science is spread.
The one thing that left me scratching my head are quotes like this: “From this research, Stern synthesized an insight that remains with him today. “Scientists don’t only care about money,” he says. “They care about discovery, and control. Those are just first-order facts about the scientific enterprise.”
The Stern quote hits on a theme that has been old hat in the social analysis of science since the day of Merton, if not earlier. Why are economists constantly surprised by these findings? Isn’t variance in human motivation the plausible prior hypothesis? Don’t economists believe in differences in personality and socialization? Isn’t the real question the degree to which specific activities are governed by financial considerations, not treating non-financial considerations as anomalies?
Matt Yglesias has a short article at Slate about STEM (science, technology, engineering, and math). The article is called “Do STEM Faculties Want Undergraduates to Study STEM fields?” Yglesias focuses on different funding structures and TA’s. I’d focus on faculty funding formulas. Faculty and graduate student funding in the sciences relies heavily on external income sources. In the social science and humanities, funding is mainly internal. Deans allocate FTEs (faculty lines) and graduate program class sizes (# of PhD students) based on a combination of merit and, more importantly, enrollments. Thus, you have an incentive to created bloated undergraduate majors, which leads to more grad students. It’s not the other way around – large grad students do not lead to more majors.
The incentives do not encourage strong teaching in the sciences. While people don’t intentionally teach bad, they do in practice because there is no reason to do otherwise. Consider the typical experience of a freshman in a big science department:
- They are a decent student in an American high school.
- They are thrown into a large lecture class with little supervision, except maybe the once a week lab or discussion section.
- The TA’s have no teaching experience. They often have bad language skills.
- Grading is often punitive – curves are often used. Students can still get crummy grades even if they learn a fair amount of material.
Adding insult to injury, a lot of fields, like physics, have poor job prospects, especially for people with only a BA. Furthermore, graduate schools in law and medicine don’t give you credit for a low GPA just because it was in a hard major. STEM is a raw deal for marginal students. Why bother with this insanely hard major that is badly taught and will punish you with low grades? Switch to a different field, get decent grades, and have a real career.
I often think about the difference between the economic and sociological approaches to markets. If I were to summarize it, I’d say that contemporary economics views a market as a social domain where actors are achieving some sort of goal and everything else is treated as parameter in some sort of optimization problem. In contrast, sociologists are more interested in how people collectively define markets as social domains. Not incompatible, but these perspectives lead to different questions.
There’s a recent article by Dobrev and Gotsopoulos called “Legitimacy Vacuum, Structural Imprinting, and the First-Mover Disadvantage” in the AMJ that nicely illustrates my point about the sociological approach to markets. Using auto industry data, the authors show that first movers have a lower survival rate. As I’ve argued in the past, the ecological theory of markets makes a distinct prediction than standard IO approaches. In standard IO, first movers have a huge advantage. They have no competition. In ecological theories, first movers are bringing a product that consumers may not understand. Think about the first home computer (not the Apple) or the first social networking site (not Facebook or even Friendster). There’s a lot of learning. Consumers learn about new products, sellers learn to make a version people can afford and use. That’s why first movers don’t do well and it’s a sociological insight.
In the last installment of this book forum, I argued that Debt could be read as an attack on the functionalist view of money, which in turn, I think, is an indirect argument on the current state of economics. In this installment, I’ll delve into the middle section of the book, which can be read as another critique of contemporary economic history and theory.
The crux of Debt is a historical review of the origins of money and credit. The big empirical claim is that barter does not exist in most societies, so money can’t be seen as a naturally evolved institution that solves the problem of barter. The next claim that Graeber makes in the middle of Debt is that there is a very important difference between monetized economies and what he called “human economies,” and that very bad things happen when the two mix. Money is the catalyst for these bad things.
Let’s move on the key distinction in the middle of the book. Graeber views “human economies” as social institutions where people (and objects) are unique and strongly embedded in a web of social relations. Even when money is used, it’s more as a symbol of an obligation or relationship that can’t be payed. It’s not a literal exchange. In contrast, commercial economies are based on using money to exchange impersonal goods that are interchangeable.
In reviewing historical accounts of servitude, slavery, and other forms of domination, Graeber describes how people in human economies become dominated when the come into contact with commercial economies. Essentially what happens is that people participate in spiraling debt traps, which often end up with people pawning themselves and their families in order to seek status, or to pay off “debts” created through violence. Money is what allows people to willingly subjugate themselves to others. Graeber describes this in detail for the Atlantic slave trade and suggests that a similar processes occur in other regions where symbolic debt economies mix up with monetized economies (e.g., Southeast Asian hill people contacting monetized Asian kingdoms).
As you can imagine, Graber (p. 210) makes a striking claim at the end of this section of the book where he claims that modern life is essentially willful subjugation based on a hidden system of violence:
Formal slavery has been eliminated, but (as anyone who works from nine to five can testify) the idea that you can alienate your liberty, at least temporarily, endures. In fact, it determines what most of us have to do for most of our waking hours, except, usually, on weekends. The violence has been largely pushed out of sight. But this is largely because we’re no longer able to imagine what a world based on social arrangements that did not require the continual threat of tasers and surveillance cameras would even look like.
If one were to accept Graeber’s thesis, then one must abandon the view that money is a functional requirement of the economy. Instead, it is a system of illusions that mask the violence that converted pre-modern people into docile modern subjects. Norbert Elias minus the salad fork, but with a credit card, if you will.
After the New Year: societies and debt cycles.
From a recent Slate article: According to recent Census data analysis, 48% of the American population lives near or below the poverty line.
Based on some new designations the Census Bureau created to better reflect the distribution of poverty in the US, the AP explains that 97.3 million Americans are “low income,” which means earning at or just over the poverty line. Added to the 49.1 million Americans living in poverty, that’s 146.4 million, or about 48 percent, of the U.S. population. The new account of poverty in the U.S. considers medical, taxes and transportation costs.
Once can argue around the margins, but the overall picture is clear. It’s not just income differences that have changed, buying power has stagnated as well.
I often teach the graduate course that introduces students to major themes of macro-sociology. I start off with rational choice theory, which, as you can imagine, triggers teeth grinding rage. I then ask students: “If people aren’t following their preferences, then what are they doing?” Answer: silence.
Of course, there are good answers to this question. Most economists, especially behavioral economists, would probably argue for a model that is close to rational choice, but includes biases. Sociologists often take this a step further and argue that people respond to social conventions, follow norms, heuristics, or employ cultural tool kits. The difference between the textbook rational choice model and what many sociologists believe lies not in the maximizing part of the model but in how individuals construct the options and judge alternatives.
I bring up this pedagogical example because contemporary economics is built on a number of simple assumptions that appear obvious and incontrovertible but can actually be successfully critiqued. The surface plausibility of standard economics is hard to argue with by novices, which is why first year graduate students often get stumped by the question I asked.
One important difference between economists and other social scientists lies in their willingness to entertain serious alternatives to the rational choice model. Psychologists are so used to thinking about different models of decision making that they find the insistence on the rational choice model a bit puzzling.
The problem, however, is that for many routine social science questions, it is hard to articulate a simple alternative model that is easy to understand and can easily be the foundation for normal science. The rational choice model has handful of simple axioms, it’s easy to formalize, and easy to tweak.
So what does this have to do with David Graber’s book on this history of debt? Aside from being a radical criticism of debt, Graeber offers one of the few successful attacks on academic economic theory. He doesn’t attack the rational choice model directly. Rather, he, in my view, attacks one of the core ideas of economics that is tied to the rational choice model.
When you read the nitty gritty of economics, you often see the following jump. You start with a description of the rational choice axioms: people have options, rank them, and act upon them in a consistent way. The jump is this: money is the natural way that you should figure out what people prefer. Money is the natural expression of needs and the money economy is the natural resolution of the economic problem of distributing goods. Without money, you’d need to barter to pursue your own personal goals and that’s very inefficient.
The first chunk of Graeber’s book is a anthropological account of barter. Where does it exist? Is it actually true that the money economy represents a solution to the problem of barter? Graeber claims that barter is actually exceedingly rare. According to him, barter makes little sense at all. Why pile up on specialized goods and wait for other people to pile up on what you want and then trade? That’s bizarre.
Instead, what happens in most non-monetized cultures is that people engage in generalized exchange. If you need X, Fred will give you X, but you (or someone else in the group) has to help Fred sometime later. Thus, most groups engage in a debt economy, not a direct trade (barter) economy. Of course, there are some exceptions, such as trade between hostile groups or prisoners from Western societies. But overall, Graeber claims that the overwhelming theme in economic ethnography is that barter simply doesn’t exist.
The conclusion? Adam Smith was wrong to say that people have a natural tendency to “truck and barter.” Why? It’s a strange, unintuitive form of economic exchange. Therefore, money is not the natural solution to barter, since barter, for the most part, does not exist.
According to Graeber, the anthropology literature, composed of observations of dozens and dozens of societies, undermines the link between self-interest and modern capitalist institutions. Classical economists, as well as their contemporaries, have made a deep error in assuming that a Western economic practice is the natural functional solution to economic issues that arise in all societies. I myself have even promoted this argument in my undergraduate class on economic sociology.
We’ll discuss the next step in Graber’s argument next week, but for now, I’ll conclude on the implications of Graeber’s attack on the barter-money link. If direct exchange of goods (barter) is not the embodiment of rational action, then what is? The answer, I think, is generlized exchange. A true believer in economics text books would correctly point out that generalized exchange can be described in terms of utility functions. Fair enough, but that’s not the point.
The real deep point is that monetary exchange, credit markets, and a whole host of other modern financial institutions are in no way natural. Furthermore, there’s actually an alternative to price theory, which uses money as it’s main variable (e.g., “clearing price”). The anthropologist’s version economics would start with indirect exchange as the main variable, which has a better claim to universality than prices, and then describe all institutions as recorders and shufflers of debt.
More evidence that our medical priorities are mixed up. Consider the following question. Who will help you live a longer, better life?
- The surgeon who replaces your lungs at age 55.
- The therapist who helps you quit smoking at age 25.
Answer #2 is correct, if you assume that decades of emphysema-free life is better than a few extra years with a damaged body. Now, consider the follow up question: Who gets paid more? The surgeon.
This shows a distortion in medical spending priorities. Good health can be obtained through low tech, low cost activities such as diet, moderate exercise, safe driving, not drinking to excess, not smoking, and avoiding drugs. Much of the health improvements in the West are due to improvements in sanitation, immunization, and improved nutrition.
However, the professions behind these improvements rarely command the salaries that surgeons get. This is because we are myopic and pay for hero medicine. Doctors are specialists in procedures aimed at dramatic medical procedures – trauma, cancer treatment, and so forth. We are lucky to have people who can do these things, but in terms of overall health, they are often small potatoes compared to people who immunize us and feed us. But, as humans, we focus on hero medicine because of a bias toward highly visible and short term problems over slower, more long term problems, like diet or smoking cessation. For that reason, the people who help us the most are often paid much less than those who can help us the least.
Merchandising!!!! From artifno:
How do artists with ephemeral work get paid?
The simplest answer is that they usually don’t. The key to a lucrative art career is — no surprises here — to produce something that has some sort of material worth. Most performances have negligible market value because they are not easily corralled into a permanent object… It could be argued that Matthew Barney, one of the most successful artists working today, has engineered his market entirely from these aesthetic epiphenomena, with the films documenting his performances, the props persisting as sculpture, and sketches being sold as art objects. Then there is the relatively new phenomenon — arising, in part, from gala culture — of the performance commission, where the most famous practitioners are paid to create spectacles for elite crowds.
Basically, artists make money from the rich dood equivalent of lunch boxes and action figures
Two conflicting themes about elite institutions:
1. Many Ivy League students are selected on political grounds – legacies, athletes, and various “well rounded” kids:
Researchers with access to closely guarded college admissions data have found that, on the whole, about 15 percent of freshmen enrolled at America’s highly selective colleges are white teens who failed to meet their institutions’ minimum admissions standards.
This report is about minimum standards. Lots of other kids probably meet minimum requirements but probably wouldn’t be competitive if it weren’t for being children of alumni.
2. Recruiters from elite law, consulting, and investment banks exclusively focus on about three or four elite colleges. See Caplan’s review of Lauren Rivera’s ethnography of elite firm recruiting for details. The take home points:
- Elite firms have no time to sort through people.
- Nearly all applicants from low status schools (e.g., the “public Ivies” like Michigan or Berkeley or any other non-HYP school) are tossed in the trash without review.
- There’s a signalling of habitus – applicants need the right interactional skills, the right major, the right extra-curriculars, showing similarity to the recruiter
- There’s modest amount of evaluation based on performance (SAT or GPA), but not a lot.
So what gives? Are elite firms stupid? Do they not know that a huge chunk of Ivy league graduates simply don’t have what it takes to get into Ivy League colleges without the help of mom and dad? If they do know, why do they keep hiring these people?
A few answers:
- These firms are selling legitimacy. Buyers want the comfort of the Ivy League brand, so there’s a premium. For this story to work, you need to believe that these services – investment banking, consulting – can be easily taught to people who aren’t geniuses.
- Heterogeneity. Yes, Ivy League schools have dim kids, but they do accept lots of brilliant people as well. So just hire a bunch of them and fire those that fare poorly, which is the strategy for many investment firms.
- Opacity. It’s hard to assign credit to specific people in these industries. So the whiz kid math majors who do the mental heavy lifting have to share credit (and paychecks) with the legacy kids. That allows the system of hiring by college to survive.
Add your own explanations.
In the social sciences, there’s a big debate over schooling and income. One theory, human capital, says that school gives you specific skills. The major alternative is that school is a de facto IQ test. You don’t learn many job skills in college, but employers pay more for college graduates because they have shown a basic level of discipline and intelligence. This theory is called signalling. What do you think?
Ok, I promise this will be the last post for a while about college majors and income. There’s an old paper in the Journal of Cultural Economics on the careers of undergraduate dance majors. What Becomes of Undergraduate Dance Majors? was written by Sarah Montgomery and Michael Robinson. Some take home points:
- Dance majors tend to give the career about 10 years before switching to non-dance.
- Those still in dance do dance about 10-15 hours a week and often must supplement their income.
- In the 1990s, dance performers (who majored in dance) made about $15k+ less than people who had switched to all non-dance employment
- Graduate education in dance seems to follow employment in dance. My guess is that further training allows successful dance to become instructors because dance is hard to do at later ages.
With respect to the debate we had about useless college majors, the main point is that dance is probably like many fields in that it is very hard to continue after graduation. As long as dance education is inexpensive, that’s not such a big deal. If peopl want to pursue the dream, that’s great. But huge college debt makes that choice hard to sustain.
A while back, I wrote a post called “what economists should learn from sociology.” Consider this a follow up post – what sociologists can learn from economists. Let’s start with substantive topics:
- Micro 101: The basic tools of microeconomics are very useful. Supply and demand, comparative advantage, marginal analysis, opportunity costs, expected utility, etc. Sure, in the real world, people aren’t perfect calculators, but they aren’t morons either. If a situation is fairly well defined, people will compare options, assess costs and benefits, and so forth.
- Game theory: Interactionism is very popular in sociology, yet interactionist theories are often ad hoc when you get down to it. Game theory is a nice way to model interactions, even if it has limitations. The other nice thing about game theory is that the basics are fairly easy to learn compared to other topics.
- A focus on outcomes: Sometimes, I feel like sociologists are a little too focused on process and not enough on outcomes. Economists have developed ideas, like welfare analysis, that could help sociologists guide their thinking on how the things we study might have policy implications.
Let’s switch to professional practices:
- I really like how most economists can easily recite the core models and theories of the discipline. Because we teach social theory through original texts, we focus too much on “Weberian theory” than the theory that Weber actually believed. Experienced researchers can, of course, extract the theories and models, but we make it too hard for students. We need our core to have a succinct presentation.
- I think it would be good to have a very modest amount of formal models.
- Economics programs have a reasonable time to degree – 4-6 years. Except for those who require extensive travel, there is little reason to believe that sociology can’t be the same way.
- I also like how economists maintain links between the academy and the worlds of business and policy.
Now, let me switch to things that should not be learned from economists:
- The belief that math makes you scientific and that un-mathematical ideas are inherently vague or useless. Any belief that implies that Charles Darwin was a bad scientist should be immediately rejected.
- We should not praise people just because they are good at math, as admirable as that may be. Social science is about understanding how people behave. Math can be a tool, but too much theorem proving will distract you from developing intuitions about the social world. Most theorems will be quickly forgotten, while a powerful empirical finding can resonate for years. We should praise people for helping us understand the social world.
- The “econ rules” for talk and interaction. We may humor ourselves by believing that aggressiveness implies authority. But, honestly, we’re propping up our self-image. Let the guy get past the first slide, please. There will be more than enough time for slash and burn during the Q&A.
- A religious belief in the neo-classical model of decision making. As any computer scientist or psychologist can tell you, there are many models of decision making that can be tested or used for theory building.
- An obsession with clean identification. You can have great scientific work with observational data. Otherwise, we’d have to fire all astronomers, meteorologists, and any other scientists who study large complex systems.
I really hope that sociologists can tap into the good side of economics. I think there’s a lot to be learned.
I’m pretty enamored by many things (including performativity). One of them is social choice theory. I think the intuition developed by scholars like Condorcet, Arrow and Sen is fundamental for any social, political or economic setting. Now, the theory of course does not capture many issues: social influence, the origins of preferences, and more generally, contextual issues. Some might even say that social choice theory scarcely corresponds with reality. But I think it nonetheless is a very powerful theory.
What I like about social choice theory is that it fundamentally is about social aggregation. And one beef I’ve had for some time is the lack of consideration for aggregation-related issues in organization theory (and strategy for that matter). Now, sure, aggregation isn’t everything – of course contextual/organizational factors and the environment matter. But there used to be a brand of organization theory that also dealt with questions of aggregation – a portion of the Simon-March line of work was dedicated to this issue. A nice articulation of a few of the key issues can be found in Jim March’s (1962) classic (and definitely under-cited) Journal of Politics piece “the business firm as a political coalition.”
So, with colleagues I’ve been working on some papers that try to apply and amend social choice intuition in the context of organizations. In one paper we develop a formal model of organizational strategy as a social choice. In the model we specifically allow for particular influence structures to condition and shape social choices in organizations. So, ok, this post is a bleg – my colleague (in electrical engineering) and I would like feedback on this particular paper.
Looking back on it, getting an MBA at the University of Chicago (1981) is really what led me to academia. Back then, course readings were 30-40 academic journal articles. Rarely did a textbook accompany a class. As students, we knew we were there to learn the latest-and-greatest academic thinking. In our view, courses based upon some textbook anybody could get at their student bookstore for $50 had to be worth little more than, well, $50. Forget about classes taught by the grey-hairs (you know, classes in which some big-shot ex-executive sits around and regales students with war stories) — total waste of time, in our view. No, we wanted the meaty stuff. The stuff that wouldn’t be “best-practices” for another 10 years. Commercializing that knowledge, yeah, that’s where the money was.
So, I specialized in Finance (what else?) and launched into an exciting decade+ of business practice. At some point, I started consulting and, at some point after that, I was asked to work on a strategy project. I knew nothing about strategy at the time — BUT! — I knew how to read academic journals. No problem. Off to the library to read the pink strategy journal! Up to speed and 10 years ahead of practice in a few sittings. That b-school training was truly awesome. (In case you are wondering, btw, years later when I was a rookie PhD, I interviewed at Chicago. My old Micro prof, Sam Peltzman, took me to dinner. When I asked him what journal articles he was putting in his MBA course, he did a spit-take and said, “Wall Street Journal articles.” More on this later.)
I guess it would be fair to say that I found the strategy literature sadly wanting in comparison to the precision and mathematical sophistication I was used to in the Finance literature (mind you, this was as a practitioner). My reaction was: big opportunity here. This was the 90s and, for those who are not aware of it, the methodological advances in economics were really expanding at that time: game theoretic learning, evolutionary economics, behavioral economics, computational methods … cool technological approaches that held some promise in tackling the complexities inherent in the strategy problem domain. Off I went to get a math econ degree and I’ve never looked back with any regrets. (I do look back and marvel at the level of hubris that propelled me on my way — though, without it, where would any of us be in this academic hustle?)
Over time, outside of trying to stay up on promising methodological developments, I became less attentive to what people were doing in economics. Early-on, I tried to get my IO friends interested in the issues that so animated my own research. Typically, 3 minutes into describing something I was working on to a respected IO colleague, I could see the eyes glaze over and hear the responses go on autopilot. I really was a strategy guy and, clearly, the strategy literature was where my career would rise or fall. When asked, I explained it in this way, “The central question in strategy is who gets what, why and for how long. IO economists, IO being in many ways a mirror field, are interested in how the most value gets created. The dichotomy is one between distributional vs. efficiency issues. We want to tell Apple how to make more profit. They want to tell the FTC how to increase social welfare.”
This is not to say there weren’t always great economists in the bi-curious category. Of course there were. But, they were not the majority and I was smugly comfortable in my belief that, regardless of how frustratingly slow progress in strategy was, the field had little to worry about from economics. In fact, just as recently as last year, I had this discussion with one of my dearest colleagues, Jan Rivkin. I was somewhat surprised when he, in so many words, told me I was full of it. I felt sorry (for him) that I couldn’t bring him around in that discussion. Eventually, though, I knew I would win him over.
That was until about a month ago. That was about a time the paper by Chad Syverson (2011) started making the rounds. Entitled, “What Determines Productivity?” it is a wide-ranging survey paper that collects and organizes work in economics on persistent differences in firm productivity levels. Almost all the papers are from 2000 on. I found the quantity and quality of work cited, frankly, jaw-dropping. Now, those who have followed the narrative to this point will say, “Yes, but it’s work on productivity — that means the interest is still all about efficiency!” True. But, here’s the catch: “efficiency” in this work is typically measured as Revenue/Cost. Take the numerator and subtract the denominator and — PRESTO — you have the object of focus in strategy.
I’m still digesting this. It could be good news. After all, I’d love to have more outlets for my work. On the other hand, young scholars like Syverson are smart … and teched-up … and full of youthful energy. What I can say is that the bar for strategy research has stealthily gone up over last decade.
Econ Journal Watch has a symposium dedicated to the question of whether property is some sort of bundle of rights. They’ve got some prominent folks, like Richard Epstein, who defends the rights bundle position. Others, such as Eric Claeys, think it is conceptual mush. Interesting readings for folks interested in legal issues, political philosophy, and econ soc.
The most recent issue of the Journal of Institutional Economics is dedicated to the “evolution of institutions.” Several interesting articles. The piece that caught my eye outlines a “diagnostic tool for analyzing institutional dynamism.” The article is written by Elinor Ostrom and Xavier Basurto, titled “Crafting analytical tools to study institutional change.”
So, the paper tries to, very practically, offer a framework of sorts for studying configurations of rules and systems. Table 1, below, summarizes the defaults for their various “rule types” (boundaries, aggregation, information etc). The authors, then, apply the framework to a typical “commons” problem: irrigation systems.
A pretty straightforward, interesting paper. The paper of course has a normative, design flavor (in a refreshing way). And, it also has a very set-theoretic feel (e.g., see Table 3) and indeed cites the work of Charles Ragin. (Of course, Peer Fiss has lately been doing lots of work in this space, highlighting the potential of fuzzy sets type methods for comparative organizational analysis.)
Worth a read.
The Guardian reported that publishers like Springer, Elsevier and others make 42% profits. If you know anything about the business world, that’s amazing. And of course, commenters have been scandalized. In my view, there’s no crime in making a healthy profit by providing something that people willingly buy.
The high profit margins do point at a profound problem with academic publishing: the reliance on an archaic business format. In previous centuries, journal publishers used to provide a vital service. They took care of assembling and delivering a print version of scientific research. In the 20th century, publishers were indispensable. Without them, academics relied on mimeos and xeroxes.
Since academic journals were only bought by scholars and libraries, the system relied on a lot of volunteer labor. Authors, editors, and reviewers all worked for free because they got university pay checks. Only the production staff – managing editors, publishers, type setters, etc. – got paid.
As the university system grew and became wealthier, publishers learned you could charge quite a bit for journals. The demand was inelastic and the buyers became wealthier. Library budgets are in the millions and some authors, such as in the biomedical fields, can even afford to pay for publication. Soon, thousand dollar subscriptions became routine. That’s normal when library administrators are told “you have to buy this.” Inefficiency abounds
As long as we replied on paper, we needed to live with this situation. High prices are normal in a system of inelastic demand, big bureaucratic budgets, and little competition (e.g., journals are not substitutes for each other). But that is no longer the case. It is now possible to go without the traditional publisher.
It’s called the Internet. Using modern software, it is now extremely easy to produce and distribute a journal. It can be done for a few thousand dollars a year. You need a proof reader, a type setter, and a web site manager. You’d also need to pay for an electronic submission website, but smaller journals could easily live with an email account that the managing editor uses. Rather than pay huge subscription fees, each author would pay for proof reading and type setting. Journals run by associations would simply be available for free at the association website. Any journal run by a department could be housed at the university website.
This is not a fantasy. As I noted in an earlier post, there is a journal called the “Public Library of Scince” or PLoS. The PLoS journals are free, peer reviewed, and open to the public. Already, they are publishing path breaking research that is having a wide impact. The only barrier to this model is the effort needed to band a bunch of people together to run the journal.
So the next time you see high journal prices, stop complaining. The solution is already here. The only question is what you will do to make it happen.
Bruce Western and Jake Rosenfeld published an important paper in the American Sociological Review that shows that deunionization has significantly contributed to increases in economic inequality. They make the case that the effect of deunionization on inequality growth is partly the result of a change in norms surrounding equity. Unions “contribute to a moral economy that institutionalizes norms for fair pay, even for nonunion workers.” When unions are less powerful and as those norms fade, even the the wages of nonunion workers decline.
A variance decomposition analysis estimated the effect of union membership decline and the effect of declining industry-region unionization rates. When individual union membership is considered, union decline accounts for a fifth of the growth in men’s earnings inequality. Adding normative and threat effects of unions on nonunion pay increases the effect of union decline on wage inequality from a fifth to a third. By this measure, the decline of the U.S. labor movement has added as much to men’s wage inequality as has the relative increase in pay for college graduates. Among women, union decline and inequality are only related through the link between industry- region unionization and nonunion wage dispersion. Union decline contributes just half as much as education to the overall rise in women’s wage inequality. These results suggest unions are a normative presence that help sustain the labor market as a social institution, in which norms of equity shape the allocation of wages outside the union sector (532-33).
An interesting comparison is the paper by DiPrete et al. (2010), who showed that increases in CEO pay are the result of firms “leapfrogging” their compensation benchmarks. Firms first identify peer groups, and they then try to match or exceed what their peers pay their executives. Continual leapfrogging of peers leads to an escalation in CEO compensation. The same kind of benchmarking was happening with union wages, but the pattern was moving in the opposite direction. Nonunion firms essentially pegged their wages to those of union firms. As unions lost negotiating power, they no longer had the ability to set wage targets, and nonunion firms were not forced to raise their employees’ wages at the same pace they had in prior years. This lack of normative pressure to keep up with the Joneses gradually eroded notions of fair pay.
From Reason TV.
After my talk at GMU on Friday, I was lucky enough to have dinner with a fun group of policy folks and economists. The discussion ranged over a lot of great topics, but here’s one question I’d like to share: Are there really any conservative economists?
This question may surprise you because economics is considered the most conservative branch of the social sciences. To get the discussion, let me explain the definitions. First, by “economist,” they clearly meant a professional PhD holding economist. Not the policy wonks you’ll find around DC. Second, by “conservative,” they mean someone who is socially conservative – anti-gay, anti-immigrant, anti-drug legalization, a Bill Bennett style culture warrior, pro-life, evangelical Christian, etc.
The observation was that economists range from liberal (e.g., Paul Krugman) to libertarian (e.g., Milton Friedman). And this is backed up by survey evidence. On social issues, economists tend to be fairly liberal, even in comparison with other social scientists. They are conservative when it comes to economic policy such as minimum wages and price controls. It was argued that economists are rarely socially conservative, while many are economically conservative.
Do you buy this observation? Can you think of prominent economists who are socially conservative?
A well known fact about CEO pay is that it has increased in absolute and relative terms. Provided by the Stanford Center for the Study of Poverty and Inequality, the chart shows that CEO pay has exploded relative to the earnings of average workers in manufacturing or production.
There’s been a lot of debate about why, but less discussion of what that says about our theories of income. My view is that this is evidence against a straight up Becker/human capital view and evidence for the segmented labor market/political view on income. According to the human capital view, personal income, roughly speaking, is a return on the investment in your skills. So if your skills are in high demand, your income goes up. If that’s true, in a relative view, demand for CEO has gone up astronomically in comparison to the typical worker. It’s easy to see why worker income has not gone up – globalization of the labor market, for example – it’s hard to see why CEO pay went through the roof. Is it really true that CEO skills became extremely scarce? Or that their marginal product shot up, and remained high, over the last few decades? Maybe…
The alternate view is that income is set by politics. The aggregate income generated by an industry may be set by consumer emand, but the way it’s distributed within firms and industries is political. As multiple folks have noted, like Jerry Davis, Neil Fligstien, and Greta Krippner, firms began to rely more and more on finance for income, which is the result not only of financial technology, but also policy. There was a lot more money in firms, but very little way to distribute it down the chain.
The Federation of Associations in Behavioral and Brain Sciences (FABBS) has put together a way to “take action” to ensure that congress does not defund the Social, Behavioral and Economic Sciences (SBE) directorate of the National Science Foundation.
In recent weeks, a number of U.S. House and Senate members have been critical of the National Science Foundation, especially the agency’s funding of research in the social sciences. One Senator specifically called for the elimination of the Social, Behavioral, and Economic Sciences Directorate at NSF.
Over the next several weeks, the U.S. House will vote on the appropriations bill that funds NSF. Amendments are expected to be offered during the full appropriations committee’s consideration of the bill scheduled for July 13 and again the first week in August when the bill is expected to reach the House floor.
Here’s a SFI lecture by Yochai Benkler that might interest orgtheoristas – “the penguin and the leviathan: the science and practice of cooperation.” It appears there is also a forthcoming book titled The Penguin and the Leviathan: How Cooperation Triumphs Over Self-interest.
My two cents?
I’m afraid the lecture (and I’m guessing book as well) features some econ-bashing and lots of wikipedia exuberance. It would be nice to hear some orgtheory-informed discussion and novel arguments related to markets, hierarchies and hybrid organizational forms. Theoretically there is quite a bit of recycling (which Benkler recognizes: see his review of disparate disciplines on matters of self-interest and cooperation) – it appears that the book is largely targeted toward non orgs specialists. So it may not necessarily be meant as a new-new scholarly contribution – we’ll see. The lecture is worth watching nonetheless (e.g., some interesting data and Q&A/public policy discussion at the end).
More on the book once it comes out.