Archive for the ‘economics’ Category
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.
Happy Independence day to all of our American readers! In honor of the holiday, I thought I’d post a paper that focuses on two aspects of our American legacy: baseball and racial bias. The paper, “Strike Three: Discrimination, Incentives, and Evaluation,” was published in the most recent issue of the American Economic Review. The authors show that Major League Baseball umpires are less likely to call strikes for pitchers who are of a different race. So, white umpires call fewer strikes when the pitcher is black and vice versa. Interestingly, the authors also show that racial bias dissipated after MLB instituted computer technology that allowed third parties to evaluate the accuracy of umpires’ strike calling, suggesting that close scrutiny may help alleviate this type of bias (at least in employment settings). Here’s the abstract:
Major League Baseball umpires express their racial/ethnic preferences when they evaluate pitchers. Strikes are called less often if the umpire and pitcher do not match race/ethnicity, but mainly where there is little scrutiny of umpires. Pitchers understand the incentives
and throw pitches that allow umpires less subjective judgment (e.g., fastballs over home plate) when they anticipate bias. These direct and indirect effects bias performance measures of minorities downward. The results suggest how discrimination alters discriminated groups’ behavior generally. They imply that biases in measured productivity must be accounted for in generating measures of wage discrimination.
Good stuff: Timur Kuran talks to Douglass North about efficient institutions and political economy.
It is often said that war spending can bring an economy out of recession. I call this the Right Wing Keynesian Thesis. I’m usually skeptical. Spending on defense does not satisfy consumer demand, even if it does mean that some more people are employed in the short term.
In 2011, we have a new test of the theory – the post 9/11 security state. We have ten years of astronomical spending on two wars, homeland security and a vastly expanded intelligence apparatus. This spending has occurred as the economy recovered in the early 2000s, boomed in the mid-2000s and then tanked in 2007.
Collectively, we have spent about two trillion on defense and anti-terrorism beyond what was projected in the 1990s. The wars have cost $1.2 T. Homeland Security has cost about $50b a year, so add another $.5T to the total over last ten years. I have no idea about the cost of expanded intelligence, but the CIA alone costs about $27B – back in 1997. I’m sure it’s a bit more now. So let’s be conservative and say that it costs $50b a year since 2001. It’s probably way more.
Basically, the US economy, in the last ten years, has been stimulated to the tune of $2T. That’s about $200B+ a year. In other words, every single year, the US government, though defense, security and intelligence, has added on an extra “stimulus package” about 1/3 the size of the Obama stimulus, which was around $700b.
All this extra money, massive and likely underestimated, seems to have done nothing to tamper the business cycle. Furthermore, there’s a lot of evidence that wages have stagnated. Given that, the Right Wing Keynesians get a failing grade.
The resent issue of Social Science History has a special section devoted to the overlap of economics and history. The issue is that (a) historians have failed to absorb economic thought and (b) economists have dropped the ball on economic history. The articles touch on the following topics:
- The increasingly mathematical nature of economic research. Colelho and McClure show that signals of math, words like “lemma” and “theorem,” have markedly increased in economics. Only one other discipline, political science, shows a similar upsurge in technical jargon.
- The persistence of the issues that drove the methodenstreit in the 19th century. Historians wants thick descriptions of specific episodes, while economists seek and apply universal laws.
- One article, by David Mitch, focuses on the fate of economic history at Chicago. Up until the 1980s or so, there were a number of highly esteemed economic historians who produced a lot of PhD students. But a combination of factors – hires that never quite panned out, shifts about what exactly counted as economic history – precipitated a decline in economic history.
So it seems that the heralded cliometrics revolution never quite took off, or it retreated from history departments and seems content as a not so prestigious economics specialty. The Mitch articles notes that Time on the Cross was not even peer reviewed because Fogel didn’t want people to get in the way of how he did history. To this day, historians still have a tough time absorbing economics. Sometimes for poor reasons, historians aren’t good at math. Sometime for good reasons, economists (like Fogel) can be notoriously sloppy with historical materials. There are deeper reasons as well. Modern economists often want to dispense will all culture and meaning, making technology and policy the catalysts of history.
why stop at cutting financial aid for for-profit colleges? why not cut financial aid to non-profits?
The NY Times has a forum on a new regulation that would reduce financial aid to for-profit entities that have low student loan repayment rates:
Under a rule announced June 1, the Department of Education will cut off federal financial aid for any for-profit program if its graduates have a lot of student loan debt and low repayment rates. This effort to require the programs to yield “gainful employment” has angered private colleges as well as some education advocates who say minority students will be disproportionately harmed if the programs lose their eligibility for federal aid.
There’s a lot of higher education that won’t get you a job – arts, philosophy, and do so forth. Unless an institution is engaged in fraud, there’s little reason to pick specifically on for-profit institutions. We should really be asking tough questions about higher education finances in general. Maybe we should have rules barring financial aid for degrees that have horrible job prospects (see here). My goal isn’t to discourage able and committed people from college. Instead, I would like to see some sort of cost-benefit analysis added to the way that we charge people for education.
The Cambridge research blog has a great post on research done by Sheilagh Ogilvie. Ogilvie’s team examine 28,000 property inventories of people who were recently married or widowed in Germany from the 1600s to the 1900s. It’s an amazing catalog for studying economic and social change. Some choice clips:
For the past three years, the Cambridge researchers have been painstakingly examining each handwritten document, compiling its contents in a vast database, and carrying out multivariate statistical analyses. In so doing, the team is reconstructing 300 years of economic history, from 1600 to 1900, for two Württemberg communities – the village of Auingen on the Schwäbische Alb and the small town of Wildberg in the Black Forest. In 2013 the completed database will be deposited in the UK Data Archive, which is open to public access.
“Aspirations for the latest fashions, furnishings and stimulants motivated people to shift time from leisure and do-it-yourself to income-earning work, creating a virtuous circle,” explained Professor Ogilvie. “More work meant more earnings, more earnings meant people could buy more consumer goods, and this spurred producers to innovate and expand.”
A reversal of the Protestant ethic thesis? Recommended!
In this final chapter, I move to critiquing Capitalizing on Crises. Since most of this post will be spent on criticism, I want to make clear that I think this is a good book. For me, the book offers two major contributions to economic sociology. First, it documents that there has been a little noticed, but extremely important, shift in the American economy – the financialization of profits. Second, it makes the important case that banking regulation and monetary policy were subject to strong pressures from interest groups. Financial policy was less about optimizing global welfare and more about solving a series of political problems. These insights, I suspect, will be a lasting contribution to economic sociology and political economy.
Now, to the heckling…
1. Critique: A central argument was that Regulation Q created a shift in profits. This may be true, but it is not obvious to me. In general, raising the price of money – ending Q meant you have to loan out deposits at a higher rate to cover higher payments to depositors – means that people will take fewer loans, and thus suppress demands for goods. In other words, getting rid of Q, and other rules, created an incentive to issue more financial instruments but it simultaneously created downward pressure in the economy.This suggests to me, at the least, that some mechanism in addition to banking regulation might needs to be considered. For example, a Krugmanite explanation might focus on taxes and redistribution of income – dividends and interest are taxed way lower than wages and salaries, which creates an incentive to shift. These alternate hypotheses need to be picked up and discussed more thoroughly. This was done do defend the financialization episode, but not the mechanisms linking various Federal policies to shifts in corporate profits.
2. Fed-centrism: The close, historical reading of Fed decisions is a really great feature of this book. Anyone who believes that the Fed is run by a bunch of a-political technocrats should read this text. This isn’t to say that the Fed eschews economic theory. Rather, the governors are subject to enormous political pressures. If nothing else, this book is a great political sociology of the late 20th century Fed. At the same time, I wondered if there is some selection bias. Does the focus on the Fed and the Treasury draw attention away from other factors in the economy that might be driving financialization? In other words, if we were in a decomposition of variance framework, how much financialization would be accounted for by Fed and Treasury decisions?
3. “With political incentives, discretion’s a joke.” That’s a line from the second Keynes/Hayek rap video and it encapsulates how I felt after reading the historical chapters of the book. In each case, with maybe the exception of the monetary policy discussion, the issue is that top down regulation of the economy became undone when subjected to a wave of political pressures. What does this say about policy in general? At the very least it is consistent with a public choice view of the world, where political institutions respond to voter or interest group pressures and not ideal policy discussions. I imagine this story would make radicals of all types comfortable. The neo-Marxist might say that yes, maybe capitalist economies can be properly regulated, but it’s a politically hopeless endeavor. The libertarian, after reading this book, would view financial policy as another example of Stiglerian processes at work, with the regulated capturing the regulators. The mainstream, who views regulation of the economy as a proper and natural function of government, are left with an empty bag, the edifice of cherished New Deal banking policy melting under the demand for easy credit.
So that’s it – thanks for reading this semester’s book forum! Send me email, or post in the comments, suggestions for the Fall.
As Fabio described, Greta Krippner’s book seeks to explain how our economy came to increasingly rely on finance as a source of profit. For Krippner most of the important action takes place in the state. By the 1970s the common view was that there was only so much money to go around. Legislators had taken on the role of allocating scarce capital to various divisions in society. The question for them became how to distribute capital so as to avoid being blamed for negative outcomes. Political expedience – specifically, seeking to avoid the “unpalatable task” of giving credit access to particular groups – ultimately drove legislators to embrace deregulation as a political solution to the problem of growing discontent with America’s economy. The real source of the deregulation movement in Krippner’s story is the masses that politicians seek approval from to get reelected. At its core, Krippner’s account is about the unintended economic consequences of political pluralism.
Two important historical factors shape Krippner’s political analysis. The first was that politicians wanted to avoid major social conflicts that put them at risk of being blamed for bad economic outcomes. Politicians need their constituents’ approval to stay in office. When the economy was booming, legislators were lauded for their “management” of the economy, but when the economy faltered they were suddenly vulnerable to criticism. The second factor was that capital had become scarce (or at least legislators believed it had become scarce) in the 1960s. When economic times were booming in the post-war years and economic growth appeared limitless, the masses were happy because the supply of capital was abundant. However, post-war growth inevitably dissipated, and citizens could no longer sustain the affluent lifestyle they associated with the American dream. Buying an affordable house, sending the kids to college, and other costly ventures would become out of reach for many Americans if credit was not available. Americans were not passive in their discontent. During the early 1970s consumer movements sprung up throughout the country. One of the leaders of that movement, Ralph Nader, actively campaigned to repeal Regulation Q, which put limits on credit availability and restrained many consumers from getting access to credit. The answer, believed many in the consumer movement, was to allow for variable interest rates and give the consumer the freedom to choose the terms of their loans while also generating better returns on savings. On its surface this seemed like a win-win for everyone. Deregulating interest rates would expand credit availability, while also allowing banks to get more creative in their offerings to potential borrowers. In retrospect we know that this deregulation also accelerated inflation and suppressed production. This had the effect of pushing more of the economy into financial markets and fueling asset price bubbles.