Economics

serbia

1. Painter: Marko Čelebonović.  Plus lots of the art in the monasteries.

2. Performance art: Marina Abramović.  I still love this video of the staring game.

3. Author: Danilo Kiš, the Serbian Borges.  Or how about Milorad Pavic, Dictionary of the Khazars, which somehow seems to have fallen through the cracks since the time of its publication.  Ivan “Ivo” Andrić is the Serbian Nobel Laureate, sort of, he espoused a Serbian identity but actually was Bosnian.

4. Actor and director: Emir Kusturica.  Recently he has disappointed, and taken flak, for having supported Putin’s invasion of Ukraine.  He is still an impressive creator, however, and is also an accomplished musician and author.  Did I mention that he espouses a Serbian national identity, and has converted to Orthodox Christianity, but originally was a Bosnian Muslim?

5. Actress: Milla Jovovich, most of all in Fifth Element and also Resident Evil, she is part Serbian.

6. Economist and blogger: Branko Milanović.

7. Sports: Lots of tennis players, plus Pete Maravich was of Serbian descent.

Other: Tesla was ethnic Serbian though born in Croatia.  American poet Charles Simic was born in Serbia, though he moved to the United States at a young age.

Singapore_Flag12

Singapore as an independent nation will be fifty years old this August 9.  In the comments, a number of you have asked me why I find Singapore so special.

I would cite three features of the country above all else:

1. It is a place where large numbers of people are obsessed with both food and economics.

2. The citizens and leadership of Singapore have an unparalleled knowledge and understanding of economics, engineering, and public policy.  In this regard the polity is distinguished in world-historic terms, and anyone who visits is enjoying a remarkable privilege to see this in action.  In my admittedly idiosyncratic view, this is one of the best and most important sights of the contemporary world, more interesting than most natural wonders.

3. Singapore has created what is possibly the highest quality bureaucracy the world has seen, ever.  Imagine a country where you can have a serious debate as to whether there is a brain drain into the government rather than out of it!

Singapore of course, like all places, has various problems and imperfections, but I believe its significance does not receive enough recognition from outside commentators.

Here is a good article about how Singapore is seeking to export its own expertise.

Private schools for the poor are growing rapidly throughout the developing world. The Economist has a review:

PrivateSchoolingPrivate schools enroll a much bigger share of primary-school pupils in poor countries than in rich ones: a fifth, according to data compiled from official sources, up from a tenth two decades ago (see chart 1). Since they are often unregistered, this is sure to be an underestimate. A school census in Lagos in 2010-11, for example, found four times as many private schools as in government records. UNESCO, the UN agency responsible for education, estimates that half of all spending on education in poor countries comes out of parents’ pockets (see chart 2). In rich countries the share is much lower.

Overall, there is good evidence that private school systems tend to create small but meaningful increases in achievement (e.g. herehere, here, here) and especially good evidence that they do so with large costs savings. The large costs savings suggest that with the right institutional structure, which might involve vouchers and nationally comparable testing, an entrepreneurial private sector could create very large gains. Karthik Muralidharan who has done key work on private schools and performance pay in India puts it this way:

Since private schools achieved equal or better outcomes at one-third the cost, the fundamental question that needs to be asked is “How much better could private management do if they had three times their current level of per-child spending?”

The Economist notes that another promising development is national chains which can scale and more quickly adopt best practices:

…Bridge International Academies, which runs around 400 primary schools in Kenya and Uganda, and plans to open more in Nigeria and India, is the biggest, with backers including Facebook’s chief executive, Mark Zuckerberg, and Bill Gates. Omega Schools has 38 institutions in Ghana. (Pearson, which owns 50% of The Economist, has stakes in both Bridge and Omega.) Low-cost chains with a dozen schools or fewer have recently been established in India, Nigeria, the Philippines and South Africa.

Bridge’s cost-cutting strategies include using standardised buildings made of unfinished wooden beams, corrugated steel and iron mesh, and scripted lessons that teachers recite from hand-held computers linked to a central system. That saves on teacher training and monitoring.

The Economist is somewhat skeptical of scripted lessons, known as Direct Instruction in the education world, but in fact no other teaching method has as strong a record of proven success in randomized experiments (see also here and here).

Need I also point out that online education can bring some of the best teachers in the world to everyone, everywhere at low cost? An article in Technology Review titled India loves MOOCs points out that students from India are a large fraction of online students (fyi, we are also finding many Indian students at Marginal Revolution University)

Throughout India, online education is gaining favor as a career accelerator, particularly in technical fields. Indian enrollments account for about 8 percent of worldwide activity in Coursera and 12 percent in edX, the two leading providers of massive open online courses, or MOOCs. Only the United States’ share is clearly higher; China’s is roughly comparable.

Education is changing very rapidly and its the developing world which is leading the way.

Arrived in my pile

by on August 2, 2015 at 4:28 pm in Books, Economics, History | Permalink

Josiah Ober, The Rise and Fall of Classical Greece.  This new history of ancient Greece has an intriguing estimate of living standards during that time, I hope to spend more time with it soon.  Ober argues there was plenty of economic growth at the time and that the Greeks lived at well above subsistence; I agree with both of those claims.

Here is the book’s home page.  Here is one useful review, though its carps at the books’ economism.  Other reviews are here.  As a first-order approximation, you can think of this book as how an economist might think about ancient Greece.

That is the new and excellent book by Sebastian Strangio, which you can think of as a post-Sihanouk look at the country from a political economy point of view.  Here are just a few bits:

The cruelty and callousness that allowed jilted wives to order and commit such brutal attacks on young women also had its echo in history.  As the historian Michael Vickery has written, patterns of sudden and extreme violence had deep roots in Cambodia, especially against those groups and individuals defined in some way as enemies.  Through cruel violence found its fullest expressions under Pol Pot, it long predated Democratic Kampuchea, stemming from cultural notions of face, honor, and revenge, in which personal grudges (kum) could elicit a disproportionate and overwhelming response.

And:

Hun Sen’s rise over the past two decades has been accompanied by the rise of what might be called HunSenomics — a blend of old-style patronage, elite charity, and predatory market economics.  Since the transition to the free market in 1989, Hunsenomics has succeeded in forging a stable pact among Cambodia’s ruling elites, but has otherwise done little to systematically tackle the challenges of poverty and development.

And:

Because Hunsenomics provides few incentives for sustainable agricultural development, Cambodia’s land and water resources remain drastically underutilized.  Just a third of Cambodia’s total land area is currently under cultivation — a much lower proportion than in neighboring countries.  Only 18 percent of this  land was irrigated as of 2005, compared to 33 percent in Thailand and 44 percent in Vietnam, and due to lack of maintenance only a fifth of irrigation systems were fully functional.  As a result, rice yields per hectare lag far behind the likes of Vietnam and Thailand.

Definitely recommended, and as Dan Klein and I used to say to each other “You so much learn the whole book.”

Prior to 1800 or so there were no large differences in per-capita GDP between nations, differences were perhaps on the order of 2-3 at most. As modern economic growth took hold in some nations and not in others, between-country inequality increased dramatically with differences in per-capita GDP between nations of up to a factor of 100. As more and more nations enter a modern economic growth phase–which now includes a very rapid catch-up phase–between-country inequality has started to decline. In the future we may return to much smaller differences in per-capita GDP between countries.

As MacAskill points out in Doing Good Better (review here see also here) this means that we live today in an unusual time when charity is very cheap. Today, for example, it’s possible to save a life for as little as $4000. As other nations become rich that will no longer be true. More generally, the average person in a developed country can do a lot of good today by giving up relatively little. As MacAskill writes:

Imagine a happy hour where you could either buy yourself a beer for five dollars or buy someone else a beer for five cents. If that were the case, we’d probably be pretty generous–next round’s on me! But that’s effectively the situation we’re in all the time. It’s like a 99-percent-off sale, or getting 10,000 percent extra free. It might be the most amazing deal you’ll see in you life.

From the comments

by on August 1, 2015 at 4:09 am in Economics | Permalink

Tyler,

Isn’t it funny how so many people hold these two opinions in their heads at the same time:

1) Wall Street is just focused on the next quarter and they push corporations to have short term motives.

2) There was a stock market bubble 15 years ago built around bidding up prices to unprecedented levels for an entire basket of firms which had never been profitable and had no near-term plans for being profitable.

That is from Kevin Erdmann, Kevin’s blog is here.

Arthur C. Brooks, The Conservative Heart: How to Build a Fairer, Happier, and More Prosperous America.

Greg Mankiw has reviewed the book.

Do pandas respond to incentives?

by on July 31, 2015 at 2:44 am in Economics | Permalink

Smarter than the average bear: Panda tricked zookeepers into giving her an air-conditioned room, round-the-clock care and extra bamboo by pretending she was pregnant

Here is the full story, with videos, consider this speculative.  For the pointer I thank the excellent Mark Thorson, a loyal MR reader.

From Free Exchange at The Economist:

In the first [paper] Isaac Sorkin of the University of Michigan argues that firms may well substitute machines for people in response to minimum wages, but slowly. Mr Sorkin offers the example of sock-makers in the 1930s, which took years to switch to less labour-intensive machines after the federal minimum wage was brought in. He also explains how this finding squares with other research. Most studies look at past minimum wage increases that were not inflation-proofed. Firms may decide not to go through the hassle of investing in labour-saving machines if the minimum wage will affect them less over time. But they could respond differently to a more permanent increase.

Mr Sorkin crunches the numbers, using a model of the American restaurant industry in which companies choose between employees and machines. He investigates the effect of a permanent (ie, inflation-linked) increase in the minimum wage and shows that the tiny short-run effects on employment normally seen are fully consistent with a long-run response over 100 times larger. The lack of evidence for a big impact on employment in the short term does not rule out a much larger long-term effect.

In a second paper, written with Daniel Aaronson of the Federal Reserve Bank of Chicago and Eric French of University College London, Mr Sorkin goes further, offering empirical evidence that higher minimum wages nudge firms away from people and towards machines. The authors look at the type of restaurants that close down and start up after a minimum-wage rise. An increase in the minimum wage seems to push some restaurants out of business. The eateries that replace them are more likely to be chains, which are more reliant on machines (and therefore offer fewer jobs) than the independent outlets they replace. This effect has not been picked up before because the restaurants which continue to operate do not change their employment levels, so the jobs total does not shift much in the short run.

The piece offers further points of interest.

Inputs are imported too

by on July 30, 2015 at 9:56 am in Economics, Law | Permalink

Ted Diamantis, an importer of Greek wines who is based in Chicago, has been helping his suppliers stock up on bottles, labels and printing ink. The barrels, though, have him worried.

In two or three weeks, some of Greece’s winemaking regions will begin their annual grape harvest. The wineries Mr. Diamantis buys from age their wine in barrels from Italy and France, but Greece’s capital controls make it difficult for them to send money out of the country to pay for the barrels they need for this season. No barrels means no wine for Mr. Diamantis.

“Without the ability to access your capital, you can’t buy anything,” said Mr. Diamantis, who is in Greece meeting with his business partners. “The marketplace is frozen.”

That is from Stacy Cowley at the NYT.  Similar examples illustrate why Greece leaving the euro, even if a better idea for the longer term, would not have been such a picnic in the short run.  Exports would have collapsed, not boomed.

A long look at short-termism

by on July 30, 2015 at 1:45 am in Data Source, Economics | Permalink

That is the title of a working study from Credit Suisse (pdf), here is one excerpt:

The problem is that short-termism is very difficult to prove. As we will see, many of the common perceived symptoms of short-termism don’t hold up to scrutiny, and there are some legitimate reasons for the shortening of time horizons. While there remains plenty of room for improvement, especially when it comes to incentives, the issue of short-termism deserves more care than it has received in the popular discourse. With little exception, the debate appears to be very one-sided.

Here is another good bit of many:

Were compensation the simple root of the problem, then correction through regulation or other market forces would be relatively straightforward. But a link between pay and termism is difficult to establish. Academic research shows that CEO pay has closely followed the size of the firms in the economy independent of the form of remuneration. Further, executive compensation has moved toward long term incentives, boards of directors are more independent than in the past, and governance committees are “nearly universal.” Reviewing the challenges of conclusively demonstrating short-termism, one scholar wrote, “[I am] aware of no empirical evidence establishing that executive pay term is inadequately focused on long-term performance from either a shareholder or societal perspective, systematically.”

And:

To summarize, a proper test of short-termism should address the micro-macro problem by relying on the outcome of the market pricing process rather than the views of individuals. While many constituents feel the market is short-term oriented—a feeling that has been expressed through the decades—asset prices don’t support this sense.

In fact there is a good deal of evidence that the sectors which require the most long-term attention attract investors and boards who understand that need.  Here is my previous post on this issue.

For the pointer I thank Michael Mauboussin.

*Money and Soccer*

by on July 29, 2015 at 2:22 pm in Books, Economics, Games | Permalink

The subtitle for this one suffices for a review:

A Soccernomics Guide: Why Chievo Verona, Unterhaching, and Scunthorpe United Will Never Win the Champions League, Why Manchester City, Roma, and Paris Saint-Germain can, and why Real Madrid, Bayern Munich, and Manchester United Cannot Be Stopped

I haven’t even read the full subtitle yet (I used Control C), much less the book.  But the author is the highly regarded Stefan Szymanski, and John Foot gave it a very positive review in the 24 July 2015 TLS.

When I was last living in Chicago, in the spring 2014, a regular visitor to the department of the University of Chicago and the editor of the Journal of Economic Literature, Steven Durlauf, asked me if I would be interested in writing something for the journal. For many years I had promised Gary Becker that I would write something to help clarify the meaning and role of price theory to my generation of economists, especially those with limited exposure to the Chicago environment, which did so much to shape my approach to economics. With Gary’s passing later that spring, I decided to use this opportunity to follow through on that promise. More than a year later I have posted on SSRN the result.

I have an unusual relationship to “price theory”. As far as I know I am the only economist under 40, with the possible exception of my students, who openly identifies myself as focusing my research on price theory. As a result I am constantly asked what the phrase means. Usually colleagues will follow up with their own proposed definitions. My wife even remembers finding me at our wedding reception in a heated debate not about the meaning of marriage, but of price theory.

The most common definition, which emphasizes the connection to Chicago and to models of price-taking in partial equilibrium, doesn’t describe the work of the many prominent economists today who are closely identified with price theory but who are not at Chicago and study a range of different models. It also falls short of describing work by those like Paul Samuelson who were thought of as working on price theory in their time even by rivals like Milton Friedman. Worst of all it consigns price theory to a particular historical period in economic thought and place, making it less relevant to the future of economics.

I therefore have spent many years searching for a definition that I believe works and in the process have drawn on many sources, especially many conversations with Gary Becker and Kevin Murphy on the topic as well as the philosophy of physics and the methodological ideas of Raj Chetty, Peter Diamond and Jim Heckman among others. This process eventually brought me to my own definition of price theory as analysis that reduces rich (e.g. high-dimensional heterogeneity, many individuals) and often incompletely specified models into ‘prices’ sufficient to characterize approximate solutions to simple (e.g. one-dimensional policy) allocative problems. This approach contrasts both with work that tries to completely solve simple models (e.g. game theory) and empirical work that takes measurement of facts as prior to theory. Unlike other definitions, I argue that mine does a good job connecting the use of price theory across a range of fields of microeconomics from international trade to market design, being consistent across history and suggesting productive directions for future research on the topic.

To illustrate my definition I highlight four distinctive characteristics of price theory that follow from this basic philosophy. First, diagrams in price theory are usually used to illustrate simple solutions to rich models, such as the supply and demand diagram, rather than primitives such as indifference curves or statistical relationships. Second, problem sets in price theory tend to ask students to address some allocative or policy question in a loosely-defined model (does the minimum wage always raise employment under monopsony?), rather than solving out completely a simple model or investigating data. Third, measurement in price theory focuses on simple statistics sufficient to answer allocative questions of interest rather than estimating a complete structural model or building inductively from data. Raj Chetty has described these metrics, often prices or elasticities of some sort, as “sufficient statistics”. Finally, price theory tends to have close connections to thermodynamics and sociology, fields that seek simple summaries of complex systems, rather than more deductive (mathematics), individual-focused (psychology) or inductive (clinical epidemiology and history) fields.

I trace the history of price theory from the early nineteenth to the late twentieth when price theory became segregated at Chicago and against the dominant currents in the rest of the profession. For a quarter century following 1980, most of the profession either focused on more complete and fully-solved models (game theory, general equilibrium theory, mechanism design, etc.) or on causal identification. Price theory therefore survived almost exclusively at Chicago, which prided itself on its distinctive approach, even as the rest of the profession migrated away from it.

This situation could not last, however, because price theory is powerfully complementary with the other traditions. One example is work on optimal redistributive taxation. During the 1980’s and 1990’s large empirical literatures developed on the efficiency losses created by income taxation (the elasticity of labor supply) and on wage inequality. At the same time a rich theory literature developed on very simple models of optimal redistributive income taxation. Yet these two literatures were largely disconnected until the work of Emmanuel Saez and other price theorists showed how measurements by empiricists were closely related to the sufficient statistics that characterize some basic properties of optimal income taxation, such as the best linear income tax or the optimal tax rate on top earners.

Yet this was not the end of the story; these price theoretic stimulated empiricists to measure quantities (such as top income inequality and the elasticity of taxable income) more closely connected to the theory and theorists to propose new mechanisms through which taxes impact efficiency which are not summarized correctly by these formulas. This has created a rich and highly productive dialog between price theoretic summaries, empirical measurement of these summaries and more simplistic models that suggest new mechanisms left out of these summaries.

A similar process has occurred in many other fields of microeconomics in the last decade, through the work of, among others, five of the last seven winners of the John Bates Clark medal. Liran Einav and Amy Finkelstein have led this process for the economics of asymmetric information and insurance markets; Raj Chetty for behavioral economics and optimal social insurance; Matt Gentzkow for strategic communication; Costas Arkolakis, Arnaud Costinot and Andrés Rodriguez-Clare in international trade; and Jeremy Bulow and Jon Levin for auction and market design. This important work has shown what a central and complementary tool price theory is in tying together work throughout microeconomics.

Yet the formal tools underlying these price theoretic approximations and summaries have been much less fully developed than have been analytic tools in other areas of economics. When does adding up “consumer surplus” across individuals lead to accurate measurements of social welfare? How much error is created by assumptions of price-taking in the new contexts, like college admissions or voting, to which they are being applied? I highlight some exciting areas for further development of such approximation tools complementary to the burgeoning price theory literature.

Given the broad sweep of this piece, it will likely touch on the interests of many readers of this blog, especially those with a Chicago connection. Your comments are therefore very welcome. If you have any, please email me at glenweyl@microsoft.com.

Does Fair Trade help poor workers? Probably not says Don Boudreaux in this excellent, short video from the Everyday Economics series at Marginal Revolution University.

As is well known, however, Don is a rabid, free-market economist with ideological blinders who has been captured by corporate interests. So let’s ignore what Don says and consider what William MacAskill, author of Doing Good Better (reviewed earlier this week) has to say. No one can fault MacAskill’s charitable bona-fides:

MacAskill’s own pledge is to donate everything he earns above about $35,000 per year, adjusted using standard economic measures for inflation and cost of living, to the organizations that he believes will do the most good. Since his bar is roughly at the UK median income—such that half the population earns more each year, and half the population earns less—he’s certainly not condemning himself to a life of hardship; rather, he is pre-committing to staying roughly in the middle of the national income distribution even as his earnings go up over time.

That said, his pledge means giving away 60 percent of his expected lifetime earnings.

When I ask him the inevitable questions about whether this isn’t rather a lot to sacrifice for one person, MacAskill shrugs modestly and smiles broadly. “Imagine you’re walking down the street and see a building on fire,” he says. “You run in, kick the door down—smoke billowing—you run in and save a young child. That would be a pretty amazing day in your life: That’s a day that would stay with you forever. Who wouldn’t want to have that experience? But the most effective charities can save a life for $4,000, so many of us are lucky enough that we can save a life every year through our donations. When you’re able to achieve so much at such low cost to yourself…why wouldn’t you do that? The only reason not to is that you’re stuck in the status quo, where giving away so much of your income seems a little bit odd.”

So what are MacAskill’s views on Fair Trade? Why they are the same as Don’s!

…when you buy fair-trade, you usually aren’t giving money to the poorest people in the world. Fairtrade standards are difficult to meet, which means that those in the poorest countries typically can’t afford to get Fairtrade certification. For example, the majority of fair-trade coffee production comes from comparatively rich countries like Mexico and Costa Rica, which are ten times richer than the very poorest countries like Ethiopia.

….In buying Fairtrade products, you’re at best giving very small amounts of money to people in comparatively well-off countries. You’d do considerably more good by buying cheaper goods and donating the money you save to one of the most cost-effective charities…