Month: March 2007

Tenure and mandatory retirement

…Is the university tenure system compatible with eliminating mandatory retirement?

Yes.  Unproductive old people are not, in academia, a huge problem.  Most of the research value comes from a small percentage of creators in the first place, and many of those people have done their important work by age 45 in any case.  To put it bluntly, the tenure system works because for many people their "output" doesn’t matter in the first place; tenure is however wonderful for the stars.  The goods produced in academia are often symbolic goods anyway, such as prestige. 

And what is the market trend?  Private universities strengthening the real value of tenure by raising salaries and lowering teaching loads.  That’s what the market test says.  Superstars are becoming more productive, in part because of the Internet and the greater ease of disseminating quality work.  For-profit universities, which typically don’t have tenure, have failed to take over the sector, once again showing there is usually competition between different organizational forms.

#19 in a series of 50.

Addendum: Here are Mankiw and Levitt on tenure.

The More Loving One

Looking up at the stars, I know quite well
That, for all they care, I can go to hell
But on earth indifference is the least
We have to dread from man to beast.

How should we like it were stars to burn
With a passion for us we could not return?
If equal affection cannot be,
Let the more loving one be me.

Admirer as I think I am
Of stars that do not give a damn
I cannot, now I see them, say
I missed one terribly all day

Were all stars to disappear or die,
I should learn to look at an empty sky
And feel its total dark sublime,
Though this might take me a little time.

– W.H. Auden

Making Knightian uncertainty operational

Tell us how "Knightian uncertainty can be made operational"…

Knightian uncertainty is not usually important when you are playing the first twenty (or is it these days thirty?) moves of a Ruy Lopez in grandmaster chess.  When Knightian uncertainty matters, we should observe market participants investing more in opportunities for serendipitous discovery.  This might, for instance, mean buying new books on a lark, traveling randomly around the world in search of insight, and in general mimicking wunderkind Ben Casnocha.

Do you think Knightian uncertainty is important in labor markets?  If so, go out and hire some people on the basis of rumors.

Norton A. Myers’s new and excellent Happy Accidents: Serendipity in Modern Medical Breakthroughs: When Scientists Find What They’re NOT Looking For is one of the best books I know of on science.

#18 in a series of 50.

Sarah asks about age and productivity

[Please discuss the] relationship between age and productivity.

Economics has a real problem.  The smartest people, by the time they are forty (if that), have extremely lucrative opportunities for consulting.  They can earn hundreds or thousands of dollars an hour.  Most of them cash in, even if they continue to produce good work based on 80 percent of their core attention and capabilities.  We get a steady stream of young innovators, but we have few truly deep thinkers at the top of their game. 

On the other hand, the economics profession stays broader than it otherwise would be.  Non-lucrative fields, such as public choice, economic history, and cultural economics, keep their best thinkers to a greater degree, relative to econometrics and finance.  But perhaps these low-paying fields attract fewer really bright people in the first place.

#17 in a series of 50.

I heart unions, unions are we

Ezra Klein tells me to go out there and tell people I support unions.  I do.  Alex likes unions too.  But we felt unions do not go far enough.  So we bypassed the capitalist altogether and started  (The sinister Jane Galt, on the other hand, rules over Winterspeak and Mindles with an iron fist and rakes in all that Amazon revenue for herself, surely they need to combine against her.)  MR is run solely by its laborers and when it comes to decision-making I can assure you there are no secret ballots. 

Labor-run firms are common in law, book agency, real estate, landscaping, and many other sectors; we even see them in airlines.  When labor in charge creates more value, labor starts its own firms or buys out the capitalist or buys greater control rights.  Growing capital markets make these evolutions easier all the time.  Cooperatives, which are governed by consumers, also are found.  Mutuals, non-profits, and yes unionized firms are common too.  I heart all of these organizational forms.  Keep in mind that if both workers and customers will be better off, yes it probably can happen; it is naive to think that liquidity problems are the major issues preventing workers from enjoying greater control rights.

In the short run, the mental model of the left-wing bloggers is a bunch of janitors trying to get better working conditions but opposed by employers.  In the longer run what is striking is the competition across different organizational forms.  It doesn’t always make sense to give labor residual control rights over capital goods, or the right to halt production. 

My favorite things Connecticut

Being from New Jersey, this is a tough post for me to write, but I recognize many virtues in our mirror enemy to the north:

Composer: Charles Ives, most of all Central Park in the Dark and The Unanswered Question, plus some of the piano music.  The Concord Sonata is wonderful to hear live, but he often loses his bearings in the longer pieces.  Bernstein or Michael Tilson Thomas are the best conductors for his music.

Popular music: There is Moby (the early stuff), Liz Phair (more consistent than her reputation), and Thurston Moore of Sonic Youth ("Daydream Nation" is amazing, but most of their CDs leave me cold), and that’s not counting the rich rock stars who have moved in, like Keith Richards or Diana Ross.

Poet: Wallace Stevens worked for an insurance company in Hartford for many years, but the people in his office did not know he was a poet.  "He was an imaginative claims man," later opined one colleague.

Artist: Chuck Close (here is the portrait of Philip Glass), honorary mention to Maya Lin.

Writer: I enjoyed Philip Roth when I read him, but it leaves a bitter taste in my mouth.  Mark Twain lived in Hartford a while, but that answer doesn’t feel right.  Harriet Beecher Stowe I could not finish.

Food: CT has the best pizza in the USA, most of all in New Haven but not only.

Movie, set in: I hated Mystic Pizza, nor can I imagine Christmas in Connecticut could have been any good.  Help!

The bottom line: The state is close to having a Grand Slam.

While I am here, I hope to see the new Howard Hodgkin exhibit, there is an excellent slide show within the link.

Prospect theory

A loyal MR reader asks about prospect theory.  I feel it is usually too experimental and too ad hoc, are those really the general biases out there in markets?  I was heartened to see the following good paper (non-gated here) on prospect theory and the stock market.  The abstract:

We study the asset pricing implications of Tversky and Kahneman’s
(1992) cumulative prospect theory, with particular focus on its
probability weighting component.  Our main result, derived from a novel
equilibrium with non-unique global optima, is that, in contrast to the
prediction of a standard expected utility model, a security’s own
skewness can be priced: a positively skewed security can be
"overpriced," and can earn a negative average excess return.  Our
results offer a unifying way of thinking about a number of seemingly
unrelated financial phenomena, such as the low average return on IPOs,
private equity, and distressed stocks; the diversification discount;
the low valuation of certain equity stubs; the pricing of
out-of-the-money options; and the lack of diversification in many
household portfolios.

In other words, we can think of stocks as a lottery ticket.  They offer a chance at the thrill of victory, and not just a mean-variance pair; this may help explain various pricing and return anomalies.  Am I convinced?  No.  Am I moved?  Yes.

#16 out of 50.

Unions really really don’t matter that much these days…

Idlehands points to this paper (QJE 2004) by John DiNardo and David Lee.  Neither author is a crazy right-winger, let’s hear their message:

Economic impacts of unionization on employers are difficult to estimate in the absence of large, representative data on establishments with union status information.  Estimates are also confounded by selection bias, because unions could organize at highly profitable enterprises that are more likely to grow and pay higher wages.  Using multiple establishment-level data sets that represent establishments that faced organizing drives in the United States during 1984-1999, this paper uses a regression discontinuity design to estimate the impact of unionization on business survival, employment, output, productivity, and wages.  Essentially, outcomes for employers where unions barely won the election (e. g., by one vote) are compared with those where the unions barely lost.  The analysis finds small impacts on all outcomes that we examine; estimates for wages are close to zero.  The evidence suggests that-at least in recent decades, the legal mandate that requires the employer to bargain with a certified union has had little economic impact on employers, because unions have been somewhat unsuccessful at securing significant wage gains.

Keep in mind what this means.  Once we control for endogeneity in where unions are formed, there may not be a union wage premium at all.  (A few posts ago I was telling you it was 10 to 20 percent, learn something new every day, etc.)  I learned also that when we look for the wage premium in establishment-level data, rather than household data, it usually isn’t there.  And that’s without considering the contribution and method of the authors.

I would like the highly intelligent left-wing part of the blogosphere to respond to this paper and to the Hirsch piece.  Here is an NBER version, here are other copies.  By the standards of labor economics, it does not suffice to note that the 1950s had both a more equal income distribution and more unions, or to call Western Europe a kinder, gentler place.  Those citations don’t sort out cause and effect, and in fact we do have more advanced ways of scrutinizing the data.

It is fair to say that these papers do not support the "right-wing scaremongering" scenarios about unions.  So a Kevin Drum might claim: "well, it can’t hurt to try more unions."  That still represents a significant downgrading of the original vision.  Unions are an emotional issue for the left, much as free trade and the fall of communism are so for the right.  Would it not be meaningful and rallying for the left to have the battle over collective bargaining once again?  But I am telling you all, there simply isn’t that much there.

By the way, here is with Megan and Matt on unions, can you imagine that?

How to read Thomas Pynchon

Bookslut will tell you "not," but you would be missing something special.  Most generally, revel in the language, the fun, and the set pieces.  Don’t look for deeper meanings, in my view there ain’t none, and for the better.  My specific tips:

1. V: Published when Pynchon was 24.  Read it once, straight through, without trying to make sense of it.  Then read it again.  Companion to V. is a useful supplement.

2. The Crying of Lot 49.  Short, fun, and somewhat scrutable.  It is a common introduction to Pynchon, although Pynchon himself dismisses its importance.

3. Gravity’s Rainbow: The masterpiece.  It doesn’t matter if you don’t finish it, the story falls apart in any case.  Even reading the first fifty pages yields a high return.

4. Vineland: This short novel came after a 17-year hiatus.  It has its defenders, but I find it unreadable and unpleasant.

5. Mason & Dixon: I love the 18th century, so you might think I could get into this one.  Pam Regis tells me it has to be read aloud.

6. Against the Day: The new 1200-page monstrosity.  How to read it?  Lean it against your sofa, and wait until your wife starts complaining about it, thereby prompting you to pick it up and get it out of the way…

The bottom line: Pynchon is about the highest-IQ author out there, a mixed blessing.  Start with Gravity’s Rainbow, or V, and hope for the best.

#15 in a series of 50.

Jean Baudrillard has passed away at 77

Here is a bio.  Here are obituaries.  It is easy enough to attach his apparently outrageous claims and paint him as a postmodern nihilist.  Looking past the surface, virtually all of his books have at least five startling and insightful sentences.  Here is one:

“Seduction is always more singular and sublime than sex and it commands the higher price”

Or try this:

“At male strip shows, it is still the women that we
watch, the audience of women and their eager faces.  They are more
obscene than if they were dancing naked themselves.”

Here are many others.  I always read him as a moralist.  None of the summaries do him justice.  Baudrillard was a major thinker of our age, and I am sad I can no longer look forward to new books from his hand.

Africa fact of the day

Advertising Age calculates that around $100 million has been spent blanketing billboards and magazines with images of Bono and other "celebrities", while the total sum raised for Africa is $18 million.

Just to be clear… Total spent on making Bono more famous = $100 million.

Total spent on drugs for Africans = $18 million.

Here is the link, and thanks to Chris F. Masse for the pointer.  Jason Kottke comments