Month: May 2007

The Legacy of Max Weber

This obscure but interesting Ludwig Lachmann book is now available on-line for free.  I studied with Lachmann at NYU when I was very young, and he helped make me more contrarian.  This short book is about how institutions coordinate plans, and how the sociological legacy of Weber is an indispensable component of any theory of Hayekian spontaneous order.  From that description alone, you ought to know whether or not you will like it.

Why does America have tipping?

Back in the days of Fifty Questions, a loyal MR reader asked:

I am interested in the economics of tipping.  This seems appropriate, since you seem to eat out a lot.  Why in the United States is the pay of waitstaff structured as it is as compared to elsewhere, where tipping is less expected? 

The best way to understand tipping is to go to a restaurant you will never patronize again.  Once your meal is over, when she is not looking, leave your tip not on your table but rather on another table she served.  That way she still gets her money and you have in no way ripped her off.

That is psychologically tough to do.  You fear the waitress will think you are a lout and a deadbeat.  Of course in no-tipping countries, or for that matter non-tipping sectors, this dilemma does not arise.

The real question is why America is structured so that waiters and waitresses can sell feel-good services ("you are a generous tipper and a fine man") to strangers, in return for money.  In other words, how did waiters end up as fundraisers, noting that the final Marshallian incidence may lower their wages by the amount they receive in tips?  Most cross-cultural explanations of tipping start with the agency problem between diners and servers ("can you bring my drink now?"), but I believe that is the wrong approach.  I view tipping as correlated with effective fundraising in other areas, and Americans as being especially willing to set this additional fundraising arena in motion.

Robin Hanson’s health care petition

our single clearest data point regarding the marginal value of this spending, the US-funded RAND health insurance experiment,
where from 1974 to 1982, 7700 subjects were randomly assigned to 3 to 5
years of free or not free medicine, found no significant evidence of a
substantial health effect of more medicine, confirming the usual results of continuing aggregate healthmedicine correlation studies,

We the undersigned petition
the US to
publicly conduct a similar experiment again soon, this time with at
least ten thousand subjects treated for at least ten years, which
should be feasible for a half billion dollars, or one part in forty
thousand of annual medical spending.  Whatever other purposes such an
experiment pursues, it should try to make clear the aggregate health
effects of variations in aggregate medical spending, variations induced
by feasible regimes of quality control, including free patient choice
induced by a varying aggregate price.

Here is the link.  I doubt if upping the number of subjects will much change the results.  As long as we are playing mad scientist, I would prefer some disaggregated tests, namely:

1. How much better off are the poor uninsured if they get health insurance?  (Financially much better off but in health terms only slightly better off is my current guess, and yes there is already some evidence here.)

2. How much less healthy would the well-insured be if they had to consume thirty percent less health care?

3. How much healthier would we be if we retargeted expenditures to some commonly recommended areas, such as pre-natal care and prescription drugs?

And my favorite is:

4. How much would health care cost if we simply banned all health insurance and modified forms thereof? 

Except possibly for #1, these are not easy experiments to run, and yes computational modeling would beg the relevant questions.  But I think #3 — or even the thought thereof — poses the biggest problem for Robin’s worldview that medicine doesn’t do us much good.  Robin is a real world innovator, a hands-on, duct tape kind of guy, so he can’t retreat into the claim that we cannot possibly parse current expenditures more effectively.  Lots of health care does lots of good, and from there we can pick up the ball and run with it.

For more on Robin’s revisionist health care views just scroll through the last week’s entries on his blog.

The cultural foundations of capitalism

Sahil, a loyal MR reader, asks:

read your blog post about Roger Scruton’s new book, which you praised
for giving a "good sense of just how much cultural background is needed
to sustain liberty."  That’s an interesting notion.  Do you have
recommendation for books that examine this very idea in a more
systematic way?  I’m sure they’re out there, and I’d be interested to
read them.

I’ll offer a few suggestions: all of Max Weber, the books by Lawrence Harrison, Alan MacFarlane on English individualism, Jonathan Israel on the Dutch Republic, Joseph Conrad, Levi-Strauss’s Triste Tropiques, Rene Girard on Christianity, anything good on English history, Hoskyns on Russian history, Albion’s Seed, IQ and the Wealth of Nations, Gilbert Freyre on Brazil, de Tocqueville, Sarmiento on Argentina, Louis Hartz, and John Gunther on America.  The book "The Influence of the African-American Tradition on the American Ideal of Liberty" remains to be written.  Nor have I scratched the all-important and largely non-European notions of liberty from the Nordic regions, which fed into the English success.

Pro-commercial norms are not scarce, as is evident here in Zanzibar.  But those norms get you only to a medieval standard of living; as Mancur Olson stressed, they do not on their own support the structures of large-scale capitalism.  It is harder to convince people to place larger abstract ideas above immediate duties to friends, family, and clan, but that is indeed the central feature of the problem.

Comments are open, what do you all recommend?

The NBA study of referee bias

As a response to Justin Wolfers and Joseph Price, the NBA financed a study supposedly showing there is no racial bias in refereeing.  Here is a WSJ analysis of that study.  Here is part of what they found:

Columbia University statistician Andrew Gelman, who has blogged
about the Wolfers-Price study and participated in a conference call
with Segal and me, said, “What the statistics tell you is that there’s
a pattern in the data that’s not explainable by chance.” University of
California-Irvine statistician Hal Stern told me the NBA’s study “can’t
be said to disprove the Price-Wolfers analysis.”

the NBA’s study didn’t include players who weren’t called for any
fouls, making Segal’s results “suspect,” according to Mr. Gelman. Mr.
Fluhr responded, “I’m not sure if you’re looking at non-calls, it would
affect the data.” He added that Segal had the data necessary to
incorporate such players, but didn’t consider the data relevant,
instead only focusing on foul calls. Messrs. Wolfers and Price included
all players who appeared in the games they examined.

The NBA does promise to examine non-calls and redo some of the results.  I do not think we have yet gotten to the bottom of this, but my "haven’t read anything but the initial study" intuition (and Steve Levitt’s comments; see also Voxbaby) is that the result of bias will hold up.

Thanks to Chris Masse for the pointer.

Addendum: Wolfers claims the NBA study supports his results.

Wolfowitz at the World Bank

In an excellent piece, Sebastian Mallaby writes:

…the biggest misconception about the bank is that it needs the goading
force of Wolfowitz to fight graft in poor countries.  Even before
Wolfowitz arrived in 2005, the bank was trying to plug leaks in
government budgets, reform civil services and back new anti-fraud
units: From 2000 to 2004 the bank’s lending to improve public-sector
governance grew 11 percent annually.  Wolfowitz’s goal was to take these
anti-corruption efforts to the next level.  The instinct was noble; the
implementation horrible.

As an outsider it is hard to judge many aspects of Wolfowitz’s tenure.  I take his continuing unwillingness to resign to be the biggest argument against his managerial abilities.  He has lost the public relations battle and can no longer be effective.  Why should he want the job any more?  The obvious hypothesis is that he is emotionally committed to a losing battle, and is not placing much weight on the long-term interests of the institution he is running.

Addendum: Chris Masse points me to this good article on the crisis facing the World Bank.  I would add that the real "corruption" problem is that the Bank’s board expects lucrative "development" contracts to be given to national firms of France, Germany, U.S., etc.  In the final analysis the Bank has a strong incentive to push through loans, whether it should or not.  Recipient nations have learned how to game this system very well.  I believe this more or less legal form of corruption is well understood by Wolfowitz and his ultimate goal was to challenge the institution at its core.

Econ Journal Watch

In the issue:

would Adam Smith publish today?  Daniel Sutter and Rex Pjesky show that
almost no math-free research appears in top economics journals.

of what?  Dan Klein and Pedro Romero articulate the difference between
model-building and theorizing, and contend that most articles in
Journal of Economic Theory do not qualify as theory.

Internet and economic discourse: Dan D’Amico and Dan Klein examine the
websites of Harvard and George Mason economists, and ask whether the
differences speak of differences in character type.

Henrik Lindberg tells of the role of economists in liberalizing Swedish agriculture.

Acemoglu says the economic analysis of constitutions and political
structure has been revolutionized by Torsten Persson and Guido
Tabellini.  But Charles Blankart and Gerrit Koester argue that the new
political economics is not that new, and might be a step backwards.

quality is all the rage.  So why doesn’t research in the top economics
journals make better use of the Economic Freedom of the World index?
John Dawson reports.

Development economics has discovered
important truths about trade, aid, property, and planning.  Ian Vasquez
recounts how the truths were advanced in the work of Peter Bauer, and
how the late-comers often neglect that learning.

Alfred Chandler

Alfred Chandler died last week.  Chandler, along with Ronald Coase and Oliver Williamson opened up the black box of the firm.  Of the three, Chandler took the longest view emphasizing how new technologies for handling information (telephone, telegraph, record keeping) gave rise to new organizational structures in business (the M-form).  Critical to Chandler, however, was that the new organizational structures were necessary to fully exploit the new technologies and they came about neither automatically nor without great experimentation, evolution and slow transformation.  We can be sure that the computer and the internet will be changing business structure for at least the next quarter century.   

Chandler’s classic The Visible Hand: The Managerial Revolution in American Business is sometimes understood ala Berle and Means as a challenge to the idea of the invisible hand and "market capitalism."  The real lesson, however, is how the invisible hand guides not just buying and selling but organizing and thinking. 

Alfred Chandler passes away

Here are obituaries.  Chandler’s The Visible Hand filled in the historical boxes of how large firms developed by learning to control their immediate economic environments.  He was a father of modern business history.  His writings were sometimes dry but he had an extraordinary sense of the newness of large-scale corporate organization and the importance of new preconditions for its emergence.  His Strategy and Structure integrated managerial theory and economics.  Much of his work brought together history, economics, and business management in new and original ways.  Chandler taught at Harvard Business School for many years and was the seed of many a promising paper or book in economic history; for decades he was the center of the business history group there.  Here is Wikipedia on Chandler.  Here is a short bio.  Here is the book The Essential Alfred Chandler.

The pointer is from Kurt Schuler.

Was Tulipmania a myth?

Chris Bertram reports:

Simon Kuper, in today’s FT, reviews Anne Goldgar’s Tulipmania,
a new study of the 17th century boom and bust in the Dutch tulip market. Disappointingly, it turns out that most of the stories are false. There was a boom, but it was a fairly marginal phenomenon in the
Dutch economy, and people weren’t ruined: the deals were done when the
plants were in the ground, but payment was due only when the bulbs were
dug up. Most people simply refused to pay, or paid only a small
fraction of what they owed.

Here is Peter Garber’s earlier revisionist account.  I’ve never been convinced by Garber’s claim that it was driven by fundamentals, but I am ready to believe that historically the crash was not such a big deal