Month: June 2007

Why so much youth entrepreneurship in the U.S.?

Here is my latest column, featuring wunderkind Ben Casnocha; it has been titled "The Loose Reins on U.S. Teenagers Can Produce Trouble or Entrepreneurs."  Here is an excerpt:

The longstanding criticism of the American school system is that even
in the better schools, too many students just “get by” rather than
engage in a rigorous curriculum.  This academic leniency is bad for many
average or subpar students, but it also allows some students to
flourish.  Relatively loose family structures have similar effects;
American children are especially likely to be working on their own
projects, rather than being directed by parents and elders.

American philanthropy is also a significant and unheralded factor behind American youth entrepreneurship; many young entrepreneurs used elders as mentors or asked them for financial assistance.  Furthermore "selling to the young" is much derided by critics such as Juliet Schor or Benjamin Barber, but it has its benefits.  Sometimes advertising inspires the young to start marketing themselves, as did Ben Casnocha.

You can read more about Ben, who started his successful company at age 14 (he is now 19), in the article.  Here is Ben’s blog.  Here is the web site for Ben’s new book.  Ben will soon be attending Claremont McKenna college, I am curious to see whether or not it drives him crazy.

My review of Taleb’s *The Black Swan*

The book is very stimulating, here is one excerpt from my review on

Another human failing stems from the nature of happiness.  In the short run, people’s happiness is often shaped more by how many "positive events" occur in their day than by the arrival of one important piece of good news.  Winning $100,000 in the lottery feels almost as good as winning $1 million.  We therefore look, consciously or not, for small but repeated successes when we should be shooting for "one large win."  It’s easy to see why:  Big payoffs come only rarely, and perhaps late in life; in the meantime, who wants to keep on feeling like a loser?

Here is another bit:

Oddly, Taleb’s argument is weakest in the area he knows best, namely finance. Only on Wall Street do people seem to give proper credence–not too much, not too little–to very unlikely events. It is easy enough to use hindsight to identify the black swans Wall Street has missed, such as stock-price crashes. But it is harder to argue that the market undervalues surprise more generally. Stock and bond markets offer simple ways to bet on black swans. In financial terminology, you can purchase an option that is "deeply out of the money"; for instance, you can bet that Google shares will rise or fall in value an enormous amount over the next three months. These investments pay off precisely when the rest of the market does not anticipate the scope for surprise. Yet "long-shot" strategies are well-studied, and they do not yield extra profit. In other words, organized securities markets track rare and unpredictable events as well as the current state of knowledge will allow. If you don’t believe me, it is easy enough to bet on the Los Angeles Clippers to win the 2008 NBA title, or to bet on the longest odds at the racetrack. Such actions are hardly the path to either happiness or riches.

Here is my previous post on the book.  Here is Taleb’s podcast on EconTalk.  If you’ve read the book, do tell us what you thought of it…

Steve Levitt at the World Series of Poker

Here is one account, here is Levitt’s account of another round.  In the latest he did very well indeed.  Out of 900 or so contestants, I am hearing reports that he finished about #25, some sources are saying as high as #10.  The pointer is from Scott Cunningham, tell us more if you know more.

So how many dimensions does intelligence have?  Some top chess players, such as Etienne Bacrot, are switching into poker for the higher pay, though I suspect Levitt’s move is temporary rather than permanent.

Addendum: Here is Levitt’s account.

Why did the Soviet Union fall?

In a simplified way, the story of the collapse of the Soviet Union could be told as a story about grain and oil.

That is from Yegor Gaidar.  In the 1980s it was necessary to import more and more grain, and Saudi Arabia was no longer supporting oil prices.  It worked like this:

The timeline of the collapse of the Soviet
Union can be traced to September 13, 1985. On this date, Sheikh Ahmed
Zaki Yamani, the minister of oil of Saudi Arabia, declared that the
monarchy had decided to alter its oil policy radically. The Saudis
stopped protecting oil prices, and Saudi Arabia quickly regained its
share in the world market. During the next six months, oil production
in Saudi Arabia increased fourfold, while oil prices collapsed by
approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per
year, money without which the country simply could not survive. The
Soviet leadership was confronted with a difficult decision on how to
adjust. There were three options–or a combination of three
options–available to the Soviet leadership.

First, dissolve the Eastern European empire and effectively stop
barter trade in oil and gas with the Socialist bloc countries, and
start charging hard currency for the hydrocarbons. This choice,
however, involved convincing the Soviet leadership in 1985 to negate
completely the results of World War II. In reality, the leader who
proposed this idea at the CPSU Central Committee meeting at that time
risked losing his position as general secretary.

Second, drastically reduce Soviet food imports by $20 billion, the
amount the Soviet Union lost when oil prices collapsed. But in
practical terms, this option meant the introduction of food rationing
at rates similar to those used during World War II. The Soviet
leadership understood the consequences: the Soviet system would not
survive for even one month. This idea was never seriously discussed.

Third, implement radical cuts in the military-industrial complex.
With this option, however, the Soviet leadership risked serious
conflict with regional and industrial elites, since a large number of
Soviet cities depended solely on the military-industrial complex. This
choice was also never seriously considered.

Unable to realize any of the above solutions, the Soviet leadership
decided to adopt a policy of effectively disregarding the problem in
hopes that it would somehow wither away.  Instead of implementing actual
reforms, the Soviet Union started to borrow money from abroad while its
international credit rating was still strong.  It borrowed heavily from
1985 to 1988, but in 1989 the Soviet economy stalled completely…

The money was suddenly gone. The Soviet Union
tried to create a consortium of 300 banks to provide a large loan for
the Soviet Union in 1989, but was informed that only five of them would
participate and, as a result, the loan would be twenty times smaller
than needed.  The Soviet Union then received a final warning from the
Deutsche Bank and from its international partners that the funds would
never come from commercial sources.  Instead, if the Soviet Union
urgently needed the money, it would have to start negotiations directly
with Western governments about so-called politically motivated credits.

In 1985 the idea that the Soviet Union would begin bargaining for
money in exchange for political concessions would have sounded
absolutely preposterous to the Soviet leadership.  In 1989 it became a
reality, and Gorbachev understood the need for at least $100 billion
from the West to prop up the oil-dependent Soviet economy.

Here is the full article.  The pointer is from VoxBaby.  Do you have further thoughts?

Do insiders have an advantage getting tenure?


At most universities there are two types of tenured economists – those that came to the school shortly after leaving graduate school (and were later promoted) and experienced economists that were hired with tenure.  Conventional wisdom in academic circles suggests that it is easier to get tenure as an insider than it is to attract an offer as an outsider.  That is, schools hold potential external senior hires to tougher standards than the requirements for promotion of the school’s junior professors.  In this paper, I take a first step towards showing that, at least for academic economists, there is an insider advantage.  I analyze the research records of economists with ten years of experience and compare the productivity of those who recently changed employers (suggesting they were hired with tenure) to those that did not (suggesting internal promotion.)  I show that the productivity of “outsiders” is higher than the productivity of “insiders” at all but the top 10 economics institutions in the world. 

That is from the May 2007 American Economic Review, here is one version of the paper.  I have seen much anecdotal evidence in support of these results, though never at my school.  I wonder, however, how much of this trend can be justified by efficiency, given that departments engage in some amount of team production.  If a department –especially a non-top department — has a true jerk, it really does make everyone else less productive.

Did Norman Finkelstein deserve tenure?

Dan Drezner has an excellent post, with which I largely agree.  I haven’t read the guy’s work (I doubt if I would like it), but my smell test suggests the following.  Many non-top universities tenure a large group of faculty members, none of whom really deserve it.  They are insiders, they have friends in the department, the replacements wouldn’t really be better, and so the tenure sticks.  It is quite easy to argue ex post that a "no" vote is warranted in most of these cases.  But if Finkelstein hadn’t done controversial work, he in fact would have received tenure along with many other non-deserving candidates.  He didn’t, and in that sense I also suspect the process was unfair.

How to study economics in your spare time

Our apologies a Typepad error has swallowed this post; might any of you have a copy of it to send me and/or put in the comments?  In any case the comments are excellent…in the post I recommended Mankiw’s text, the reading list on his blog, Freakonomics, Tim Harford, my own In Praise of Commercial Culture, and texts by Hal Varian and Eric Rasmusen, among other sources.  Most of all just let loose and break from your reading program to follow your inclinations and passions…

Addendum: Simon Taylor comes to the rescue, here was the original post:

I am a chemistry major interested in learning economics in my spare time.  With summer fast approaching, I’ll have more spare time to pursue the subject than I currently do.  I would like to start with the basics and pursue micro and macro up to an advanced level.  (I realize, of course, this cannot be done over the summer alone.)  I’ve never taken an economics course before, but being a science student, I can handle a mathematically intensive approach.

I am wondering if you could recommend some textbooks, journal articles, and any influential books by economists that you would encourage others to read, as well as provide some recommendations as to the order in which these things should be studied.

The best start is our blogroll and then try Mankiw’s Principles book if you need the background and don’t mind the length.  More generally, here is Greg’s recommended reading list, though I don’t like Heilbroner’s book.  I also recommend Arnold Kling’s on-line text, my own In Praise of Commercial Culture, but best of all is having an office next door to Alex, Bryan, and Robin.  For mathematical approaches, see the Ph.d. textbook by Hal Varian, Eric Rasmusen’s Games and Signalling, Milton Friedman’s old Price Theory book, and quiz yourself with micro puzzles until you drop dead.

Most of all, I don’t think people much stick to reading programmes, nor should they.  It is best is to jump off track and pursue the diversions which fascinate you.

Readers, what else do you recommend?

Only an economist could have written this

I responded that economists usually analyze low regulation scenarios
first, as a baseline to compare with higher regulation scenarios, and
that I don’t endorse vague slogans – it is hard to tell who are the
deserving "poor" in the scenario I consider.  My explicit denials did
not much move James.

That is Robin Hanson, and I hope you are all reading his disagreement case studies.

Does anyone understand macroeconomics?

Ponder this one on your daily walk:

The key question asked by standard monetary models used for policy analysis is, How do changes in short-term interest rates affect the economy?  All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates.  We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and nearly no changes in conditional means.  In this sense standard monetary models capture essentially none of what is going on in the data.  We thus argue that almost everything we say about monetary policy using these models is wrong.

Or put it this way:

We have focused on exchange rates rather than the term structure of interest rates because the implications of exchange rates are so striking.  Specifically, if exchange rates are random walks, then all of the fluctuations in interest differentials are accounted for by fluctuations in conditional variances and none by fluctuations in conditional means.  The data are so opposite of what standard models assume that even the most die-hard defenders of them should take note:  If these data are accurate, then almost everything we say about monetary policy is wrong.

That is from the May 2007 American Economic Review, here is an earlier version of the paper.  I doubt if changes in interest rate differentials are driven by risk premia of the standard sort; I would sooner cite "noise plus news," but resist the pull toward calling that a "conditional mean."  I’ll also note that calling exchange rates a "random walk" is in the "do not reject" rather than "accept" statistical category.  Both asset price moves contain lots of junk information, so we shouldn’t be totally surprised if they don’t fit together in some simple manner.  Those moves weaken the paradox presented, but don’t come close to offering a coherent account of what is going on.