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I am particularly fond of this passage of Acemoglu's:

"In our obliviousness to the importance of market-supporting institutions we were in sync with policymakers. They were lured by ideological notions derived from Ayn Rand novels rather than economic theory. And we let their policies and rhetoric set the agenda for our thinking about the world and worse, perhaps, even for our policy advice. In hindsight, we should not be surprised that unregulated profit-seeking individuals have taken risks from which they benefit and others lose."

He follows this with:

"But now we know better."

Do we? Really? I will be interested to see 20 or 30 years hence whether we do.


Ok Tyler, as a food-lover yourself, we must ask when were you hit on the right side of your head? Did you fall off your bike maybe as a child? Did a playmate smack you with a toy truck in pre-school?

From the summary:
"3. The way we think about reputation, including how it is acquired and maintained, is way off base... You walk into a grocery store with a mental model that is based on the premise that the individuals all through the production chain operate in a control structure designed to build brands and make you think their products are healthy and tasty. Such reputations are costly to build and not readily squandered. But, Daron points out, this is too simple. In particular, we should no longer make the mistake of saying “the company† wants this or that. There are no companies in any kind of behavioral sense. There are people, struggling to get ahead, and it is their interactions that can lead - particularly in finance - to products that are really terrible for you and your neighbors (and even quite bad for themselves)."

If this is true in finance (I do not think its true in retail, or in most sectors), then we should ask *why* - what are the institutional incentives that are destroying the reputation mechanism?

We must ask: (a) Why are not employees hired to do what is best for the company and held to account for it?

Maybe the liability structure is off; maybe the stockholders aren't wielding their power; maybe the pay structure is too associated with short-term gains; etc.

Then we have to ask (b): Why has the company not been held to account by its customers?

Why have not the companies that had this bad institutional framework not gone under, weeding it out. It could be because (a) the institutional structure is law, no company has a choice (b) those companies failing due to this structure were able to survive because of subsidy, bailout, or other advantage conferred by government, (c) this is the weeding out time right now ...

I love Brooks. His main worries are that:

(1) Obama is deviating from "the economic doctrine that reigned up until a few months ago". Heaven forbid!

(2) Obama will be a broken president if he doesn't fix the current mess in twelve months. Newsflash to Brooks: It will take a lot more than twelve months to fix 20 years of Republican incompetence and economic boobery, which was (of course) cheered on and supported by the likes of David Brooks.

To sum up, if Brooks is against it, that is a necessary (although not sufficient) condition for the actions to be the right ones.

As a side note, I don't understand why the Republicans aren't calling for a massive war. Iraq and Afghanistan aren't the problem, it is that the Iraq and Afghanistan wars aren't big enough. To China, my hearties!

"But now we know better."

“We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term.† -- Jeremy Grantham

Anonymous (two posts prior to mine) makes a great counter point.

I can certainly say that history has repeatedly shown that freely elected vote-seeking politicians have wrought just as much REAL harm (probably more) than freely "elected" (read employed) profit-seeking suits have.

Should we restrain political choice then, as you are proposing we restrain economic choice?

Gourmand syndrome: Utterly fascinating, and not even a hoax. Finds like this are why I love MR so much.

It sounded to me like Acemoglu was partly justifying a big stimulus by saying "spend a trillion dollars in order to placate people, exercise government muscles, and protect our capitalist institutions against pitchfork-wielding mobs by showing people that someone will stick up for them."

This could be right. Psychology is the least understood of all sciences, particularly mass psychology.

However, this is very speculative, precisely because we don't understand.
There are risks of inaction and of action, and of everything in between.

We were in a similar fog before invading Iraq. The reasons had this sort of airy quality to them. "Let's invade this country because we need to teach people a lesson, and create XYZ in the middle of the Middle East, and maybe they have weapons which maybe someone would use against us."

None of those points were stupid but it was all very speculative.

I think David Brooks is right to say that hubris is the biggest concern here. Unfortunately hubris is why we shot ourselves in the foot with the invasion of Iraq. In Iraq it was "the hubris of the ballsy go-getters," in this situation it is "the hubris of the smart and careful." I prefer #2 to #1 but both are scary.

The analogy of the pigs is absolutely brilliant. I never understood why the second pig was in the story.

If Bush failed massively because he was too gutsy and Obama fails massively [let's hope not] because he's too gutsy, does that mean we should pick presidents based on how ineffectual they seem?

Acemoglu (how do you pronounce his name? Ace - Magloo?) takes 13 pages when two or three pages would have sufficed. Does he believe that we have an unregulated market when the government determines the money supply, tinkers with interest rates and creates rogue entities like Fannie and Freddie? Big mistakes have been made by private actors, but they were hardly alone, and may have been misled by government actions.

ZBicyclist -- indeed there are almost always three (like the three billy goats gruff) but in this case, the second pig isn't just a placeholder. He's an example of doing something halfway. But in any event, it looks like Obama is going to listen to reason and propose a Third Pig stimulus.

Ah-jem-ooh-loo. In Turkish it means the Persian's son.

Acemoglu's prior beliefs about institutions and their reputations were simply naive. I'm a partner in a law firm and have witnessed first hand two institutional failures (fortunately I saw the writing on the wall and escaped to stronger partnerships before the implosions).

In each case the problem was the same - partners whose names weren't on the door and who didn't give a tinker's damn about the place. Infamously one stated at a partners' meeting "I don't care if the last printer collapses into a pile of dust 5 minutes after I quit. I'm here to make as much as I can as fast as I can and when I've hit my nut I'm done."

In both cases, because the guys were aggressive and at least temporarily heavy hitters, management let them have their way. And in both cases their way produced a window of sharply higher profits followed by a decline in one case and an outright collapse in the other.

Eventually strong leadership will always be replaced by weak leadership and weak leadership will always be exploited by people who don't care a whit about the institution's reputation.

You can't legislate forceful leadership - you can only legislate the sort of transparency that allows investors to see what I saw - so they can run away, like I did.

Brad DeLong notes that Brooks misrepresented what the Romer paper. He also misrepresented what was said in the 1963 Economic Report of the President:

Not sure how you can call such mendacity "very good".

Daron Acelmoglu's central point is that deregulation got us into this mess, "In our obliviousness to the importance of market-supporting institutions we were in sync with policymakers. They were lured by ideological notions derived from Ayn Rand novels rather than economic theory." What, Ayn Rand? I don't think Ayn would have advocated the Community Reinvestment Act, Fannie and Freddie, fiat Fed money, or special tax breaks on homes. Nobel prize winning theory also played a key role--It was the economic theory of options and financial insurance that led to the creation and breakdown of the derivatives markets.

No, Daron is way off the mark. It was bad economic theory, bad legislation, bad regulation, and the moral hazards engendered by the latter that lead to the housing and derivatives bubbles. As economists, we need to read more of Smith, von Mises, Hayek, and, yes, even Ayn Rand to mend our minds. Men of system, such as Daron appears to be, will only lead us down the primrose path to poverty and serfdom.



Jeffrey Steingarten's collection _It Must Have Been Something I Ate_ (I think--it might have been his first book) includes an essay in which he happens upon an article in a medical journal arguing that brain lesions are responsible for sudden appreciation of fine food. Steingarten has a CT scan and, sure enough, there is evidence of damage to the suspect part of his brain. He speculates suddenly ending his career as a lawyer to obsess over food is a result of this injury.

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