Month: October 2010

A rainfall theory of democracy

From Stephen Haber and Victor Menaldo:

Why have some countries remained obstinately authoritarian despite repeated waves of democratization while others have exhibited uninterrupted democracy? This paper explores the emergence and persistence of authoritarianism and democracy. We argue that settled agriculture requires moderate levels of precipitation, and that settled agriculture eventually gave birth to the fundamental institutions that under-gird today’s stable democracies. Although all of the world’s societies were initially tribal, the bonds of tribalism weakened in places where the surpluses associated with settled agriculture gave rise to trade, social differentiation, and taxation. In turn, the economies of scale required to efficiently administer trade and taxes meant that feudalism was eventually replaced by the modern territorial state, which favored the initial emergence of representative institutions in Western Europe. Subsequently, when these initial territorial states set out to conquer regions populated by tribal peoples, the institutions that could emerge in those conquered areas again reflected nature’s constraints. An instrumental variables approach demonstrates that while low levels of rainfall cause persistent autocracy and high levels of rainfall strongly favor it as well, moderate rainfall supports stable democracy. This econometric strategy also shows that rainfall works through the institutions of the modern territorial state borne from settled agriculture, institutions that are proxied for by low levels of contemporary tribalism.

For the pointer I thank www.bookforum.com.

Stanley Fischer update

Formerly a famous macroeconomist at MIT, he now runs the central bank of Israel and he just won a Euromoney award for best central banker of the year.

Jacob Frenkel argues that Fischer's shekel-selling policies are unsustainable.  Here is another account.  Israel foreign currency reserves now exceed $66.3 billion, in part because of Fischer's decision to buy up so many dollars and keep down the value of the shekel.

Here, Fischer complains that the Israeli economy is dominated by a few families and excessively concentrated wealth.  He wants the government to remedy this situation, although it is hard to tell which policy he is proposing.

Arbitrage

I make a living buying and selling used books. I browse the racks of thrift stores and library book sales using an electronic bar-code scanner. I push the button, a red laser hops about, and an LCD screen lights up with the resale values. It feels like being God in his own tiny recreational casino; my judgments are sure and simple, and I always win because I have foreknowledge of all bad bets. The software I use tells me the going price, on Amazon Marketplace, of the title I just scanned, along with the all-important sales rank, so I know the book's prospects immediately. I turn a profit every time.

Sometimes the guy spends eighty hours a week in used book stores, and if you are an author think of this as your competition.  For the pointer I thank Andy Howard and the full story is here

Along related lines, Adam Ozimek thinks that "Brain Mounted Computers are a Dominant Strategy Equilibrium."

Barter markets in everything, bring your own restaurant

On a recent evening, an abandoned gas station with a curb blocked by cement barriers is the meeting point for a group of people who appear to be pulling chairs and tables from the trunks of their cars. It's almost dark. Some boxes are set on the sidewalk; linens and dishes and food are pulled out and what moments ago was an eyesore has been transformed into a popular place to eat. It's called BYOR. That stands for "bring your own restaurant." It's not quite an established venue, but the food is very good.

It's free to those who share. And the ambiance is unexpected as the outdoor location keeps changing. People learn where BYOR is going to be via Facebook. In the mild weather it's "open" every other weekend. No reservations required: just an appetite and some extra chairs if you have them.

What should you infer about Holyoke, the locale of this practice?  The full story is here and I thank Anastasia for the pointer. 

And from China, here is a vending machine for live crabs.

$$ Leaving Las Vegas, continued

The meaning of such facts is speculative, but they are fun to ponder:

A 40†² container filled with household goods, shipped from Shanghai to Houston, TX costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07. That’s because 60% of containers on ships coming from the US to China are empty, which means Maersk and other shippers are desperate to sell container space.

The full story, which considers the cost of shipping a bottle of Fiii water, is here and I thank Henry at Crooked Timber for the pointer.

Markets in everything, unexpected loopholes edition

"Crafted from 40,000-year old Woolly Mammoth Ivory, they capture the exquisite design and proportions of the original Staunton pattern Chess set, registered by Nathaniel Cook and produced by Jacques of London in 1849"

For more than 2,000 years, Mammoth Ivory has been traded and it remains a highly prized commodity across the world. While that demand for the Mammoth Ivory has always been higher than its supply, it skyrocketed in 1963 when the CITES agreement was enacted. This agreement banned all sales of new Elephant or Walrus Ivory, in an effort to protect the animals from extinction. As a result, Mammoth Ivory became the only type of animal-based ivory that is exempt from the international trade restrictions because it is considered to be a fossil.

The price is $9.995.00.  If that's not offbeat enough for you, try "Endangered Parrots of the World Chess Set," for $4,790.00, although I suspect they would come down if you bought them in quantity.

Run for the Border

By perceiving state borders to be physical barriers that keep disaster at bay, people underestimate the severity of a disaster spreading from a different state, but not the severity of an equally distant disaster approaching from within a state. We call this bias in risk assessment the border bias.

More here.  Amusingly, the authors show that making the border more salient by darkening the border lines on a map can make people feel even more protected.   

Hat tip: Paul Kedrosky.

Classical economics reading list

Joel, a loyal MR reader, asks me:

I am an undergraduate economics student curious about which of the classical economists and books you find most valuable. Classical not just meaning Ricardian but in terms of significant non purely quantitative works that influenced economics as a whole. If one were to put together a reading list of twenty or so of the most influential or important books, what would you recommend? The Wealth of Nations and General Theory of Employment, Interest, and Money seem logical starting points, beyond them though it's hard to wade through the range of choices (Ricardo or Hayek? Schumpeter or Jean Baptiste Say?)

For now I'll stick with classical economics in the narrow sense, as it ends in 1871.  If you can read only a few works, I recommend these:

1. Adam Smith, Wealth of Nations.  Duh.

2. David Hume, Economic essays.  He lacks some of Smith's profundity as an economist, but he is more precise analytically and as always a beautiful writer.

3. David Ricardo, Principles of Political Economy, the first six chapters.  Rigor arrives, though at the expense of truth.  Still there is something to it.  Supplement with Mark Blaug on Ricardo, if you want the model spelt out mathematically.

4. The early marginalists: I'll recommend Samuel Bailey on value and Mountifort Longfield on price theory.  Yet still it was a (temporary) dead end and you should read them with that puzzle in mind.  At what level of technical sophistication do the contributions of marginalism suddenly seem impressive?

5. Thomas Robert Malthus, on population (don't ask which edition) and Principles of Political Economy.  He understood supply and demand, elasticity, a version of the Keynesian model, and environmental economics, and yet he is mainly criticized for being wrong about population.  He is one of the strongest and most profound and most underrated economists of all time.  Also read Keynes's biographical essay on him.

6. Edinburgh Review.  The econ blogosphere of its day.  Read the economic essays published in that outlet, by Malthus and many others, especially on monetary theory.  I don't know any easy way to track this stuff down, but if you do please tell us in the comments.

7. John Stuart Mill: Autobiography (yes, for economics) and his Some Essays on Unsettled Questions in Political Economy (Kindle edition is free).  Mill has underrated depth as an economic thinker and he encompassed virtually all of the interesting trends of his time.  That was both his greatest strength and his biggest weakness.

8. Marx: The 1844 manuscripts.  More generally, read the Romantics as critics of classical political economy.  Coleridge and Carlyle are good places to start.

What about the French?:  I find Say boring, Bastiat fun, Cournot incredible but there is no reason to read the original.  Try someone weird like Comte or LePlay to get a sense of what economic discourse actually was like back then.

Underappreciated economists: Eric van den Steen

Can a professor at HBS be underappreciated?  I believe so.  Eric van den Steen is in my view one of the best young microeconomists.  He is not a mere technician but rather a dealer in ideas.  Oddly, I don't hear his name mentioned often by ordinary, non-frontier economists.

Here is his page of research papers.  I am most struck by his paper on the theory of the firm.  It is an explicitly Knightian and non-Coasian model of the firm.  Unlike many authors, van den Steen does not require that the "firm mode of organization" lower transactions costs in the traditional sense (ever try to get a favor from your purchasing department?).

Instead his model starts with the Aumann model of disagreement and he suggests that control rights in the firm follow from a (figurative) auction over who gets to rule the cooperative venture.  It's bidding on the basis of relative certainty to break the initial disagreement.  If you bid for the capital goods, and turn the relationship into a "firm," you have greater authority over the other agent, because you can threaten to separate that agent from the capital goods.  The winner then installs low-powered incentives because the loser still disagrees with him, and the winner doesn't want the loser to be too motivated to pursue his own vision, thus subverting the winner's orders and recommendations.  Overall, the firm increases cooperation among agents but lowers motivation for non-ruling agents and that trade-off determines whether or not a firm will displace a market transactions based on decentralized control of separate decisions. 

It's one of the few articles on theory of the firm which make sense to me, the other candidate being Julio Rotemberg's brilliant but poorly explained "A Theory of Inefficient Intrafirm Transactions."  I view the Coasian tradition as somewhat of a dead end in industrial organization.  Internally, firms aren't usually more efficient than markets although there are good non-transactions cost reasons — including rent-seeking — why they exist.

Here is Eric's paper on the costs and benefits of homogeneity.  It's worth reading just about all of his work.  Hail Eric van den Steen!