Did France cause the Great Depression?
Here is Doug Irwin, I remember once hearing a related argument from David Glasner (was his piece on that ever published?):
The gold standard was a key factor behind the Great Depression, but why did it produce such an intense worldwide deflation and associated economic contraction? While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33. The deflation could have been avoided if central banks had simply maintained their 1928 cover ratios.
The non-gated copy is here.
Winner take-all economics
Ezra Klein writes:
The top 1 percent, for instance, has gone from capturing about 8 percent of the
national income to 18 percent. But there's no obvious skills differential
between workers in the top 1 percent and the workers directly beneath them. It's
not like hedge fund managers are the only guys able to use Excel.
In a winner-take all economy, however, small differences in skills can mean large differences in returns and we have moved towards a winner take-all economy because technology has increased the size of the market that can be served by a single person or firm. Sherwin Rosen laid this out in a 1981 classic, The Economics of Superstars and Robert Frank and Robin Cook have a good popular account, The Winner Take All Society. Here is how I explained it a few years ago in a post titled Harry Potter and the Mystery of Inequality.
J.K. Rowling is the first author in the history of the world to earn a billion dollars.
I do not disparage Rowling when I say that talent is not the
explanation for her monetary success. Homer, Shakespeare and Tolkien
all earned much less. Why? Consider Homer, he told great stories but
he could earn no more in a night than say 50 people might pay for an
evening's entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn't have to be at the theater to earn. Shakespeare's words were leveraged.Tolkien's words were leveraged further. By selling books Tolkien
could sell to hundreds of thousands, even millions of buyers in a year
– more than have ever seen a Shakespeare play in 400 years. And books
were cheaper to produce than actors which meant that Tolkien could earn
a greater share of the revenues than did Shakespeare (Shakespeare
incidentally also owned shares in the Globe.)Rowling has the leverage of the book but also the movie, the video
game, and the toy. And globalization, both economic and cultural,
means that Rowling's words, images, and products are translated,
transmitted and transported everywhere – this is the real magic of Ha-li Bo-te.Rowling's success brings with it inequality.
Time is limited and people want to read the same books that their
friends are reading so book publishing has a winner-take all
component. Thus, greater leverage brings greater inequality. The
average writer's income hasn't gone up much in the past thirty years
but today, for the first time ever, a handful of writers can be
multi-millionaires and even billionaires. The top pulls away from the
median.The same forces that have generated greater
inequality in writing – the leveraging of intellect, the declining
importance of physical labor in the production of value, cultural and
economic globalization – are at work throughout the economy. Thus, if
you really want to understand inequality today you must first
understand Harry Potter.
Hat tip to Matt Yglesias who understands the issue and points out how it applies to newspapers.
Henry on “markets in everything”
But Hayek is remarkably incurious about the actual social processes through which markets work, and in particular the forms of standardization that are necessary to make long-distance trade work. I imagine Scott’s counterblast going something like this: It is all very fine to say that markets provide a means to communicate tacit knowledge, and it is even true of many markets, especially small scale ones with participants who know each other, know the product and so on. But global markets do not rely on tacit knowledge. They rely on standardization – the homogenization of products so that they can be lumped under the appropriate heading within a set of standard codified categories. Far from communicating tacit knowledge, the price system (and the codified standards that underlie it) destroys it systematically.
Here is much more, mostly on James Scott.
I agree with the frustration about a lack of detail about markets. Nonetheless, I am more optimistic than this. Standardized products often fund a more general trade or communications infrastructure which the non-standardized products then piggyback upon. Think of funding a port with oil shipments (by the way, how many grades of crude are there?) but at the margin using it to trade strange toys as well. Alternatively, a highly standardized product can be communicating the (sometimes tacit) knowledge that liquidity and interchangeability and lots of direct competition matter more than does product diversity.
The Grossman-Stiglitz framework helps us think through the trade-off between the average and the margin. Let's say that some trades shift into the more standardized, liquid market and out of the more idiosyncratic market. Some knowledge is lost. But at the margin, there is now a stronger incentive for information-gathering, or knowledge mobilization, in the less liquid market. It will be easier to beat the rest of the market (price is not much of a sufficient statistic) and so people will try harder.
This topic is related to the current controversy over whether swaps contract will be overly customized (wider spreads and harder to monitor and higher regulatory risk?) or overly standardized (more liquid but less useful?).
Is this more or less humane?
Inmates on death row are not told when they will be executed until the last minute – a procedure Japanese officials say prevents panic among inmates – and their family members and lawyers are informed only afterward, as are the news media.
And this:
The inmate is handcuffed and blindfolded before entering the execution room, officials said. Three prison wardens push separate buttons, only one of which releases the trapdoor [for hanging] – but they never find out which one. Wardens are given a bonus of about $230 every time they attend an execution.
The full story is here, interesting throughout. The murder conviction rate in Japan is 99 percent, some of which is likely due to false or pressured confessions.
Assorted links
1. What were the top TV words this last year?
2. What a fig is.
3. How the WSJ and NYT really work, in the eyes of the Chinese (video).
4. Camille Paglia on Lady Gaga (negative).
5. The culture that is Australia, part I, and here parts II and III.
6. Against the R&D tax credit.
7. Video of Manne, Sen, Ostrom, and Buchanan at George Mason; at 90 years old Buchanan still stole the show.
*Sakhalin Island*
That is a book by Anton Chekhov, part memoir, part ethnographic study of a penal colony and the surrounding economic institutions on Sakhalin Island. I hardly ever hear of this work, but it is both a literary and social science masterpiece; I will teach it next spring in my Law and Literature class. Here is one review of the book. This excerpt reminded me of some recent events:
On the fifth line I marked their age. The women who were already over forty remembered theirs only with difficulty, and had to think for a bit before answering. Armenians from the Yerevan Region had no idea of their age at all. One of them answered me: "Might be thirty, but it could be fifty by now." In cases such as these, the age had to be determined approximately from their appearance and then verified from the relevant prison documents. Youths of fifteen and slightly older would usually reduce their ages. Some women would already by married, or have been engaged for ages in prostitution, yet still said they were thirteen or fourteen. The point about this is that children and juveniles in the poorest families receive a food ration from the state; which is issued only up to the age of fifteen, and here a simple calculation induces young people and their parents to tell lies.
These days, lying about age, and continued existence, seems to a standard practice in Japan. Here is more on Japan's "missing elderly". Apparently 884 people are listed as over 150 years of age; it is believed that many of these pensions still are being collected.
The preference for low quality in Italian academia
There is a relatively new paper by Diego Gambetta and Gloria Origgi, here is the abstract:
We investigate a phenomenon which we have experienced as common when dealing with an assortment of Italian public and private institutions: people promise to exchange high quality goods and services (H), but then something goes wrong and the quality delivered is lower than promised (L). While this is perceived as ‘cheating’ by outsiders, insiders seem not only to adapt but to rely on this outcome. They do not resent low quality exchanges, in fact they seem to resent high quality ones, and are inclined to ostracise and avoid dealing with agents who deliver high quality. This equilibrium violates the standard preference ranking associated to the prisoner’s dilemma and similar games, whereby self-interested rational agents prefer to dish out low quality in exchange for high quality. While equally ‘lazy’, agents in our L-worlds are nonetheless oddly ‘pro-social’: to the advantage of maximizing their raw self-interest, they prefer to receive low quality provided that they too can in exchange deliver low quality without embarrassment. They develop a set of oblique social norms to sustain their preferred equilibrium when threatened by intrusions of high quality. We argue that cooperation is not always for the better: high quality collective outcomes are not only endangered by self-interested individual defectors, but by ‘cartels’ of mutually satisfied mediocrities.
It is common practice, for instance, that high quality providers are not trusted because they are not signaling the appropriate kind of loyalty. Might this model also apply outside of Italian academia?
Hat tip goes to Seth Roberts.
Assorted links
No Checks, No Balances
From the NYTimes
The lead plaintiff is Binyam Mohamed, an Ethiopian citizen and legal resident of Britain who was arrested in Pakistan in 2002. He claimed he was turned over to the C.I.A., which flew him to Morocco and handed him off to its security service.
Moroccan interrogators, he said, held him for 18 months and subjected him to an array of tortures, including cutting his penis with a scalpel and then pouring a hot, stinging liquid on the open wounds.
Mr. Mohamed was later transferred back to the C.I.A., which he said flew him to its secret prison in Afghanistan. There, he said, he was held in continuous darkness, fed sparsely and subjected to loud noise – like the recorded screams of women and children – 24 hours a day.
He was later transferred again to the military prison at Guantánamo Bay, Cuba, where he was held for an additional five years. He was released and returned to Britain in early 2009 and is now free.
and from the court's response:
First, that the judicial branch may have deferred to the
executive branch’s claim of privilege in the interest of
national security does not preclude the government from honoring
the fundamental principles of justice.
Oh that's nice the U.S. government is not precluded from honoring the fundamental principles of justice. Tell me, what government ever was?
A new paper on high-frequency trading
The author is Jonathan Brogaard of Northwestern and here is the abstract:
This paper examines the impact of high frequency traders (HFTs) on equities markets. I analyze a unique data set to study the strategies utilized by HFTs, their profitability, and their relationship with characteristics of the overall market, including liquidity, price efficiency, and volatility. I find that in my sample HFTs participate in 77% of all trades and that they tend to engage in a price-reversal strategy. I find no evidence suggesting HFTs withdraw from markets in bad times or that they engage in abnormal front-running of large non-HFTs trades. The 26 high frequency trading (HFT) firms in the sample earn approximately $3 billion in profits annually. HFTs demand liquidity for 50.4% of all trades and supply liquidity for 51.4% of all trades. HFTs tend to demand liquidity in smaller amounts, and trades before and after a HFT demanded trade occur more quickly than other trades. HFTs provide the inside quotes approximately 50% of the time. In addition if HFTs were not part of the market, the average trade of 100 shares would result in a price movement of $.013 more than it currently does, while a trade of 1000 shares would cause the price to move an additional $.056. HFTs are an integral part of the price discovery process and price efficiency. Utilizing a variety of measures introduced by Hasbrouck (1991a, 1991b, 1995), I show that HFTs trades and quotes contribute more to price discovery than do non-HFTs activity. Finally, HFT reduces volatility. By constructing a hypothetical alternative price path that removes HFTs from the market, I show that the volatility of stocks is roughly unchanged when HFT initiated trades are eliminated and significantly higher when all types of HFT trades are removed.
The paper you can find here, and I thank a loyal MR reader for the pointer.
Why does a rise in imports lower gdp?
FYI, a loyal MR reader and commentator, writes to me:
I would like to suggest a topic for your blog: the way imports are used in the GDP calculation. To me it makes no sense that we would decrease our GDP every time something is imported. What is the rationale here? That we are sending 'gold overseas'? I mean, if one really believes that trade works by exchanging items of same perceived value (I give you $50 and you give me a $50 product) how can we ever explain this GDP deduction? Isn't this another mercantilist heritage that proves how not so free our trade system is?
The rationale is a) that is simply how the number is calculated, and b) a nation's capacity to produce goods and services determines its long-run standard of living. On b), you might argue that the world's capacity to produce goods and services is what matters in a globalized setting, which returns us to FYI's question.
The comments of Angus are on the mark ("People, Accounting identities do not imply causation!"):
As a matter of accounting, the arithmetic is correct. But the suggestion that the trade deficit CAUSED growth to be lower by some measurable amount is completely unproven and just plain wrong.
The argument implies that there somehow would have been perfect substitutes for all imported goods being produced domestically and available for sale at the same price. Thus, if we could just keep out those damn imports, growth and jobs would soar.
Yet, this is far from true on the face of it, let alone considering if we banned all imports, we'd have a pretty hard time making any exports and that might create a "drag" on growth too, no?
Proposed markets in everything
In what Mr. DiSimone called his Free Limit Plan, he would give Nevadans and nonresidents the option to drive up to 90 miles an hour on state roads. The privilege would cost $25 a day and would conservatively generate more than $1 billion a year in new state revenue, he said.
DiSimone is an independent gubernatorial candidate, which I suppose means he is unlikely to win. The article is here and here and I thank John Thorne and Ted Craig for the pointers.
Assorted links
2. Would campaign finance reform matter?
3. Should we create an option for making Ereading harder?
4. How Apple tricks you, or applied behavioral economics.
5. ATM graffiti.
The rule of law, or the rule of men (women)?
The Obama administration on Thursday told health insurers that it will track those who enact "unjustified" rate increases linked to the health overhaul and may block those companies from a new marketplace for insurance coverage.
Kathleen Sebelius, secretary of Health and Human Services, issued the warning in a letter to Karen Ignagni, the insurance industry's top lobbyist.
Ms. Sebelius said some insurers were notifying enrollees that their insurance premiums will increase next year as a result of the law's new benefits.
…"There will be zero tolerance for this type of misinformation and unjustified rate increases," Ms. Sebelius wrote. "We will not stand idly by as insurers blame their premium hikes and increased profits on the requirement that they provide consumers with basic protections."
Nowhere is it stated that these rate hikes are against the law (even if you think they should be), nor can this "misinformation" be against the law. Here is further information, including a copy of the letter, which is worse than I had been expecting.
Lesson One of Econ 101
Here is David Kestenbaum of NPR's Planet Money talking with me about lesson one (audio about 3 and a half minutes; text here) of my Econ 101 class. Of course, the textbook that I use has lots of great stories to bring economics to life throughout the semester!