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Is Efficient Market Theory Dead?

Efficient Market Theory is Dead! Long Live Efficient Market Theory!

Many pundits believe that the efficient market hypothesis as a way to describe financial market behavior has suffered a fatal blow from the recent financial crisis. These advocates have attempted to nail the coffin on the EMH. Jeremy Siegel, author of Stocks for the Long Run, begs to differ. Read his October 27th piece in the Wall Street Journal which I have posted on my website.

Efficient Market Theory and the Crisis

The High Cost, er, Price of US Medical Care

Is US health care more expensive because we have higher costs of provision, or is it simply that providers charge higher prices? Blogging wunderkind Ezra Klein at the WaPo gives us some insight into what appear to be exorbitant US prices. He also provides a link to the full pack of charts with the international price comparisons. Yowza.

I can think of reasons why the US might have higher costs and hence higher prices. For example, I’m told that Allegheny County in Pennsylvania has as many medical helicopters at the ready as the entire country of Canada. I will not stake my name on whether that is true or not, but it certainly could be the case that higher average costs lead to higher prices, even with robust competition. There are also arguments of waste, fraud, abuse, exorbitant overhead, what have you that could also contribute.

On the other hand, maybe it’s (just) the prices, stupid.

Daylight Savigs — Watch Your Step

The debate over the utility of daylight savings comes up about twice a year, usually around the time the clocks change. This post at Tree Hugger takes on some of these issues, with a hat tip to yours truly. Watch your step, indeed!

The original intent of daylight savings was to save energy. Daniel Engber at Slate reviews some of the evidence on this front.

If the policy isn’t meeting its objective, why don’t we just repeal it? That’s not a rhetorical question.

The Land of Opportunity?

The folks at Brookings have a consistently-interesting research agenda addressing questions that seem pretty central to economic growth and social welfare. Students have really enjoyed (and been disturbed by) Alesina, Glaeser, and Sacerdote’s Why Doesn’t the US Have a European-Style Welfare State published in Brookings Papers on Economic Activity. Gary Burtless’ work on the sources of American inequality is quite revealing.

And, most recently, Isabel Sawhill and Ron Haskins have identified Five Myths about Our Land of Opportunity. I particularly liked the discussion of Myth #4.

4. If we want to increase opportunities for children, we should give their families more income.

Of course money is a factor in upward mobility, but it isn’t the only one; it may not even be the most important. Our research shows that if you want to avoid poverty and join the middle class in the United States, you need to complete high school (at a minimum), work full time and marry before you have children. If you do all three, your chances of being poor fall from 12 percent to 2 percent, and your chances of joining the middle class or above rise from 56 to 74 percent. (We define middle class as having an income of at least $50,000 a year for a family of three.)

ECON 450 Preview, The Royal Lesson Edition

For those of you wondering what this winter’s ECON 450, Economics of the Firm, is all about, might consider taking a peek over at the Machiavellian personality test. These are exactly the types of issues that we will be tackling in class — how different assumptions about how people actually think and behave shapes markets and organizations.

As you probably know, Machiavelli famously said that the “prudent ruler ought not keep faith when by doing so it would be against his interest…” Recent Nobel Prize winner Oliver Williamson responds by saying, “the more important lesson, for the purposes of studying economic organization, is this: Transactions that are subject to ex post opportunism will benefit if appropriate safeguards can be devised ex ante.”

Well said!. No wonder he gets his own parking spot.

Another important lesson you might want to keep in mind, especially around grading time, is that I received a “high Mach” on the test, revealing my high levels of Machiavellian thinking.

Now if only Wal Mart sold textbooks

Anyone care to take a stab at estimating the consumer surplus generated from the price war blowing up between Amazon, Wal-Mart, and Target?

The price war began last week when Wal-Mart announced that it would offer Walmart.com customers who preordered any of 10 of the coming holiday season’s biggest potential best sellers the chance to buy the books in hardcover editions for just $10. Typically new hardcovers sell for $25 to $35, although some discounting is common.

Amazon.com quickly matched Wal-Mart’s preorder price on the same books, which include “Ford County” by Mr. Grisham, “Under the Dome” by Mr. King and “Going Rogue,” Sarah Palin’s memoir. Wal-Mart then lowered the price to $9, and Amazon followed suit. By late Friday afternoon Wal-Mart had cut another penny off the price.

On Monday, Target entered the fray by offering six of the preorder titles on Target.com for $8.99. By Tuesday Wal-Mart had lowered the price on those titles to $8.98.

Full story here

Interestingly, independent booksellers are claiming that this price competition “is damaging to the book industry and harmful to consumers.”

Well, I don’t know how damaged consumers are by paying half price for hardcover books, but it is certainly won’t be good for independent booksellers.

Public Policy and Drug Producer Profits, Parts 1 and 2

From the Wall Street Journal we have a story tallying up the winners and losers from proposed health care reform. It looks like the drug makers are in for a bonanza, though things might not be so cheery for hospitals and insurers.

Meanwhile, the Department of Justice has decided against prosecuting growers and shops that sell state-sanctioned medical marijuana. Certainly, one of the big costs of being an illicit drug producer is the threat of legal sanctions, which is why organized crime often weighs in. With the liberalization of drug enforcement, will mom & pop producers run the Mexican cartels out of business?

Stay tuned.

More on the Nobel on WLFM

Professor Gerard (that’s me) will be talking about the Economics Nobel Prize winners at 6:30 p.m. tonight on WLFM.net. (That’s 6:30 cst for our readers outside the Lawrence area).

The program is Page 404 and my host is Avi Steiner.

We will be taking the lid off the economics of organization (with guile), taking on topics from the assumption of rationality in economics to grazing rights in Switzerland to who (probably) owns the McDonalds up the street. It should be a fun half hour.

Williamson, Ostrom Share Nobel in Economics

Oliver Williamson and Elinor Ostrom are sharing this year’s Nobel Prize in Economics. Williamson is out of what is known as the Carnegie School of organizational economics, and is the titular head of “transaction cost economics.” If you wanted a theoretical model to help understand why Lawrence contracts out its food service rather than doing it internally, you might pick up a copy of The Economic Institutions of Capitalism. Much, much more on Williamson in the Economics of the Firm course this winter.

Ostrom is one of the founders of the Indiana School, and thinks about collective management of common property resources. She has found that private groups are often able to avoid the dreaded tragedy of the commons and become long-term stewards of common property resources. More on Ostrom in Econ 385, Natural Resource Economics.

Sadly, there was no winner in the Pick the Nobel contest. We will put the pears in the storeroom and award them to next year’s winner. See you then.

America’s Most Influential Economist?

Who do you suppose is America’s most influential economist? Paul Krugman? Greg Mankiw? Paul Samuelson? Steve Levitt?

The answer may well be Larry Summers, the chair of the National Economic Council for President Obama. This week’s New Yorker carries a (lengthy) profile that is good reading, especially for its peek at what the White House does (or thinks it does) to manage the US economy.

Who ever said economists were boring? He has had a stellar academic career. He served in several capacities in the Clinton Administration, ultimately replacing Robert Rubin as Treasury Secretary. He was also tapped as the president of Harvard, where he was ousted in spectacular fashion. And now he’s back in Washington amidst the biggest economic calamity since 1980 or 1930, depending on who you listen to.


If you can’t get enough, Felix Salmon provides some very thought-provoking commentary on the article.

The Long Climb

This week’s Economist magazine features a special report on the world economy. The authors address the current state of the world economy as well as conjecture about a “new normal” for the path forward. This indepth and well referenced report serves as great background for discussion about the state of the world’s economy, how we reached this state, and what are the prospects for the future. Follow the link below to indulge.


Campus Lectures on Agricultural Policy, Thursday Oct 1

Jill Richardson, author of Recipe for America and activist for organic farming, will be on campus Thursday, October 1 to give several talks. Her public address, “The Global Food Crisis,,” is at 7 p.m. in the Wriston Art Center auditorium. She will also be talking with students from 11:10-12:20 in Science 102.

According to the poster I saw, one of her messages is that the world is not short of food, but that the inequitable distribution of food is fundamentally a political problem. This should be a familiar message to economics students, as ag policies are classroom favorites for demonstrating the perversities of government price controls and subsidies. Her solution advocates industry disintegration and decentralization, which should make for some very tasty discussion, so to speak.

For those interested in further reading, Pasour and Rucker provide a (very) critical history in Plowshares and Pork Barrels: The Political Economy of Agriculture.

ACM Off-Campus Study Programs — Everywhere You Want to Be

Scott Ozaroski (Oh-zuh-ros-key ), the Director of Recruiting for the ACM programs, will be visiting Lawrence Wednesday, September 30 to talk about ACM off-campus study programs. He will be having a lunch table and an informational meeting from 11:00-1:00 on the first floor of the Warch Campus Center. At 4:30 he will host an informational meeting for all ACM programs in the Cinema, also at the Warch Campus Center.

Here’s the poster.

For those of you taking Intro Micro, he will visit at the end of class on Wednesday as well.

The Economists’ Voice

We are fortunate to have on-campus access to The Economists’ Voice . These are short, generally readable pieces by some well-known economists.

This week we get an analysis of the cash for clunkers huzzah. It is a nice example of a benefit-cost analysis that monetizes non-market amenities. Those with interest in environmental economics, take notice (you’ll be seeing this again).

Is CARS a Clunker?

Burton A. Abrams, University of Delaware

George R. Parsons, University of Delaware

Summary: Burton Abrams and George Parsons of the University of Delaware evaluate the efficiency of the recently introduced ‘Cash for Clunkers’ program and conclude that the cost exceeds the benefit by approximately $2000 per vehicle.

Did they say $2000 per vehicle? Couldn’t be!

Take a look at the archives. It’s ripe with good reading.

Announcements and information that might be of interest to some of you.


The Lawrence University Career Center, along with St. Norbert College and the University of Wisconsin Green Bay is hosting a Graduate School Fair on Tuesday, September 29th from 4-6:00 p.m. at the St. Norbert College campus in De Pere, WI. Transportation will be provided.

More than 20 representatives from graduate and professional schools across the country will be on hand to answer the student’s questions and speak with them 1:1 about admission and testing requirements as well as the type of programs they offer.

Ms. Stephanie Van Handel can help you to connect with these programs. She can also assist you with your grad school application. Please contact Ms. Stephanie Van Handel at 920.832.6561 or stephanie.f.vanhandel@lawrence.edu.


“Actuaries are experts in:

• evaluating the likelihood of future events,

• designing creative ways to reduce the likelihood of undesirable events,

• decreasing the impact of undesirable events that do occur.”

Source: http://www.beanactuary.org/about/whatis.cfm

To become an actuary, you have to pass a series of exams, which require rigorous quantitative training. For more information on the career path of an actuary and the courses offered at Lawrence that will help you in preparing for the exams, please contact Prof. Joy Jordan (joy.jordan@lawrence.edu)


The Center for Teaching and Learning will sponsor workshops to provide students with an opportunity for a review of quantitative concepts. Each workshop will be held in Briggs 420 and is approximately 2 hours long.

Algebra 4:30 PM on Tuesday, September 22, 2009

Workshop 7:00 PM on Monday, September 28, 2009

The goal of the algebra workshop is to share information on an algebra reference sheet that should empower students with a resource to help answer common algebraic questions. The algebra reference sheet will include information on fractions, exponents, algebraic properties, the order of algebraic operations and the FOIL method of multiplying binomials.

Graph 4:30 PM on Wednesday, September 23, 2009

Workshop 7:00 PM on Tuesday, September 29, 2009

The goal of the graph workshop is to share information on a graph reference sheet that should empower students with a resource to help answer common graphing questions. The graph reference sheet will include information on the Cartesian Coordinate System, linear equations in two variables, the slope of a straight line, axis intercepts of a straight line and reading data from a graph.

Word Problem 4:30 PM on Thursday, September 24, 2009

Workshop 7:00 PM on Wednesday, September 30, 2009

The goal of the word problem workshop is to share information on a word problem reference sheet that should empower students with a resource outlining strategies for approaching word problems. The word problem reference sheet will include information on general strategies that encourage students to extract relevant information, organize the information into patterns and work toward the successful completion of word problems.

iOMe challenge

“You’re NOT even working yet –

and your Retirement Plan is already all screwed up! Huh!?

And Guess What? Some old people somewhere aren’t going to fix it for you!

Are YOU up for a Good Challenge?”

If that caught your attention, go to this website to find out more. If you are up to the challenge and have some ideas, you’ll need to talk a faculty member into being your team’s faculty advisor. The winner gets $16,000 and the ears of policymakers in Washington DC.

Aspiring Environmental Economists?

If you are going to be a junior and you are interested in environmental economics and policy, this might be right up your alley. It seems to be well paid and well funded.


Title: 2010 Academic Year EPA Greater Research Opportunities (GRO) Fellowships for Undergraduate Environmental Study

Open Date: 09/15/2009 – Close Date: 12/10/2009

Summary: The U.S. Environmental Protection Agency (EPA), National Center for

Environmental Research (NCER), invites applications for the Greater Research

Opportunities (GRO) Fellowships for undergraduate environmentally related

study for bachelor’s level students. The deadline for receipt of applications

is December 10, 2009. Subject to availability of funding, the Agency plans to

award approximately 30 new fellowships by July 30, 2010. The fellowship

provides up to $19,250 per year of academic support and $8,000 for internship

support for a combined total of up to $46,500 over the life of the fellowship.

The GRO program enhances and supports quality environmental education for

undergraduates, and thereby encourages them to continue their education beyond

the baccalaureate level, and pursue careers in environmentally related fields.

The actual amount awarded per year will vary depending on the amount of

tuition and fees and the number of months the stipend is required. This

fellowship is intended to help defray costs associated with environmentally

oriented study leading to a bachelor’s degree.

New faculty members

The Economics department is very pleased to welcome David Gerard, who is joining us as an Associate Professor this Fall, and Tsvety Karagyozova, who is joining us as an Assistant Professor this Fall.

Professor Karagyozova comes to Lawrence after a post-doctoral fellowship at the University of British Columbia. She received a Masters Degree in Finance from the University for National and World Economics from her native Bulgaria, an MA degree in Economics from the University of Colorado at Denver, and her PhD in Economics from the University of Connecticut. Her research fields are Financial Economics, Industrial Organization, and Macroeconomics with a particular interest in International Finance. This year she will be teaching courses entitled Topics in International Economics, Applied Financial Economics, Econometrics, Advanced International Economics, and Introductory Macroeconomics.

Professor Gerard holds a BA in American Studies and Economics from Grinnell College and a PhD in Economics from the University of Illinois. He has spent the last six years as executive director of the Center for the Study and Improvement of Regulation in the Department of Engineering & Public Policy at Carnegie Mellon University. His research fields are New Institutional Economics, Environmental and Resource Economics, Regulation & Public Policy, and Law & Economics. This year he will be teaching courses on Regulation, on the Economics of the Firm, Environmental Economics, as well as Microeconomic Theory and Introductory Microeconomics.