The Economics Department proudly presents The InformantTuesday night at 9:30 in the Warch Campus Center Cinema.
The movie “comically” recreates the character of Archer Daniels Midlands (ADM) employee, Mark Whitacre, the principal informant in the notorious lysine price fixing scandal. Lysine, as you probably know, is an essential amino acid used to fatten up hogs and broilers. If you mix it in with corn, you don’t have to spring for the relatively more expensive soymeal, or so I’m told.
Well, I’ll let deRoos (2006) characterize the market for us:
deRoos (2006)
Lysine is an essential amino acid for the lean muscle development of hogs and poultry. Being a chemical compound, lysine is as close as we get to a homogeneous product. Farmers can obtain the required nutrients either through the use of soybeanmeal, or through the combination of corn and lysine… Industry experts suggest that there are no substantial costs involved in switching between these two nutrient sources. The shadow price of the alternative feed source (henceforth the “ceiling price”) can be approximated by a weighted average of corn and soybean meal prices. In the demand estimation results below, we will characterise demand as being relatively inelastic… Firms face capacity constraints. There is a great deal of heterogeneity in firm capacities, locations, and costs.
Through 1990 the market lysine market was dominated by three firms with prices (as you can see) somewhere north of $1 / lb. However, in 1991 ADM opened a massive production facility in Decatur, Illinois, doubling world capacity and pushing the price below $1 toward its (probable) marginal cost of $0.66 / lb.
Whitacre subsequently orchestrated a coordinated effort to fix prices among the four dominant producers (a CR4 of 95-97%), though there is some dispute as to what exactly happened. Nonetheless, price fixing is a per se violation of federal antitrust laws, so ADM was in pretty serious hot water as soon as Whitacre turned informant.
On the other hand, Whitacre was absolutely crazy himself. And the movie does a good job portraying the frustration and insanity of everyone involved in the situation as the events unfolded. It seems the best defense for ADM was to simply let Whitacre unravel and leave the prosecutors to deal with him.
Meanwhile, the economics of the case spawned a rather, well, let’s call it a rather spirited debate in the academic literature over the length of the conspiracy and the damages done. These are well documented in the sources below, particularly John Connor and Lawrence White, who trade body blows over the appropriate theoretical model, the appropriate choice of the conspiracy period, and the proverbial “but for” price (that is, the price that would have prevailed “but for” the conspiracy).
A truly remarkable episode all around.
Pop some corn and mix in three parts lysine. We’ll see you there.
The Economics Department once again proudly announces its community read for the term. The formal title of the course is DS 391 – Keynes, Cowen & Capitalism, and sign up sheets are tacked to my bullitin board. You can get instructor approval from either Professor Galambos or me (or both!). We will see about arranging a time.
The Backhouse and Bateman book is a quick read, and Professor Bateman is tentatively scheduled to visit as part of our Senior Experience. Backhouse and Bateman have promoted their work with pieces in the the New York Times and more recently in The Guardian.
Tyler Cowen’s little ebook also talks about some of the problems and prospects of American capitalism, and should be interesting to set side-by-side with the Keynesian worldview. As a bonus, the book has been heavily reviewed, and there is certainly no consensus view on whether he is right or wrong. There have been a couple of recent reviews juxtaposing Cowen with Brynjolfsson and McAfee. We should be able to do the same.
One of the key issues of capitalism moving forward seems to be the division of the proverbial pie, and Cowen’s piece in The American Interest is one of the more thoughtful pieces on inequality that I have come across. I especially like the “betting against the Wizards” example of picking up pennies in front of the steamroller.
Once we have our enrollment, I will coordinate a schedule.
Students (and faculty) are required to read and respond thoughtfully.
As I was preparing for Econ 100 for next term, I came across a piece by Roger Backhouse and Steven Medema on the definition of economics. Or, to put it more bluntly, what exactly is economics anyway?
Backhouse and Medema run through a bunch of textbook descriptions of what dismal scientists spend their time thinking about, and offer up a few choice quotes. The first candidate is from the indefatigable Paul Krugman and Robin Wells from their intro textbook: “Economics is the study of economies, at both the level of individuals and of society as a whole.”
That seems pretty accurate, but I don’t think economics is nearly as exciting as they make it sound. ;-)
Here’s another from David Colander, a man who knows a thing or two aboutThe Making of an Economist. He says “Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.”
Coordination, indeed. For us market types, scarce resources are generated and distributed via market forces (e.g., prices), and there are all sorts of “agents” running around maximizing this and that — utility, profit, market share, Facebook friends, etc…
Harvard’s Greg Mankiw simply says “Economics is the study of how society manages its scarce resources.” Pithy, to the point, possibly accurate, and consistent with what Robert Heilbronner tells us in The Worldly Philosophers. More on that later.
Or perhaps try the more pro-market friendly Gwartney and Stroup et al.: “[E]conomics is the study of human behavior, with a particular focus on human decision making.”
Couldn’t that describe psychology?
Scarcity, choices, allocation, behavior, decision making — not exactly narrowing down our subject here, are we?
So, for the punch line, here is the classic Jacob Viner quip, “Economics is what economists do.”
That’s it!
Thanks to Mr. T for the tip. You can read the full piece here.
We have been sponsoring a reading group (DS-391) in the economics department over the past four terms, and we will continue that with two books during the winter term. If you have some spare time in the next five weeks, you might try getting a jump on these.
The first is Roger Backhouse and Brad Bateman’s Capitalist Revolutionary: John Maynard Keynes. The authors’ names might sound familiar from a couple of posts ago where I briefly discuss their op-ed in the New York Times about the need for economist as “worldly philosopher” rather than “dentists” (Keynes’ term) honing in on the intricacies of the little picture. Indeed, the book portrays Keynes both as a deep thinker and an accomplished technical theorist.
Back in July I was telling you about Netflix and its remarkable stock price ascension. At the time, its price was rising rapidly with a price flirting with $300, and it was overall looking like a good bet (click on the chart to your right). If the author was to be believed, it was a great bet. Indeed, the stock price rose 60 points in the week following that post (did our loyal readers run out and bid the price up?).
So let this be a lesson about getting your stock tips from The Atlantic, things can change pretty fast these days. Today I pick up my local computer and Netflix shareholders — the ones who haven’t bailed, that is — are bemoaning a stream of remarkable decisions that have kneecapped the company’s stock price, sending it into a free fall back toward $100 per share.
Of course, this could be one of those cases where Netflix management is taking the long view instead of grubbing for short-term profits. The original argument is that there were significant barriers to entry in streaming content, and that seems to be what management still believes — no close substitutes, no potential entrants with the same type of content.
This will likely make its way into both IO and the Senior Read. A very interesting situation, indeed.
Those of you interested in signing up for the group read of The Road to Serfdom need to turn in your registration forms and get your schedules to Professor Galambos or me so we can coordinate a meeting time. We will likely have our first meeting during the first week in October and cover the first 50 or 60 pages of the book at that time.
If you have any questions, stop by Briggs 2nd for some answers.
Here is our previous post on the group, including some auxiliary and supplementary materials.
Speaking of web interviews, check out Professor Finkler talking about the Henry Luce Foundation grant for the Sustainable China initiative. A fluid speaker, indeed.
The conventional wisdom is that the war somehow magically transformed the doom and gloom of the Depression into the U.S. standing like a colossus astride the world in 1948. My counterargument is that potential output expanded by leaps and bounds between 1929 and 1941, and it was this expansion in capacity that both helped us win the war and established the foundations for postwar prosperity.
Suppose the NFL players and owners fail to agree to terms on a new contract, thus reducing (or eliminating) the number of professional football games this coming season. What are the expected changes (if any) to the equilibrium price and quantity of chicken wings?
Today we concluded this term’s Schumpeter Roundtable, what I consider a reasonably successful, certainly enjoyable reading of Joseph Schumpeter’s Capitalism, Socialism, and Democracy. Those who follow our blog have probably pegged its authors (notably me) as Schumpophiles, so to speak, but I think it was just a groove that we settled into following our reading of the Thomas McCraw biography, Prophet of Innovation: Joseph Schumpeter and Creative Destruction.
For the Spring term, we will take a crack at another noted entrepreneurship scholar, Israel Kirzner, whose Competition and Entrepreneurship is considered a classic in Austrian Economics. This is a one-unit course that will meet weekly for about half of the term. The requirements are to read, participate in discussions, and complete a short writing assignment.
Yes, but what is it all about?
According to the book’s publisher, Kirzner “provides at once a thorough critique of contemporary price theory, an essay on the theory of entrepreneurship, and an essay on the theory of competition. Competition and Entrepreneurship offers a new appraisal of quality competition, of selling effort, and of the fundamental weaknesses of contemporary welfare economics.” And, writing for the Concise Encyclopedia of Economics, Russell Sobel gets at why this is important:
Two notable twentieth-century economists, Joseph Schumpeter and Israel Kirzner, further refined the academic understanding of entrepreneurship. Schumpeter stressed the role of the entrepreneur as an innovator who implements change in an economy by introducing new goods or new methods of production. In the Schumpeterian view, the entrepreneur is a disruptive force in an economy. Schumpeter emphasized the beneficial process of creative destruction, in which the introduction of new products results in the obsolescence or failure of others. The introduction of the compact disc and the corresponding disappearance of the vinyl record is just one of many examples of creative destruction: cars, electricity, aircraft, and personal computers are others.
In contrast to Schumpeter’s view, Kirzner focused on entrepreneurship as a process of discovery. Kirzner’s entrepreneur is a person who discovers previously unnoticed profit opportunities. The entrepreneur’s discovery initiates a process in which these newly discovered profit opportunities are then acted on in the marketplace until market competition eliminates the profit opportunity. Unlike Schumpeter’s disruptive force, Kirzner’s entrepreneur is an equilibrating force. An example of such an entrepreneur would be someone in a college town who discovers that a recent increase in college enrollment has created a profit opportunity in renovating houses and turning them into rental apartments. Economists in the modern Austrian school of economics have further refined and developed the ideas of Schumpeter and Kirzner.
That’s a good start, and I look forward to developing some auxiliary materials to help us to understand the material. It would probably help a lot of if you’ve had Econ 300, but I certainly won’t exclude anyone on that basis. The course requirements are to read the book, attend several weekly discussions (likely five or six weeks), and complete one or two short writing assignments.
The sign up is 391 DS-Discovering Kirzner, as a one-unit course with either myself (Professor Gerard) or Professor Galambos. We will arrange a time based on the schedules of those who sign up.
Cheap is the title of the “community read” that dozens of students and over a dozen faculty members will be discussing weekly during the first half of next term. Here is the semi-official course advertisement:
A 'Cheap' Shot
Registration is open for the 2011 Community Read! This year we’ll be reading Cheap: The High Cost of Discount Culture, by Ellen Ruppel Shell. It’s a deep look at the environmental, social, political, economic and human costs of consumerism in the US. There are nine different sections available, each led by two faculty members from different departments. The sections are listed as Environmental Studies (ENST) 320 – SEM: CHEAP, which is a 1-unit S/U-only course that will meet for the first half of Spring term. These are discussion sections, so there are no exams or writing assignments – only lively conversation!***
Professor Gerard is partnering with Professor Maryuri Roca (Chemistry) for a section at 2:30 on Thursdays, and I (Galambos) am co-leading a section at 8:30 on Fridays with Professor Beth De Stasio (Biology). We’d love to have you in our sections.
Based on some book reviews (here’s one), I will have a lot to say about this book, but I promise I’ll try to shut up most of the time. I know one chapter beats up on IKEA pretty badly, and I’m just not sure how I will handle that… Let me just say that other than a couple of chairs, perhaps, all our furniture comes from that wonderful, CHEAP, tastefully Northern European design paradise.
***An earlier version of this post said the book would be available at the Gift Shop. It turns out that this is not true. We sincerely apologize for the mix-up.
Click on the classes for descriptions (or old syllabi for Professor Galambos’ courses). As of this writing, there are still spots in each of these sections. There is a bevy of 200-level classes for all you thinking about taking the Econ route or filling out a minor. There are also a pair of 400-level classes, both seem to be extraordinarily topical.
Once again, Professor Galambos and I will be facilitating a group read, this as a follow-up to the Schumpeter Roundtable — this time we will be Discovering Kirzner. For those of you who have had 300 and love it, this should give you plenty to think about.
Later this week, I will post the tentative schedule for next year. You can also find it here.
A new course possibly of interest to many of you will be offered next term. It was not on the books when you registered, so we are trying to let you know about it:
History 376: International Development in Historical Perspective
History of economic development theory, policy, and practice throughout the world since 1945. Particular focus will be given to the evolution of orthodoxy in this field, from modernization theory through dependency theory to neoliberalism, considering the performance and criticism of each. Case studies include African, Asian, and Latin American countries.
Taught on TR 12:30, the course requires sophomore standing and has no other prerequisites. It is taught by Michael Mahoney, a specialist on the history of Africa who taught at Yale for a decade (including this course).
Having dispensed with the ever-dynamic Marx, the Schumpeter Roundtable continues through Capitalism, Socialism, and Democracy this week with a close read of Part II — Can Capitalism Survive? After some wonderful writing on Creative Destruction in Chapter VII, we move on to the projected demise of capitalism, oh, sometime in the next 100 years or so. (Of course, this was published in 1942, so we could still be on schedule). In Chapter XIII we are faced with “Growing Hostility,” and Schumpeter provides us with some rather inflammatory views of the “The Sociology of the Intellectual.” To wit, Schumpeter contends that “unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates, and subsidizes a vested interest in social unrest.”
That vested interest, of course, is the intellectual. It is not my purpose here to endorse or to attack Schumpeter’s views (is he analyzing or just venting?), but rather to point to George Stigler’s concise “The Intellectual and the Market Place” as another giant of the profession trying to come to terms with why intellectuals seem — at least to these authors — to be be hostile to market economies. Continue reading The Intellectual and the Marketplace — Schumpeter & Stigler
Earlier this week, President Obama penned an op-ed in the Wall Street Journal about his Administration’s plans for the regulatory state. The executive branch, as its title suggests, is in charge of executing and administering the laws of the land, and the President expresses his desire to balance the free-market innovation machine while protecting public health and safety:
[C]reating a 21st-century regulatory system is about more than which rules to add and which rules to subtract. As the executive order I am signing makes clear, we are seeking more affordable, less intrusive means to achieve the same ends—giving careful consideration to benefits and costs. This means writing rules with more input from experts, businesses and ordinary citizens. It means using disclosure as a tool to inform consumers of their choices, rather than restricting those choices. And it means making sure the government does more of its work online, just like companies are doing.
As my students learn in 240, 280, and 271, the executive branch, through the Office of Management and Budget, (potentially) plays a central role in shaping regulations as they make their way through the rulemaking process. Indeed, President Reagan issued the seminal executive order concerning benefit-cost analysis, and each President since has attempted to put his stamp on the process.
Of course, there is often a disconnect between what politicians say and what regulators actually do, here are a couple of other takes from a pair of scholars who spend more than their fair share of time thinking about administrative regulation: Stuart Shapiro and Lynne Kiesling.
Brandenberger and Galambos strike again. This via the Faculty & Grants Fellowships Newsletter:
This summer, the In Pursuit of Innovation course — co-taught by Professors John Brandenberger (Physics) and Adam Galambos (Economics) — received a two-year $23,000 grant from the National Collegiate Inventors and Innovators Alliance substantially to enhance the support for student projects and to fund guest speakers. Team projects play a central role in the course, and the NCIIA grant will allow students to dream bigger and to go further in pursuing their chosen innovations. It is expected that some teams will go beyond producing a prototype and will bring their idea close to being commercialized. The Innovation course, to be offered for the third time in Winter 2011, is one of the core courses of the Innovation & Entrepreneurship program, which is Lawrence University‘s model for integrating innovation and entrepreneurship into liberal arts education.
The program currently features three core courses that are to be complemented by additional topical courses dealing with environmental issues, politics, economic development, and other subjects that reflect interests of participating faculty. As a result of the program, several courses in economics as well as several courses in the arts will have newly added entrepreneurial components for the first time this year.
Invited experts also play critical roles in the program‘s core courses, including Innovation. These experts also help the program grow, expanding opportunities for students to engage in real-world entrepreneurship and innovation, through structured practical opportunities to take their course-based projects to commercialization, or internships in businesses or nonprofits that foster entrepreneurship or innovation. The NCIIA grant will help pay for travel expenses of several highly regarded experts who will contribute to the next offering of the Innovation course. The expectation is that students who take I&E courses will gain knowledge and cognitive skills that will equip them to be “change agents.” Combined with LU‘s emphasis on critical thought and information synthesis, the conceptual and practical knowledge gained through these courses will prepare students to undertake imaginative and ambitious innovative and entrepreneurial activities.
For those of you interested in an extra unit or two, this term we are offering an independent study / tutorial reading Joseph Schumpeter’s classic, Capitalism, Socialism, and Democracy. For those of you unfamiliar with the book, here is a review by Schumpeter biographer, Thomas McCraw.
This is a thick book, so you might think about your time commitments before you complete the registration. The likely trajectory for this is for us to set up a weekly discussion time beginning the week of January 10 or 17. Right now I have three hands raised that want to participate.
I am thinking about requirements right now. The bulk of the effort will be focused on the reading, and there will be an attendant writing assignment as well.
Listening to the latest Car Talk, I was happy to hear a variant of the muddy children puzzle as this week’s “puzzelah.” Here it goes, straight from Ray:
The warden admits three prisoners into his chambers. He tells them, “One of you fellas is going to have a chance to get out. Here’s the deal.
“I’m going to blindfold all of you, then I’m going to put hats on your heads. I have three white hats and two black hats. Each of you is going to get a hat. You have to figure out which color hat you have to get released.”
He blindfolds them and puts a hat on each prisoner. They’re led out of the room in single file. When the blindfolds are removed, the guy in the back can see the two people in front of him, the guy in the middle can see the one guy in front of him, and the guy in front can see nobody.
They walk around the prison, stopping outside the warden’s office. The warden says to the fellow in back, who can see the two people in front of him, and their hats, “Can you tell me what color your hat is?”
Don’t forget, there are three white hats and two black hats available. The fellow in back says nothing. He doesn’t know.
The fellow in the middle is asked the same question. He is unable to answer.
The guy in the very front, who can see no hats, knows. He says, “I can identify the color of my hat.”
How does he know?
Those of you who have taken Advanced Game Theory will be done with this before I can finish this sentence. And if you haven’t taken that course yet and enjoy this sort of thing, you should definitely take Advanced Game Theory (Econ 410) this coming Spring, where we ponder some similar puzzles (and, yes, I do know that the course title has “& Applications” in it). All this goes under the heading Interactive Epistemology, and it is generally as complicated as it sounds. But also very important, as the surprising answer to this puzzle will no doubt show you.
The Economics Department once again proudly announces its community read for the term. The formal title of the course is DS 391 – Keynes, Cowen & Capitalism, and sign up sheets are tacked to my bullitin board. You can get instructor approval from either Professor Galambos or me (or both!). We will see about arranging a time.
Those of you interested in signing up for the group read of The Road to Serfdom need to turn in your registration forms and get your schedules to Professor Galambos or me so we can coordinate a meeting time. We will likely have our first meeting during the first week in October and cover the first 50 or 60 pages of the book at that time.
Invited experts also play critical roles in the program‘s core courses, including Innovation. These experts also help the program grow, expanding opportunities for students to engage in real-world entrepreneurship and innovation, through structured practical opportunities to take their course-based projects to commercialization, or internships in businesses or nonprofits that foster entrepreneurship or innovation. The NCIIA grant will help pay for travel expenses of several highly regarded experts who will contribute to the next offering of the Innovation course. The expectation is that students who take I&E courses will gain knowledge and cognitive skills that will equip them to be “change agents.” Combined with LU‘s emphasis on critical thought and information synthesis, the conceptual and practical knowledge gained through these courses will prepare students to undertake imaginative and ambitious innovative and entrepreneurial activities.
For those of you interested in an extra unit or two, this term we are offering an independent study / tutorial reading Joseph Schumpeter’s classic, Capitalism, Socialism, and Democracy. For those of you unfamiliar with the book, here is a review by Schumpeter biographer, Thomas McCraw.