Lawrence Economics Blog

Creative Instruction

First Economics TeaBA of the New Term

Welcome back to campus.   With the new term comes an all new and improved Economics TeaBA.   This term promises to offer more beverages, more insight, more excitement than all of the prior terms of economics TeaBA combined.

For those of you who are new to this, the economics faculty and students began meeting Mondays for cookies and discussion last term.  The faculty turnout has been outstanding, including all of the regular faculty and emeritus professor Corry Azzi, and we have had occasional visitors from mathematics and other disciplines.   Generally, it is a time for informal discussion, but we will occasionally have a formal presentation or another matter to discuss.  It certainly lets you know where you can find at least one of us if you need some help.

Things (like the water and coffee) get heated up every Monday at 4:15 in Briggs 217.

See you there.

Schumpeter and Business Cycles

In the paragraphs below, I attempt to both summarize McGraw’s description of Schumpeter’s contribution to business cycles and add a few comments  as to where his reasoning might help us interpret a post 1950 world.

For many years, Schumpeter focused his scholarly attention on understanding the ups and downs in the economy known as business cycles.  He viewed these ups and downs as part and parcel of the dynamics of capitalism, which could not be understood without paying specific attention to the institutions through which capital flowed.  The two volume 1,095 page magnum opus entitled Business Cycles captures Schumpeter’s look into virtually every nook and cranny of the dynamics of capitalism in the U.S., the U.K. and Germany.  Although he apparently left few stones unturned in this voluminous study, many reviewers concluded that he was not very successful in distinguishing between the forest (of cyclical dynamics) and the trees (of specific institutions in particular countries.)

One Schumpeterian conclusion, however, did come through with incredible clarity: “…theoretical equipment, if uncomplemented by a thorough grounding in the history of the economic process, is worse than no theory at all (254).”  Although Schumpeter would approve of the mathematical precision that modern economics has sought as well as of the empirical confirmation or rejection offered by econometric techniques, he would be aghast at economic analysis without either capitalists or entrepreneurs.  For him, both economic growth and business cycles – which must be closely linked in the study of capitalism – required the entrepreneur as innovator whether it be through new processes (including physical and virtual factories), new forms of organization (such as corporations and partnerships) and new forms of financing (including well developed bond markets, seller financed purchases, and a vibrant market for venture capital.) Continue reading Schumpeter and Business Cycles

The Sage, Part 1

Before I catalog my notes on the last section of the book, The Sage,  I’d like to simply point out some excellent resources that have helped me to put Schumpeter’s work in context.   Indeed, that is one of the main challenges for economists today, I think, is what was genuinely important about Schumpeter’s work and what wasn’t.

Certainly, McCraw is a strong partisan of Capitalism, Socialism, and Democracy as being the seminal piece.   Before you tuck that away as Gospel, you might wan to check out Robert Solow’s review of the book for the New Republic.   Solow is a central figure in economic growth and development over the past half century (help me out here, Professor Finkler) and also took courses with Schumpeter at Harvard.   He wasn’t so impressed with Schumpeter’s entrepreneur, and consequently the famous Solow growth model doesn’t draw heavily on these ideas.   What could have been?

Another interesting perspective on the emergence and persistence of managerial capitalism is Deidre McCloskey’s piece, “Creative Destruction versus The New Industrial State,” comparing Schumpeter to John Kenneth Galbraith;  Schumpeter being the face of Harvard economics for the first half of the century and Galbraith for the second.  McCloskey is an important thinker and a brilliant writer, and her piece is excellent.

Then, of course, there is the Keynes versus Schumpeter rivalry.   This being a pro-Schumpeter crowd, let’s start with management uber-guru Peter Drucker’s thoughts.   Certainly, this territory is covered in the text.

I’ll post more on The Sage as we move toward our meeting date.

The Adult

This is a continuing live blog for the Innovation & Entrepreneurship Reading Group‘s discussion of Thomas McCraw’s Prophet of Innovation.  You can see previous entries by clicking on the “Schumpeter Live Blog” tag below.

The second section of the book covers Schumpeter’s life between 1925 and 1940, following the death of his beloved mother and his beloved wife, who died in childbirth of his son, who also died.  McCraw emphasizes that this had a rather profound impact on Schumpeter as he straddled time between Bonn and Harvard, all the while repaying the massive debts he accumulated during his vaunt into the private sector. The capstone of this section is that he, indeed, settled into Harvard permanently and reluctantly married for a third time.  These events set the stage for the final act of his life as The Sage, as McCraw puts it.

Given the tragedy in his life and his need to pay off his massive debts, it is not surprising that this was not the most productive period for his scholarship.  Two pieces jumped out at me as worth discussing — “Social Classes in an Ethnically Homogeneous Environment” and “The Instability of Capitalism.”  Continue reading The Adult

The Nobel-ist Triumph?

The economics Nobel selection committee evidently isn’t the only body impressed with Oliver Williamson’s Transaction Cost Economics (TCE). Personally, I have always liked transaction cost economics because I found the construct consistent with my own intuition.  Put succinctly, watch out because someone might be looking to screw you over.

Evidently, the students in my Economics 450, Economics of the Firm course, share my enthusiasm.

Here is a full accounting of their written responses from this term’s course evaluations:

Q:  What was the best topic in this course?
TCE

TCE

TCE! Williamson changed my life :-)

INNOVATION and ENTREPRENEURSHIP.

I love Williamson’s TCE forever and ever. I also really liked talking about McDonalds. I dont think the Innovation and Econ was particulary central to the class but I really enjoy it too!

TCE

L’Enfant Terrible

Welcome to the Innovation & Entrpreneurship Reading Group’s Live Blog of Thomas McCraw’s Prophet of Innovation: Joseph Schumpeter and Creative Destruction.  The theme of the book is Schumpeter’s emphasis on capitalism as a process of creative destruction.  That is, entrepreneurship and innovation creates value and is the engine of the capitalist economy, but those that win at the game (successful entrepreneurs) leave a “gale of creative destruction” in their paths.  Hence, he sees capitalism as a positive-sum game, but not necessarily as making everyone better off.   Just ask any horse and buggy dealer.

The first chunk of the book, L’Enfant Terrible, covers the first 42 years of Schumpter’s life.  During that time, he had him traveling from Austria to England to Cairo to the United States, serving as a lawyer, a minister of finance, a businessman, and a scholar.   In the scholarship realm, depending on whom you believe, he wrote what was perhaps his defining work — The Theory of Economic Development.*

David Hounshell provides some context for this early work and Schumpeter’s entrepreneur, mark 1.

The entrepreneur is the innovator in Schumpeter’s conception. His original word for the entrepreneur was der Unternehmer, literally undertaker—not in the sense of mortician but from the French verb, entreprendre, to undertake. Schumpeter identifies the entrepreneur as the person who makes new combinations and carries them out. Entrepreneurs are change agents; they create the basis for economic growth.

Continue reading L’Enfant Terrible

I&E Reading Group, Prophet of Innovation

I’m sure that I am not the only member of the I&E Reading Group plodding through Thomas McCraw’s enthralling Prophet of Innovation this week.  I will also start in on the “live blog,” as promised.

The book is a linear progression through both his life and his thinking about economics.  One of the clear messages, and, indeed, a clear message of virtually any history of thought book, is that the thinker is shaped by his or her environment (see, for example, The Worldly Philosophers and New Ideas from Dead Economists).   McCraw certainly paints Schumpeter (a.k.a., Jozsi, Schum, Schumy, Schump, Go-Go) as a product of his environment.   From his mother’s social climbing (Chapter 2 Summary:  Jozsi was something of a mama’s boy) to the horror and devastation of World War I to his spectacular failure as an investment banker, each of these experiences is linked to Schumpeter’s intellectual and professional trajectories.

McCraw divides this world up into three parts: L’Enfant Terrible,  The Adult, and The Sage.  By the time he’s 40, he’s already “played many parts — boy genius, Austrian aristocrat, English gentleman, Cairo attorney, Viennese economist, university professor, minister of finance, investment banker, socialite, and free-spirited Casanova” (124). Not to mention, triumphant swordsman in a duel with an uncooperative librarian (I’m looking at you, Mr. Gilbert).  That’s quite a whirlwind.  Not incidentally, he had also written some defining pieces, including The Theory of Economic Development and “The Crisis of the Tax State,” which made him almost world famous.

So, this week and next, I will be “live blogging” the book.  Rather than recounting the fascinating details of Schumpeter’s life in the “live” blog, I am simply going to offer up some thoughts and topics for discussion that I have carved out and that other members of the group have provided me.   I will likely have my first post up later tonight.

You can get a listing of our progress by clicking on the tag “live blog” below.   I hope it’s helpful.

A Significant Discussion about Statistics

Tom Siegfried at Science News has a rather lengthy and useful post about the nature of and some knotty problems with the concept of statistical significance. Not too much new here — be sure you understand what a P-value really is, don’t conflate statistical and economic significance — as Siegfried points out:

Experts in the math of probability and statistics are well aware of these problems and have for decades expressed concern about them in major journals. Over the years, hundreds of published papers have warned that science’s love affair with statistics has spawned countless illegitimate findings. In fact, if you believe what you read in the scientific literature, you shouldn’t believe what you read in the scientific literature.

The statistics blogosphere, to the extent that there is one, is all a flutter.   Andrew Gelman provides a round up on his blog.

My statistician pal generally endorses the Science News article, but I didn’t see his email to me because it got dumped in my junk mail folder.   He attributes this to spam filters using Bayesian methods.

No kidding.

Economic Impact of Badger State Games on the Fox Cities: Are you interested?

Wisconsin Sports Development Corporation has an opportunity for a student or class to gain real-world experience in conducting an economic impact survey of the 2010 Badger State Summer Games held in the Fox Cities during the weekends of June 18-20 and June 25-27.

Wisconsin Sports Development Corporation (WSDC) is a nonprofit 501(c)(3) charitable organization devoted to fostering participation, competition and memorable experiences through our events and programs that promote health, active lifestyles and a sense of community.  WSDC’s marquee event is the Badger State Games.  The philosophy of the Badger State Games is that everyone plays regardless of age or ability. The Games embody the values of participation and good sportsmanship. BSG is Wisconsin’s only Olympic-style sports festival and is truly a grassroots organization that relies on the dedication of thousands of volunteers and the support of corporate partners.

WSDC wishes to ascertain the economic impact the Badger State Games has on the Fox Cities area.  In order to do this the following steps will need to be accomplished (see attachments):

  1. Review past processes, tools, timelines and reports
  2. Revise, update or create new processes and tools
  3. Create a timeline for implementation
  4. Recruit and train volunteer staff as needed to implement the study
  5. Collect and analyze appropriate data
  6. Prepare reports and deliver presentations to various stakeholders – eg: BSG staff, board of directors, funding sources, and other constituents.

See Professor Finkler if this project intrigues you.

Are You Looking for a Summer Internship?

Consider an internship with one of the policy research organizations below:

The Heritage Foundation Internship Program

The Heritage Foundation Internship Program attracts young conservative leaders of the highest caliber. We train, equip, and develop tomorrow’s young conservative leaders during their time at Heritage. Our paid interns are given substantive work, acquire policy expertise, and build marketable skills.

Interns work with Heritage experts on foreign and domestic policy issues in such areas as energy and the environment, the rule of law, homeland security, and health care. For those interested in business, Heritage offers the opportunity to work in communications and marketing, development, coalition building and outreach, and government relations.

Inter-American Development Bank

Progressive Policy Institute

PPI’s mission is to define and promote a new progressive politics for America in the 21st century.

Center on Budget and Policy Priorities
Founded in 1981, the Center on Budget and Policy Priorities is one of the leading organizations in the country working on public policy issues affecting low-income families and individuals. The Center seeks highly motivated undergraduate and graduate students (including law), as well as recent graduates, in the following areas for full-and part-time paid internships: Media, Federal Legislation, Health Policy, Housing Policy, International Budget Project, Food Stamps, National Budget and Tax Policy, Outreach Campaigns, State Budget and Tax Policy and Welfare Reform and Income Support Division.

Health Care Reform and Entrepreneurship

Partisan cheerleading or naysaying aside, there are many reasons that the health care reform is interesting.   Over here amidst I&E week, we might consider how health care reform will affect the level and rate of entrepreneurial activities.   It has long been asserted that the lack of health care creates “job lock,” whereby potential entrepreneurs stay in their current job for fear of losing health insurance.  The assurance of health care mitigates this concern, hence unleashing the full force of entrepreneurial activities…  Or so the argument goes.

Scott Shane from Case Western buys into the idea of job lock, but doesn’t necessarily believe that this week’s legislation will create any jobs.  He recounts his reasoning in Business Week, concluding:

In short, the current system of employer-sponsored health insurance creates job lock that keeps some entrepreneurs from starting businesses and creating jobs. But the size of that effect is smaller than most estimates of the number of jobs that health-care reform will destroy.

If you are interested in looking at how someone does a back-of-the-envelope calculation on such matters, the Business Week piece is quite interesting.

You might also consider checking out Megan McArdle’s blog for much more on this topic here, here, and here.

Innovation Summit on Left Coast

The Economist is hosting an innovation summit this week, and our own John Brandenberger is serving as our correspondent for the affair.    The speakers list is too long to get into here, but it includes many well-known folks in the field.  This morning’s keynote is from Jared Diamond, author of the classic Guns, Germs, & Steel, and there are dozens of other high-profile folks.

We look forward to the report.

Kicking Off I&E Week

Here’s a question from the recent economics 450 test that you might want to consider part or all of:

Discuss what people mean by entrepreneurship and explain how it fits into the theory of the firm. Things you might discuss:

  • What is an entrepreneur?  How is it different than being a manager?
  • Do entrepreneurs usually work for themselves?  What does that mean?
  • Is asset ownership necessary? Is that part of working for themselves?

Part of the inspiration from that question comes from an interesting piece by Foss and Klein from a few years back.

Not coincidentally, the economics department generally is pondering these very questions as we try to figure out our curriculum offerings.

Stay tuned.

Smile!

This seems to need no explanation.   I wonder if you could do the same analysis from the annual Lawrence faculty picture?

Smile Intensity in Photographs Predicts Longevity

Ernest Abel & Michael Kruger
Psychological Science, forthcoming

“Photographs were taken from the Baseball Register for 1952 (Spink, Rickart, & Abramovich, 1952). We restricted our analysis to players who debuted prior to 1950, and we included only photographs in which the player appeared to be looking at the viewer…Players with Duchenne smiles were half as likely to die in any year compared with nonsmilers, HR = 0.50, p = .006…In this model, smile intensity accounted for 35% of the explained variability in survival”

Can Cities Shrink Their Way Back to Greatness?

In a recent NYTimes Economix blog entry, Edward Glaeser argues that we should watch Detroit under mayor David Bing and see if the answer is yes.  Bing, former NBA all-star guard, has formulated a plan to downsize Detroit; that is, identify policies that will help Detroit generate a sustainable comparative advantage by reducing and removing those policies that are destructive.  It’s an intriguing and very politically challenging idea.  See what you think.

http://economix.blogs.nytimes.com/2010/03/16/shrinking-detroit-back-to-greatness/

Vive la Freshman Studies

Leave it to reality television to resurrect the Stanley Milgram experiments in front of a live studio audience.

The game involved contestants posing questions to another “player”, who was actually an actor, and punishing him with 460 volts of electricity when he answered incorrectly.

Eventually the man’s cries of “Let me go” fell silent, and he appeared to have died.

Not knowing that their screaming victim was an actor, the apparently reluctant contestants followed the orders of the presenter, as well as chants of “Punishment” from a studio audience who also believed the game was real.

The programme’s producer and a team of psychologists recruited 80 volunteers, telling them they were taking part in a pilot for a new television show.

Well, I think that speaks for itself.

Econometric Madness

A lot of people have been stopping me in the halls asking, Is there any way we could somehow use a Markov-Chain model to help with March Madness tournament picks?

Well, folks, it’s your lucky day.

Paul Kvam and Joel Sokol out of Georgia Tech  published a piece in Naval Research Logistics a few years back explaining a simple three-parameter model. (In the event that the Mudd doesn’t have an old copy laying around, you can read it here).

For those of you without time to crunch the numbers yourself, you might check out the handy LRMC Information Page.  Last year I went with the “Pure” LRMC, but this year I’m feeling a little Bayesian.

The authors claim — and there appears to be something to their claim — that their model does a better job than the experts and competing methods (e.g., seeds, RPI, rankings).   And here’s a shocker — they have Kansas over Duke in the final (like it took a genius to come up with that).  On the other hand, they have BYU as their #4 team, so I will bet the farm on that one watch that game with interest.

Hidden in Plain Sight

Last week’s report by Lawrence Alum Anton Valukas on Lehman Brothers reveals that the actions taken by Lehman were assumed to be legitimate and above board. Transparency was evident. But as Andrew Ross Sorkin opines in the linked New York Times story below,  which matches Michael Lewis’s view, the incentives were wrong, and regulators did not look in the obvious places.

http://www.nytimes.com/2010/03/16/business/16sorkin.html?adxnnl=1&ref=business&adxnnlx=1268751826-n8L9ylXvRETjzarAOCJirg

The Big Shorts for Spring, Introducing Michael Lewis

Michael Lewis is one of our generation’s most influential business writers, having penned the Wall Street classic Liar’s Poker (even I read that one), the professional sports classic Moneyball (hey, I read that one, too), along with assorted other gems on the would-be masters of the universe (here’s a page-turner about Iceland ).

Why am I telling you this?  Well, because his new book, The Big Short has arrived, and with it the obligatory lengthy excerpt at Vanity Fair.

Please let me know what you think.

Oh, for good measure, here’s what he reads.

Take a Deep Breath

Good news on the clean air front — it’s getting cleaner.   In fact, it’s been getting cleaner for a long, long time.   Don’t believe me?  Well, then go check out the new EPA Air Quality Trends that was released earlier this week.  Of the six criteria pollutants (NOx, SOx, CO, PM, O3, and Pb), the trend is continually downward.  Hazardous air pollutants (HAPs) are also on their way down.  That’s despite a growing population, growing vehicle fleet, and (until recently) a growing economy.

Almost makes me want to go out and eat a big hand full of dirt.

Almost.