It’s just a theory!
21 Jul 2014 Leave a comment
in economics Tags: anti-intellectualism, methodology of economics, The Age of Enlightenment
One of the most frustrating thing when having arguments with supposedly university educated people is when they retort: it’s just a theory. Escaping this rancid anti-intellectualism should be the least of which you learn in a university education but I found this not to be so so many times. I would fear for the continuity of the Age of Enlightenment every time I heard these words uttered.
A scientific theory is not just an idea that lives in someone’s head, rather than an explanation rooted in experiment and testing. Scientific theories are central to the growth of knowledge which itself grows through criticism and discussion:
If we are uncritical we shall always find what we want: we shall look for, and find, confirmations, and we shall look away from, and not see, whatever might be dangerous to our pet theories.
In this way it is only too easy to obtain what appears to be overwhelming evidence in favour of a theory which, if approached critically, would have been refuted – Karl Popper
A theory is an explanation or model based on observation, experimentation, and reasoning, especially one that has been tested and confirmed as a general principle helping to explain and predict natural phenomena.
When I speak of reason or rationalism, all I mean is the conviction that we can learn through criticism of our mistakes and errors, especially through criticism by others, and eventually also through self-criticism.
A rationalist is simply someone for whom it is more important to learn than to be proved right; someone who is willing to learn from others — not by simply taking over another’s opinions, but by gladly allowing others to criticize his ideas and by gladly criticizing the ideas of others. The emphasis here is on the idea of criticism or, to be more precise, critical discussion – Karl Popper
Any scientific theory must be based on a careful and rational examination of the facts.
Military deaths in world war 2
21 Jul 2014 Leave a comment
in economics, war and peace Tags: World War 2
Jus in bello: the IDF dropped this Arabic flyer warning residents of Shuja’iya to evacuate – Hamas told them to stay
21 Jul 2014 2 Comments
Alfred Marshall as a pioneer of human capital theory
21 Jul 2014 4 Comments
in history of economic thought, human capital, labour economics Tags: Alfred Marshall, human capital
Marshall viewed education as an instrument capable of lifting up the poor and relocating them into the middle class. The direct benefits come from eliminating much of
that wasteful negligence which allows genius that happens to be born of lowly parentage to expend itself in lowly work
The indirect benefits of education came from character formation:
[Education] confers great indirect benefits even on the ordinary workman. It stimulates his mental activity, it fosters in him a habit of wise inquisitiveness: it makes him more intelligent, more ready, more trustworthy in his ordinary work; it raises the tone of his life in working hours and out of working hours; it is thus an important means toward the production of material wealth; at the same time that, regarded as an end in itself, it is inferior to none of those which the production of material wealth can be made to subserve.
Marshall’s primary solution to the problem of poverty is education, but he also exhorts individuals to behave responsibly, with thrift and self control.
Aaron Director and the default answer to why hard to understand business practices exist is ‘monopoly’ and the default policy response is ‘call the cops’
21 Jul 2014 Leave a comment
in industrial organisation, survivor principle Tags: Aaron Director
There are the myriad of ways in which real world business practices behave differently from the caricaturing in textbooks. Those differences sometimes arouses suspicious responses from economists.
Visions of market power and deadweight loss triangles dance their heads, and some of the suspect practices have been constrained by anti-trust policy. Director rejected this kind of intellectual laziness, and he sought, sometimes successfully, to inoculate those around him against it.
Director approached all business practices with the methodology that entailed asking very basic questions and answering them in a rigorous logic that it appealed ultimately to facts.
The style was verbal – some combination of Socratic dialogue and Adam Smith. This style had the disadvantage of producing few closed-form solutions. But it had the advantage of permitting analysis of the kind of problems that eluded simple solutions.
Indeed I believe that one reason for Director’s lasting influence he was able to show that simple judgements about business practices often cannot withstand rigorous scrutiny.
Sam Peltzman
Spans of control and the cost of entrepreneurial time
20 Jul 2014 Leave a comment
in applied price theory, Armen Alchian, industrial organisation, Ronald Coase, theory of the firm Tags: markets and hierarchies, Oliver Williamson, Robert Lucas, Ronald Coase, span of control, theory of the firm, Walter Oi
One constraint on the growth of any firm is entrepreneurs have a limited span of control (Coase 1937; Williamson 1967, Lucas 1978; Oi 1983a, 1983b). A span of control is the number of subordinates that an individual supervisor has to control and lead either directly or through a hierarchical managerial chain (Fox 2009).
There are only so many tasks that even the most able entrepreneurs can carry out in one day. Over-stretched spans of control motivate entrepreneurs to hire professional managers and delegate to them a wide range of decision-making rights over the firms they own (Williamson 1975; Foss, Foss and Klein 2008).
Entrepreneurs and the professional managers they hired to assist them must divide their respective time between monitoring employees, identifying new business opportunities, forecasting buyer demand and running the other aspects of their business (Lucas, 1978; Oi 1983, 1983b, 1988; Foss, Foss, and Klein 2008). The larger is the firm, the more employees there are for the entrepreneur to direct, monitor and reward. These costs of directing and monitoring employees will increase with the size of the firm and larger firms will encounter information problems not present in smaller firms (Alchian and Demsetz 1972; Stigler 1962).
The cost of entrepreneurial time spent monitoring employees will increase with the size of the firm (Lucas 1978; Oi 1983b). The time of the more talented entrepreneurs is more valuable because they had the superior managerial skills and entrepreneurial alertness to make their firms large in the first place and remain deft enough to survive in competition. Time spent on the supervision of employees is time that is spent away from other uses of the talents that got these more able entrepreneurs to the top and keeps them there (Williamson 1967; Lucas 1978; Oi 1983b, 1988, 1990; Idson and Oi 1999; Black et al 1999).
Firms in the same industry tend to exhibit systematic differences in their organization of production and the structure of their workforces because entrepreneurial ability is the specific and scarce production input that limits the size of a firm (Lucas, 1978; Oi 1983b). The less able entrepreneurs tend to run the smaller firms while the more able entrepreneurs tend to lead both the currently large firms and the smaller firms that are growing at the expense of market rivals (Lucas 1978, Oi 1983b; Stigler 1958; Alchian 1950).
Utopia, you are standing in it! 
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