via Cafe Hayek
Celebrating humanity's flourishing through the spread of capitalism and the rule of law
04 Jul 2014 Leave a comment
via Cafe Hayek
03 Jul 2014 Leave a comment
in financial economics, labour economics, managerial economics, market efficiency Tags: CEO turnover, creative destruction
27 Jun 2014 Leave a comment
in experimental economics, financial economics, market efficiency Tags: efficient markets hypothesis

Source: John Cochrane
A share market that jumps suddenly when there is news of change in economic corporate fortunes is efficient.
This means that an efficient market can be highly volatile because it is rapidly incorporating changes in information. An efficient market is a volatile market.
As for smart money managers beating an efficient market, John Cochrane explains:
…efficiency implies that trading rules — “buy when the market went up yesterday”– should not work.
The surprising result is that, when examined scientifically, trading rules, technical systems, market newsletters, and so on have essentially no power beyond that of luck to forecast stock prices.
This is not a theorem, an axiom, a philosophy, or a religion: it is an empirical prediction that could easily have come out the other way, and sometimes does.
Efficiency implies that professional managers should do no better than monkeys with darts. This prediction too bears out in the data.
It too could have come out the other way. It should have come out the other way! In any other field of human endeavour, seasoned professionals systematically outperform amateurs. But other fields are not as ruthlessly competitive as financial markets.
26 Jun 2014 Leave a comment
in market efficiency, politics - USA, Public Choice Tags: prediction markets
Below is a map showing the results of the 2012 US presidental elections and the map of prediction market forecasts on October 1st.


Florida had not been called to Obama when the map was made.
via Thinking on the Margin: How Did the Prediction Markets Do?.
10 Jun 2014 Leave a comment
in economic history, economics of media and culture, industrial organisation, market efficiency, survivor principle Tags: competition as a discovery process, Free press

For much of the 19th century U.S. newspapers were public relations tools funded by politicians. Information hostile to a paper’s political views were ignored or dismissed as sophistry. Newspaper independence was rare. Fraud and corruption in 19th century America approached today’s more corrupt developing nations.
The newspaper industry underwent fundamental changes between 1870 and 1920 as the press became more informative and less partisan.
– 11 per cent of urban dailies were independent in 1870,
– 62 per cent were in 1920.
The rise of the informative press was the result of increased scale and competitiveness in the newspaper industry caused by technological progress in the newsprint and newspaper industries.
• From 1870 to 1920, when corruption appears to have declined significantly within the United States, the press became more informative, less partisan, and expanded circulation considerably.
• By the 1920s, the partisan papers no longer coupled allegations of the corruption of their party members with condemnation of the character of the person making the charge.
A reasonable hypothesis is rise of the informative press was one of the reasons why the corruption of the Gilded Age was sharply reduced during the Progressive Era.
A supply-side model suggesting that newspapers weigh the rewards of bias—politicians’ bribes or personal pleasure—against the cost of bias—lost circulation from providing faulty news.
The key predictions of the model are that, as the size of the market for newspapers rises, and as the marginal cost of producing a paper falls, newspapers will become less biased and invest more in gathering information.
Corruption declined because media proprietors discovered that they could maintain and boost circulation by exposing it. An independent press which kept a watchful eye over government and business was a spontaneous order that was a by-product of rising incomes and literacy of readers.
Politicians did not help the process along. Technological innovations and increased city populations caused a huge increase in scale.
Newspapers become big businesses; they increased readership and revenue by presenting factual and informative news. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, it is from their high regard to their own interest.
Following these incentives, newspapers changed from political tools to impartial reporting. Those newspapers that did not did not survive in competition.
HT: The Rise of the Fourth Estate: How Newspapers Became Informative and Why It Mattered by Matthew Gentzkow, Edward L. Glaeser, and Claudia Goldin in Corruption and Reform: Lessons from America’s Economic History (2006).
09 May 2014 Leave a comment
in entrepreneurship, industrial organisation, market efficiency, survivor principle Tags: infotainment, media bias, Tyler Cowen
Limiting the number of TV stations has unusual effects on media slant and muckraking.
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Tyler Cowen argues that competition by itself is not a powerful force for media accuracy.
In the traditional conception of the demand for news, audiences read, watch, and listen to the news in order to get information. The quality of news is its accuracy.
But when there are many media outlets, competition results in a common slanting of news towards reader biases in the audience niche each network are serving. The market is very good are serving up what the customer wants.
Competition forces news outlets to cater to their customer’s niche preferences.
On topics where reader beliefs diverge on politically divisive issues, media outlets profit from segmenting the market and slanting reports to the biases of their niche audiences.
There is less bland truth-telling and more of the polemics that each market niche wants.
This means that left-wing and right-wing media outlets will hound the political enemies of their readers to cater to the preferences of their audience niche.
The clearest illustration of infotainment is the Lewinsky affair:
When there are only a few media outlets, the networks instead go for the median viewer/reader and offer more sedate and less scandal driven coverage.
More media competition increases the chances of the muckraking that brings down ministers and governments.
04 May 2014 Leave a comment
in constitutional political economy, development economics, entrepreneurship, liberalism, market efficiency, technological progress Tags: Deirdre McCloskey, industrial revolution, Rise of the Western World, rule of law, The Bourgeois Virtues, The Great Fact
Throughout the history of the world, the average person on earth has been extremely poor: subsisting on the modern equivalent of $3 per day.
This was true until 1800, at which point average wages—and standards of living—began to rise dramatically.
Prof. Deirdre McCloskey explains how this tremendous increase in wealth came about.
In the past 30 years alone, the number of people in the world living on less than $3 per day has been halved.
The cause of the economic growth we have witnessed in the past 200 years may surprise you.
It’s not exploitation, or investment. Innovation—new ideas, new inventions, materials, machinery, organizational structures—has fueled this economic boom.
Prof. McCloskey explains how changes in Holland and England in the 1600s and 1700s opened the door for innovation to take off—starting the growth that continues to benefit us today.
via Why Does 1% of History Have 99% of the Wealth? | Learn Liberty – YouTube.
04 May 2014 Leave a comment
in applied welfare economics, economic growth, entrepreneurship, industrial organisation, market efficiency, Rawls and Nozick, technological progress Tags: envy, John Rawls, super-rich, SuperEntrepreneurs, top 1%, top talent
The report SuperEntrepreneurs shows that:
SuperEntrepreneurs examined about 1,000 self-made men and women who have earned at least $1 billion dollars and who appeared in Forbes magazine list of the world’s richest people between 1996 and 2010.

Hong Kong has the most, with around three SuperEntrepreneurs per million inhabitants, followed by Israel, the US, Switzerland and Singapore.
The US is roughly four times more super-entrepreneurial than Western Europe and three times more super-entrepreneurial than Japan.
Super-entrepreneurs tend to be well-educated – 84% have a university degree.
Many started their own company but there is no clear relationship between self-employment and successful entrepreneurship
Steven Kaplan and Joshua Rauh’s “It’s the Market: The Broad-Based Rise in the Return to Top Talent” Journal of Economic Perspectives 2013 found that those in the Forbes 400 richest are less likely to have inherited their wealth or grown-up wealthy.
Today’s super-rich are self-made rich because they produce new and better products and services that people wanted and are willing to pay for.
John Rawls was alive to the importance of incentives in a just and prosperous society.
With his emphasis on fair distributions of income, Rawls’ initial appeal was to the Left. Left-wing thinkers then started to dislike his acceptance of capitalism and his tolerance of large discrepancies in income and wealth.
Rawls excluded envy when we are behind his veil of ignorance designed the social contract about how the society will be organised. He believed that principles of justice should not be affected by individual inclinations, which are mere accidents.
Rawls also argued that the liberties and political status of equal citizens encourage self-respect even when one is less well off than others; and background institutions (including a competitive economy) make it likely that excessive inequalities will not be the rule. He supposes that
the main psychological root of our liability to envy is a lack of self-confidence in our own worth combined with a sense of impotence
Then there is the old Russian joke that tells the story of a peasant with one cow who hates his neighbour because he has two. A sorcerer offers to grant the envious farmer a single wish any thing he wants: “Shoot my neighbour’s cow!” he demands.
29 Apr 2014 Leave a comment
in applied welfare economics, entrepreneurship, macroeconomics, market efficiency, politics, Rawls and Nozick, taxation, technological progress Tags: Greg Mankiw, Jon Elster, Mirrlees Review, Robert Lucas, Thomas Piketty, Tyler Cowen
It’s 700 pages long and goes on about Marx. Some people were watching the other channel when the Berlin Wall fell.

My 1 o’clock lecture at ANU in 1990 was next to a room rented out ironically from 12 to 1 to the Campus Trots and then to the Campus Christians for an hour of prayer to another saviour.
The Twitter summary of Piketty is this:
Karl Marx wasn’t wrong, just early. Pretty much. Sorry, capitalism. #inequalityforevah
The only Marxist I bother with is Jon Elster. He is a leading proponent of Analytical Marxism and one of the last polymaths. Brian Barry once wrote that to review one of Elster’s books one:
would either have to have taken off several years to master the many fields which fall within Elster’s purview or would be a consortium of at least twenty carefully-chosen experts.
All of Elster’s books and writings are worth reading, including
As Jon Elster noted:
Marxian economics is, with a few exceptions, intellectually dead
and Marx’s labour theory of value is:
useless at best, harmful and misleading at its not infrequent worst.
To go on with my non-review, I will quote Tyler Cowen:
The crude seven-word version of Piketty’s argument is “rates of return on capital won’t diminish.”
Piketty’s reasons why rates of return on capital won’t diminish are fairly specific and restricted to only a small share of capital.
.. In any case this is pure speculation and Piketty’s entire argument depends upon it.
… Piketty converts the entrepreneur into the rentier.
To the extent capital reaps high returns, it is by assuming risk…
Yet the concept of risk hardly plays a role in the major arguments of this book.
Once you introduce risk, the long-run fate of capital returns again becomes far from certain.
In fact the entire book ought to be about risk but instead we get the rentier…
Overall, the main argument is based on two (false) claims.
First, that capital returns will be high and non-diminishing, relative to other factors.
Second, that this can happen without significant increases in real wages.
Piketty’s advocacy of a top marginal income tax rate of 80% and a an international treaty for a wealth tax are wildly impractical and destructive of economic growth and entrepreneurship. His advocacy of 60% marginal tax rates on incomes above $200,000 strike at the heart of the professional and managerial occupations that are the backbone of day-to-day capitalism. Piketty’s wealth tax would tax the homes and the retirement savings of the ordinary middle class:
Piketty’s reason for these high top tax rates is not to bring in more revenue or to redistribute wealth to poor and the downtrodden but simply “to put an end to such incomes.” Harsanyi argues that:
Like many progressives, Piketty doesn’t really believe that most people deserve their wealth anyway, so confiscating it presents no real moral dilemma.
He also argues that we can measure a person’s productivity and the value of a worker (namely, low-skilled labourers) while arguing that other groups of workers (namely, the kind of people he doesn’t admire) are bequeathed undeserved, “arbitrary” salaries. What tangible benefit does a stockbroker or a kulak or an explanatory journalist offer society, after all?
This takes me back to Jon Elster who had this to say on socialism:
Optimism and wishful thinking have been features of socialist thought from its inception.
In Marx, for instance, two main premises appear to be that whatever is desirable is possible, and that whatever is desirable and possible is inevitable.
…It has become clear that classical socialism massively underestimated the importance of economic incentives
.
Greg Mankiw is less harsh, but still to the point:
Like President Obama and others on the left, Piketty wants to spread the wealth around.
Another philosophical viewpoint is that it is the government’s job to enforce rules such as contracts and property rights and promote opportunity rather than to achieve a particular distribution of economic outcomes.
No amount of economic history will tell you that John Rawls (and Thomas Piketty) offers a better political philosophy than Robert Nozick (and Milton Friedman).
John Rawls was actually very much alive to the importance of incentives in a just and prosperous society.
Unequal incomes might turn out to be to the advantage of everyone. Work effort and entrepreneurial alertness respond to incentives; incentives channel people into the occupations and jobs where they produce more.
Rawls lent qualified support to the idea of a flat-rate consumption tax because these taxes:
impose a levy according to how much a person takes out of the common store of goods and not according to how much he contributes.
A simple way to have a progressive consumption tax is to exempt all savings from taxation.
With his emphasis on fair distributions of income, Rawls’ initial appeal was to the Left. Left-wing thinkers then started to dislike his acceptance of capitalism and his tolerance of large discrepancies in income and wealth.
It’s impossible to make the workers better off by taxing capital. The optimal rate of tax on income from capital is zero. This is why the Mirrlees Review of the UK taxation system argued for zero taxation of the returns to capital.
Robert Lucas estimated in 1990 that eliminating all taxes on income from capital would increase the U.S. capital stock by about 35% and consumption by 7%.
Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, and Laurence J. Kotlikoff (2014) found that eliminating the corporate income tax completely would raise the U.S. capital stock (machines and buildings) by 23%, output by 8% and the real wages of unskilled and skilled workers each by 12%.
Book reviews serve the same purpose as film reviews. They are filters for our time. Do you agree?
I made a time management decision to not read a long book plenty of others reviewed and some even understood.
As for the growing income inequality, there is a long literature dating back 25-years arguing that skill-biased technological change is increasing the returns to investing in education as Gary Becker blogged in 2011:
Earnings inequality in the United States and many other countries has increased greatly since the late 1970s, due in large measure to globalization and technological progress that raised the productivity of more educated and more skilled individuals.
While the average American college graduate earned about a 40% premium over the average high school graduate in 1980, this premium increased to over 70% in 2000.
The good side of this higher education-based earnings inequality is that it induced more young men, and especially more young women, to go to and finish college.
The bad side is that many sufficiently able children could not take advantage of the greater returns from a college education because their parents did not prepare them to perform well in school, or they went to bad schools, or they lacked the financing to attend college.
As a result, the incomes of high school dropouts and of many high school graduates stagnated while incomes boomed for many persons who graduated college, and even more so for those with post graduate education.
There is nothing new under the sun.
23 Apr 2014 Leave a comment
in applied welfare economics, entrepreneurship, environmental economics, environmentalism, liberalism, market efficiency Tags: Earth Day, Julian Simon, Paul Ehrlich
During the first great Earth Week in 1970 there was panic.
The public’s outlook for the planet was unrelievedly gloomy.
The doom saying environmentalists – of whom the dominant figure was Paul Ehrlich – raised the alarm: The oceans and the Great Lakes were dying; impending great famines would be seen on television starting in 1975; the death rate would quickly increase due to pollution; and rising prices of increasingly-scarce raw materials would lead to a reversal in the past centuries’ progress in the standard of living.
… On average, people throughout the world have been living longer and eating better than ever before.
Fewer people die of famine nowadays than in earlier centuries.
The real prices of food and of every other raw material are lower now than in earlier decades and centuries, indicating a trend of increased natural-resource availability rather than increased scarcity.
The major air and water pollutions in the advanced countries have been lessening rather than worsening.

Via Julian Simon memorial site
22 Apr 2014 Leave a comment
in applied welfare economics, market efficiency Tags: fatal conceit, John Tierney, Mark Perry, pretence to knowledge, recycling
Mark Perry for Earth Day linked to the classic 1996 New York Times Magazine article “Recycling is Garbage” by New York Times columnist John Tierney. He wrote about those millions who suffer from “garbage guilt,” as Tierney describes the religious components of recycling.
Tierney’s argument was that recycling may be the most wasteful activity in modern America:
Rinsing out tuna cans and tying up newspapers may make you feel virtuous, but it’s a waste of time and money, a waste of human and natural resources.
You can understand why Tierney’s article set the record for the greatest amount of hate mail in New York Times history.
22 Apr 2014 Leave a comment
in industrial organisation, market efficiency, politics - New Zealand, Public Choice, survivor principle Tags: industry policy, picking losers, picking winners
Industry policy is back in vogue in New Zealand:
The case against picking winners is the answer to the question in the picture of the weirdoes below.

One of the people in the photo won a competition on the radio that offered free company photos. That is how Microsoft could afford the photo. That photo became one of the most iconic photos in American business history.
I first saw this photo 12-14 years ago at a presentation, so who first designed the caption is lost in time.
Celebrating humanity's flourishing through the spread of capitalism and the rule of law
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