Urging Economists to Step Away From the Blackboard

by Brendan Greeley

Bloomberg
November 29, 2012

Ronald Coase published his career-making paper, The Nature of the Firm, 75 years ago. He won the Nobel prize for economics in 1991. In a lecture in 2002, he argued that physics has moved beyond the assumptions of Isaac Newton, and biology beyond Darwin. (Not that he knew them.) But economics, he said, had failed to advance past the efficient-market assumptions of Adam Smith. This year Coase, a professor emeritus at the University of Chicago Law School, is attempting to start a new academic journal ambitiously titled Man and the Economy. The premise: Economics is broken. Coase’s journal is still just a plan, but his frustration with orthodox economics has energized his followers.

The financial crisis forced economists to confront the limitations of their profession. Former Federal Reserve Chairman Alan Greenspan admitted as much when he told Congress in October 2008 that markets might not regulate themselves after all. Coase says the problem runs deeper: Economists study abstractions and numbers, instead of firms and people. He doesn’t believe this can be fixed by tweaking models. An entire generation of economists must be encouraged to think differently.

The idea for the journal stems from his collaboration with Ning Wang, an assistant professor at the School of Politics and Global Studies at Arizona State University who grew up in a rice- and fish-farming village in the Hubei province of China. Coase, 101, began working with Wang in the 1990s at the University of Chicago. Neither has a degree in economics; the two understood each other. “We’re not constrained by a mainstream, orthodox view,” says Wang. “A lot of people would see this as a weakness.” Coase declined to be interviewed.

When Coase and Wang hosted a conference on China in 2008, they noticed that many Chinese academics had never talked to either policymakers or entrepreneurs from their own country. They had learned only what Coase calls “blackboard economics,” sets of theories and mathematical relationships between bits of data. “I came from China,” says Wang. “We have a lot of nationals come here; they’re taught game theory and econometrics. Then they’re going home … without a basic understanding of how the real world functions.”

In an essay published on Nov. 20 in Harvard Business Review, Coase argues that in the early 20th century, economists began to focus on relationships among statistical measures, rather than problems that firms have with production or people have with decisions. Economists began writing for each other, instead of for other disciplines or for the business community. “It is suicidal for the field to slide into a hard science of choice,” Coase writes in HBR, “ignoring the influences of society, history, culture, and politics on the working of the economy.” (By “choice,” he means ever more complex versions of price and demand curves.) Most economists, he argues, work with measures like gross domestic product and the unemployment rate that are too removed from how businesses actually work.

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Are wealth and prosperity synonymous?

by James Melik

BBC News
November 23, 2012

What is it besides the money in people's pockets that makes a society prosperous?

Many people argue there are ingredients other than hard cash to consider - such as personal freedom and good governance.

The International Energy Agency recently predicted the US could become self-sufficient in energy within a couple of decades - a move that should make any nation more prosperous.

Will Hutton, who chairs the economic research think tank Big Innovation Centre, and is principal of Hertford College in Oxford, says: "A secure energy supply will lead to lower energy prices, which could lead to a more vigorous US manufacturing sector."

It might make the US more prosperous financially, but will it feel safer and more at peace with itself?

Not necessarily so, thinks Jeff Gedmin at London-based think tank the Legatum Institute, which says its aim is to advance ideas and policies in support of free and prosperous societies around the world.

"I don't think there is any kind of mechanical relationship between material wealth and the well-being of citizens," he says.

"Every year we publish the Prosperity Index, and we find this year, for the first time, the US drops out of the top 10."

"When you look at access to education, access to health care, or access to opportunity, there are problems," he says. "The feeling Americans have is that hard work, as it once was, does not get them ahead any more in the same way."

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The lottery of life: Where to be born in 2013

Economist
November 21, 2012

Warren Buffett, probably the world’s most successful investor, has said that anything good that happened to him could be traced back to the fact that he was born in the right country, the United States, at the right time (1930). A quarter of a century ago, when The World in 1988 light-heartedly ranked 50 countries according to where would be the best place to be born in 1988, America indeed came top. But which country will be the best for a baby born in 2013?

To answer this, the Economist Intelligence Unit (EIU), a sister company of The Economist, has this time turned deadly serious. It earnestly attempts to measure which country will provide the best opportunities for a healthy, safe and prosperous life in the years ahead.

Its quality-of-life index links the results of subjective life-satisfaction surveys—how happy people say they are—to objective determinants of the quality of life across countries. Being rich helps more than anything else, but it is not all that counts; things like crime, trust in public institutions and the health of family life matter too. In all, the index takes 11 statistically significant indicators into account. They are a mixed bunch: some are fixed factors, such as geography; others change only very slowly over time (demography, many social and cultural characteristics); and some factors depend on policies and the state of the world economy.

A forward-looking element comes into play, too. Although many of the drivers of the quality of life are slow-changing, for this ranking some variables, such as income per head, need to be forecast. We use the EIU’s economic forecasts to 2030, which is roughly when children born in 2013 will reach adulthood.

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Misery Leads to Myopia on Money

by Daniel Akst

Wall Street Journal
November 16, 2012

If you’re organizing the funeral of a recently deceased loved one, beware. Sadness makes people more short-sighted when it comes to money, a new paper reports.

In experiments, researchers first primed participants by showing short films known to instill either sadness, disgust or neutral feelings. Then participants were offered choices between immediate sums of money or larger sums they would receive months later.

Faced with such choices—a staple in social science experiments—people typically discount future rewards heavily. But results in this case show that sad people discounted the future much more than people feeling neutral or disgusted. In one experiment, neutral-feeling people required $56 to forgo $85 three months later, but sad people required only $37.

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Women eager to negotiate salaries, when given the opportunity

by William Harms

UChicagoNews
November 15, 2012

Although some scholars have suggested that the income gap between men and women is due to women’s reluctance to negotiate salaries, a new study at the University of Chicago shows that given an invitation, women are just as willing as men to negotiate for more pay.

Men, however, are more likely than women to ask for more money when there is no explicit statement in a job description that wages are negotiable, the study showed.

“We find that simple manipulations of the contract environment can significantly shift the gender composition of the applicant pool,” said UChicago economist John List, the Homer J. Livingston Professor in Economics.

List was a co-author of a paper based on a study of people responding to job advertisements in which salaries were advertised either as negotiable or fixed. Women were three times more likely to apply for jobs with negotiable salaries and to pursue negotiations once they applied, the study found.

Among those responding to an explicit salary offer, 8 percent of women and 11 percent of men initiated salary negotiations. When the salary was described as negotiable, 24 percent of women and 22 percent of men pursued salary discussions.

“By merely adding the information that the wage is ‘negotiable,’ we successfully reduced the gender gap in applications by approximately 45 percent,” said List.

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For Investors, Costly Academic Studies

by Daniel Akst

Wall Street Journal
November 7, 2012

A wide variety of investment strategies are described in the finance literature, but they do have something in common: after the professors write about them, returns are diminished.

That’s the finding of a couple of finance professors who looked at 82 market anomalies exploited by investors and then described in academic papers. In a working paper, the authors estimate that “the average anomaly’s post-publication return decays by about 35%.”

Mostly this seems to be the result of investors learning about the strategy from the academic papers and trading on it, thereby diminishing the precious anomaly in just the way markets are supposed to work. The effect is most pronounced, the professors write, “in large market capitalization stocks, high dollar volume stocks, low idiosyncratic risk stocks, and stocks that pay dividends.”

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