New Economist

Should we kill the king?

Are autocratic leaders an impediment to democratisation? An intriguing question, which some economists have recently sought to answer.

A year ago a JPE article by Harvard's Ben Olken on corruption in Indonesia attracted attention for its innovative appproach. The American magazine has a profile of him by Michael Moynihan, Graft Paper, discussing this and other research, including a paper co-written with Northwestern's Ben Jones, Hit or Miss? The Effect of Assassinations on Institutions and War (PDF). Moynihan summarises it thus:

Olken and Jones looked at the effects of political assassination, using a strict empirical methodology that takes into account economic conditions at the time of the killing and what Olken calls a “novel data set” of assas­sination attempts, successful and unsuccessful, between 1875 and 2004.

Olken and Jones discovered that a country was “more likely to see democratization follow­ing the assassination of an autocratic leader,” but found no substantial “effect following assassinations—or assassination attempts—on democratic leaders.” They concluded that “on average, successful assassinations of autocrats produce sustained moves toward democracy.” The researchers also found that assassinations have no effect on the inauguration of wars, a result that “suggests that World War I might have begun regardless of whether or not the attempt on the life of Archduke Franz Ferdinand in 1914 had succeeded or failed.”

The whole article is worth a read - as are Olken's other papers.

Academic outsourcing

Though co-authorship between leading academics and graduate students is common, and can often be of mutual benefit, it is reasonable to expect the professor in question to make a substantial contribution to the end product - especially if they are the lead author.

A key issue is how much credit should be given those who do the hard slog of gathering the evidence and crunching the numbers? When co-writing papers I have always insisted they be the lead author, but I suspect this is often not the case. This paragraph from an article by Jacob Hale Russell in magazine 02138, A Million Little Writers, caught my eye:

One of academia’s up-and-coming darlings is Roland Fryer, an assistant professor in the economics department who began teaching at Harvard just last year. Fryer is a media star: He has appeared on CNN and been written about in the New York Times, Esquire, and this issue of 02138 (see page 34). Fryer’s group, the American Inequality Lab, works on a half-dozen or more major research areas at a time. To do so, Fryer now employs seven full-time “project managers,” mostly recent college alums, and works with dozens of others. The students, generally recent college graduates like David Toniatti, each manage a research project, from designing the methodology to collecting the data and running the numbers. Fryer writes the final papers, for which he is accorded primary authorship. “It’s him casting a vision, us working through the details, and him correcting it,” Toniatti says. “Everyone can run the regression; it’s really the idea that counts.”

I am sure what goes on at Harvard's American Inequality Lab is quite common, and that many economic professors engage in such 'atelier' practices. And at least Fryer is said to write the final papers. But to what extent should such academic outsourcing be accredited? Is co-authorship enough? Comments welcome - especially if you have been party to these kind of arrangements yourself.

UPDATE: Tim Harford links to this post at his FT Undercover Economist blog, and comments:

This makes perfect sense to me, but the 02138 article also lays out some of the risks and problems of too much outsourcing. Roland Fryer, incidentally, is a very impressive figure and features in The Logic of Life. Stephen Dubner (co-author of Freakonomics) wrote a truly astonishing profile of him here - if you never read anything about an economist every again, at least read that.

The nature and significance of economic science: Lionel Robbins revisited

This year marks the 75th anniversary of Lord Lionel Robbins's An Essay on the Nature and Significance of Economic Science - the book where he famously redefined the scope of economics to be:

the science which studies human behavior as a relationship between scarce means which have alternative uses.

As Ken Binmore writes, Robbins "beat the drum for what eventually evolved into neoclassical economics." Robbins also emphasised the importance of separating economics and psychology, making him "an ogre for the new school of behavioral economists".

The LSE and the editors of Economica organised a 75th Anniversary Conference to mark the occassion. Held in London yesterday and today, there have been a wonderful array of contributions. There are 22 full papers and 8 abstracts available online from leading economists including Richard Lipsey, Ken Binmore, David Colander, Charles Goodhardt and Roger Backhouse.

For any readers with a good working knowledge of, and interest in, economic history, methodology, or the purposes of economics, I recommend you dive straight in.

In conversation with Richard Freeman

One of America's most prolific and well respected economists, Harvard's Richard Freeman, talks about his career and his research at UC Berkeley, available on YouTube: Global Capitalism, Labor Markets, and Inequality

Hat tip: BookForum.com

What was special about Europe?

Gregory Clark's new book A Farewell to Alms is not the only recent take on the emergence of the industrial revolution. Dartmouth's Meir Kohn has a forthcoming work too. Titled The Origins of Western Economic Success: Commerce, Finance and Government in Pre-Industrial Europe, the book manuscript is available online. As Kohn explains in Chapter 1, his work has a Smithian focus on commerce and markets, seeing the creation and expansion of markets in pre-industrial Europe as the key to economic growth:

The can-opener in the Ricardian theory of economic growth is the market. The market is simply taken for granted: it plays no explicit role in the Ricardian theory. But in the real world, markets cannot be taken for granted. Contrary to the Ricardian view, it is not technological progress but rather the creation and expansion of markets that drives economic growth. Technological progress is a consequence, not a cause. It is a lack of well-functioning markets—not a lack of resources or of technology—that explains the stagnation of the less-developed world and the problems of the transition economies.

The economic success of the West is explained, not by its cultural superiority or by the wisdom of its governments, but by its greater success in developing markets. Of course, the obvious question is, Why do markets develop more successfully in one place rather than in another? Answering that question is a primary goal of this book.

This is a detailed and fascinating work, written in a clear prose. I look forward to its publication and the ensuing debate.

Douglass North's new book

Good news. Dani Rodrik tells us that a new book co-authored by Hoover Institution and Washington University's Douglass North is soon to be published. It goes by the lofty title, A Conceptual Framework for Interpreting Human History

Written with Stanford's Barry Weingast, the book was ths subject of a two-day colloquium hosted by Harvard's Institute for Quantitative Social Science. PDFs of most of the chapters are available to download. Rodrik writes of the forthcoming work:

The book's focus is on two fundamental modes of social organization, which the authors call the Natural State and the Open-Access Order.  The first of these appeared about 10,000 years ago and characterizes not only most of recorded human history, but also most of today's countries. It is a system where a small group of elites--the authors emphasize that the multiplicity of elites is important--reach a modus vivendi whereby they agree to create and distribute rents among themselves.

Only about 25 countries and 15 percent of the world's population live in open-access societies, according to the authors. Open-access orders are based on competition--both in economics and in politics--and use the threat of entry to regulate social, economic, and political relations.

The authors emphasize that much of social science today goes astray because it tries to fit all countries under the same theoretical construct. Instead, they argue, you must understand that the logic of these two systems are fundamentally different. 

Growth: the central questions

Daron Acemoglu's new textbook on economic growth concludes at Chapter 24 with a discussion of 'what we have learned', some answers to what he dubs 'the central questions', and a quick overview of 'some of the many remaining questions' faced by researchers. On page 1068 (sic) he writes:

The central questions are these:
(1) Why did the world economy not experience sustained growth before 1800?
(2) Why did economic takeoff start in 1800 and inWestern Europe?
(3) Why did some societies manage to benefit from the new technologies and organizational forms that emerged starting in 1800, while others steadfastly refused or failed to do so?

I will now offer a narrative that provides some tentative answers to these three questions.

And so he does. It's the best summary of the economic growth literature I have read - but alas, too long to include in this blog. To tempt readers, here is a small sample, from pages 1077f:

Why did some societies manage to benefit from the new technologies while others failed?

The economic takeoff started in Western Europe, but quickly spread to certain other parts of the world. The chief importer of economic institutions and economic growth was the United States. The United States already had participatory political institutions, founded by settler colonists, who had just defeated the British crown to gain their independence and set up a smallholder society. This was a society built by the people who would live in it, and they were particularly keen on creating checks and balances to prevent a strong political or economic elite. This environment turned out to be a perfect conduit for modern economic growth.

The lack of a strong political and economic elite meant that a broad cross-section of society could take part in economic activity, import technologies from Western Europe and then build their own technologies to quickly become the major industrial power in the world (Galenson, 1996, Engerman and Sokoloff, 1997, Keyssar, 2000, Acemoglu, Johnson and Robinson, 2002). In the context of this example, the importance of technology adoption from the world technology frontier is in line with the emphasis in Chapter 18, while the growth-promoting effects of a lack of elite creating entry barriers is consistent with the approach in Section 23.3 in Chapter 23.

Similar processes took place in other West European offshoots, for example, in Canada. Yet in other parts of the world, adoption of new technologies and the process of economic growth came as part of a movement towards defensive modernization. Japan started its economic and political modernization with the Meiji restoration (or perhaps even before) and a central element of this modernization effort was the importation of new technologies.

Fairness and the labour market - or why don't economists learn economic history anymore?

Last week the Boston Fed held a two day conference on the Implications of Behavioral Economics for Economic Policy (hat tip: Greg Mankiw). Amongst a number of interesting papers was one on labour markets by Ernst Fehr (University of Zurich), Lorenz Goette (Boston Fed), and Christian Zehnder (Harvard Business School). It doesn't break any new ground, but it does ably summarise a lot of research and presents it in a palatable way for mainstream grad economists. Here is the abstract for the draft paper, The Behavioral Economics of the Labor Market: Central Findings and their Policy Implications (PDF):

Many labor markets are characterized by long-term employment relations and incomplete labor contracts. The employees’ effort, in particular, is typically not contractible so that effort needs to be enforced endogenously in repeated interactions. Theory and evidence shows that under these conditions fairness concerns play an important role in affecting effort choices and wage setting, rendering wage levels and wages’ responsiveness to shocks rather rigid. In addition, loss aversion and money illusion interact with fairness concerns to generate downwards nominal wage rigidity and - in case of strong unions - downwards real wage rigidity.

Thus, key structural features of labor markets such and long-term relations and contractual incompleteness and the psychological forces of fairness concerns, loss aversion and
money illusion lead to substantial departures from the predictions of the standard competitive model, rendering this model problematic for policy prescriptions. We illustrate this claim for two policy domains - monetary policy and minimum wage legislation.

Or to put it more simply, workers are not simply commodities. Most jobs are based around long-term employment relations and incomplete contracts, where effort is difficult to monitor and enforce. Hence issues such as trust, fairness and loyalty matter. As a result, labour markets seldom behave the way a competitive spot market would.

Of course this isn't rocket science, nor is it new. Labour economists such as John Dunlop and John Commons made much the same points over half a century ago. They didn't dress it up in fancy behavioural economics language, but their arguments were similar. While it is good to see the economic mainstream is at last catching up with the institutionalists (just as they are rediscovering other fields, such as pyschology), I find it astonishing that the paper makes no reference to Dunlop or Commons - or even to the more recent May 1989 Monthly Labor Review article by Jack Barbash, John R. Commons: Pioneer of Labor Economics (PDF).

I can understand such ignorance from Goette and Zehnder, who both have recently acquired PhDs. But Fehr completed his Doctorate in Vienna back in 1986. Don't the Austrians study labour economics or the history of economics? Or is this simply another case of the curse of JSTOR - if it's not online, it doesn't exist.

There is plenty I like about economics, but the appalling ignorance of most recent gradautes about both economic history and the history of economics is hardly a strength. I heartily endorse Arnold Kling's recent call to reform PhD programmes:

I would be inclined to require a course in economic history. There is much to be learned from trying to understand events like the Industrial Revolution or the Great Depression. There is much to be learned from more detailed analysis of lesser issues, as well.

How should one rank economists?

I've never found the phrase 'one size fits all' useful for T-shirts. Maybe it is also wrong when seeking to rank academic economists too.

Much heated debate has ensued from the 2001 working paper Rankings of Academic Journals and Institutions in Economics  by Pantelis Kalaitzidakis and colleagues. The 'KMS' paper, later published in the December 2003 issue of the Journal of the European Aconomic Association, proposed a world-wide ranking of economic research institutions based on a computation of the current impact factors ranking of economic journals. Harvard, Chicago and MIT were ranked first, second and third respectively. But US instutions accounted for less than half (44%), compared with one-third from Europe and a fair smattering of Asian institutions.

But was the methodology the right one? A new paper by Magnus Henrekson and Daniel Waldenström argues it wasn't. In Should Research Performance be Measured Unidimensionally? Evidence from Rankings of Academic Economists, they applied seven established measures of research performance for all professors of economics in Sweden, exploring how different measures influenced the skewness and ranking of individual performances. The Kalaitzidakis et al method did not perform well:

We find large differences across all measures, but some deviate more than others. In particular, the journal ranking of Kalaitzidakis et al. 2003 (KMS), which was endorsed by the European Economic Association and has been extremely influential especially in Europe, appears to be an outlier among the available measures. Its distribution of performances is the most skewed, and its ranking of scholars corresponds the least with the rankings of the other measures.

Hence, relying on one single metric of research quality, especially one that is as extreme as KMS, is associated with a great risk given that researchers tend to adjust behavior in order to maximize the assessed relative and absolute value of their work.

The authors conclude on a cautious but sensible note:

Our results do not imply that we should refrain from efforts to rank individual researchers and ban all attempts to quantify the value of research output. But our results make clear that there is no single unequivocal catch-all measure that can be used.

All seven measures provide relevant information about the performance of individual researchers, and no doubt there are additional aspects that may be important that are largely overlooked by all of these measures. For instance, only a small subset of all journals are included in the KMS, IF and KY measures, and most measures either ignore or give little weight to impact outside economics or on policymaking. Hence, quantitative measures cannot fully substitute for careful reading and individual assessment of the works of individual researchers.

Identity and economics: what are we missing?

Is identity the missing motivation of economics? UC Berkeley's George Akerlof and University of Maryland's Rachel Kranton certainly think so. In a recent London lecture at the LSE, Akerlof explains how this interest arose:

In the spring of 1996 Rachel wrote me a letter which said that my previous paper, on Social Distance, in Econometrica, had missed the concept of identity. She also said that concerns regarding identity were a serious omission from economic theory.

Initially I was not pleased to receive this letter, which said that my previous paper was all wrong. I also thought that Rachel was in error. I thought that identity was just an aspect of people’s tastes. As a result, I also thought that standard utility theory already took full account of it. But after we talked it over for a great deal of time we discovered that identity really does have a meaning. We decided also that it is a major factor missing from current economics.

Rachel and I have now written four lengthy papers on this subject, and now we are trying to summarize it in a book. ...this lecture is a summary of where we have gotten to date on that book.

Of course, the fourth of these papers was Akerlof's January 2007 AEA Presidential Address, which has already attracted some econoblog commentary. But in his recent Stamp lecture Akerlof provides the wider argument, spanning all four papers. Both the Powerpoint (PDF) and transcript (PDF) from Akerlof's Stamp Lecture on 'Economics and Identity', delivered at the London School of Economics on April 25, are now available. This body of work is certainly starting to influence economic debates. Their first article, published in the QJE in 2000, has already been cited by over 100 economic papers.

Many of us would agree that the neoclassical model of human behaviour is incomplete. To what extent does the Akerlof-Kranton thesis help complete the picture? I'm not yet sure. But for those looking for a little economic theory to stimulate their neurons on a holiday Monday, reading the four papers below (which will form the basis of their forthcoming book) may be time well spent. I'm certainly taking them to read on my summer break.

Further reading:
* Economics and Identity (PDF), Quarterly Journal of Economics CXV(3), August 2000, pp. 715-733.
* Identity and Schooling: Some Lessons for the Economics of Education (PDF), Journal of Economic Literature, 40(4), December 2002, pp.1167-1201.
* Identity and the Economics of Organizations (PDF), Journal of Economic Perspectives, Fall/Winter 2004; a longer version with the modelling is available here (PDF).
* The Missing Motivation in Macroeconomics (PDF), AEA Presidential Address, January 2007