Was League of Nations better than IMF?

Rogoff and Reinhart's forthcoming book is a real gem-This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises. Some excerpts related to data issues on public debt below;

Until very recently, domestic debt was not on the radar screen of the multilateral institutions. Neither the International Monetary Fund nor the World Bank systematically collected such data. In fact, cross-country historical time series on domestically issued debt are also absent from private data collections. Reinhart, Rogoff and Savastano (2003), with extensive help from IMF staff and country sources, put together an annual series going back to 1990 for a limited number of emerging market countries.

The topic of domestic debt is so important, and the implications for existing empirical studies on inflation and external default are so profound, that we have broken out our data analysis into an independent companion piece (Reinhart and Rogoff, 2008). Here, we focus on a few major points. The first is that contrary to much contemporary opinion, domestic debt constituted an important part of government debt in most countries, including emerging markets, over most of their existence…

One would think that with at least 250 sovereign external default episodes during 1800– 2007 and at least 70 cases of default on domestic public debt (not to mention the significant economic disruption associated with these events), it would be relatively straightforward to find a comprehensive long time series on public sector debt. Yet, this is not the case—far from it.

Government debt is among the most elusive of economic time series. For the advanced economies, the most comprehensive data comes from the OECD, which provides time series on general government debt since 1980. However, this data has several important limitations: it only includes a handful of emerging markets; for many advanced economies (France, Finland, Greece, and the U.K., to name a few), the data actually begins much later in the 1990s, which cannot be considered as much of a time series; and only total debt is reported, with no particulars provided of the composition of debt (domestic versus foreign) or its maturity (long-term versus short-term). To state that the IMF’s well-known World Economic Outlook (WEO) database extends to public debt requires a stretch of the imagination. Data is only provided for the G-7 from 1980 onward (out of 180 countries covered in the WEO).

The most comprehensive data on public debt comes from the World Bank’s Global Development Finance (GFD, known previously as the World Debt Tables). It is an improvement on the other databases in that it begins (for most countries) in 1970 and it provides extensive detail on the particulars of external debt. Yet, GFD also has serious limitations. There are no advanced economies included in the database (nor newly-industrialized countries (such as Israel, Korea, or Singapore, for that matter) to facilitate comparisons. Unlike data from the IMF and the World Bank for exchange rates, prices, government finances, etc., there is no data prior to 1970. Last, but certainly not least, these data only cover external debt. In a few countries, such as Panama or Côte
D’Ivoire, external debt is a sufficient statistic on government liabilities, since domestic public debt levels are relatively trivial. As Reinhart and Rogoff (2008) illustrate, however, for most countries domestic debt accounts for an important share of total government debt. The all-country average oscillates between 40 to 80 percent during 1900–2006.

In search of the elusive data on total public debt, we examined the archives of the global institutions’ predecessor, the League of Nations, and found that this institution collected information on, among other things, public domestic and external debt in its Statistical Yearbook (1926–1944). While, neither the IMF nor the World Bank continued this practice after the war, the newly-formed United Nations (UN) inherited the data collected by the League of Nations and in 1948 its Department of Economic Affairs, published a special volume on public debt, spanning 1914–1946. From that time onwards the UN continued to collect and publish the domestic and external debt data in the same format as their pre-war predecessor on an annual basis in their Statistical Yearbooks. As former colonies became independent nations, the database expanded accordingly. This practice continued until 1983, at which time the domestic and external public debt series were discontinued altogether. In total, these sources yield time series that span 1914– 1983 for the most complete cases. It covers advanced and developing economies. For the most part, it also disaggregated domestic debt into its long-term and short-term components. To the best of our knowledge, this data is not available electronically in any database, hence it required going to the original publications. This data provides the starting point for our public debt series, which have been (where possible) extended to the period prior to 1914 and post-1983.

For data prior to 1914 (including several countries that were then colonies), we consulted numerous sources, both country-specific statistical and government agencies and individual scholars. Data Appendix II provides details or the sources by country and time period. When no public debt data is available prior to 1914, we proceed to approximate the foreign debt stock by reconstructing debt from individual international debt issues. This debenture data also provide a proximate measure of gross international capital inflows. Much of the data come from scholars including Lindert and Morton, Marichal, Miller, and Wynne, among others. From these data, we construct a foreign debt series (but, not total debt). This exercise allows us to examine standard debt ratios for default episodes for several newly-independent nations in Latin America as well as Greece and important defaults such as that of China in 1921, and Egypt and Turkey in the 1860s– 1870s. These data are most useful for filling holes in the external debt time series, when countries first tap international capital markets. Their usefulness (as measures of debt) is acutely affected by repeated defaults, write-offs, and debt restructurings that introduce disconnects between the amounts of debt issued and the subsequent debt stock.

For some countries (or colonies in the earlier period) where we have only relatively recent data for total public debt, but have reliable data going much further back on central government revenues and expenditures, we calculate and cumulate fiscal deficits to provide a rough approximation to the debt stock.31
To update the data for post-1983, we mostly rely on GFD for external debt. Two very valuable recent studies facilitate the update: Jeanne and Guscina (2006) compile detailed date on the composition of domestic and external debt for 19 important emerging markets for 1980–2005; Cowan, Levy-Yeyati, Panizza, Sturzenegger (2006) perform a similar exercise for all the developing countries of the Western hemisphere for 1980–2004. Last, but certainly not least, are the official government sources themselves, which are increasingly forthcoming in providing domestic debt data, often under the IMF’s 1996 initiative, Special Data Dissemination Standard.

It is all the more interesting since both Rogoff and Reinhart have worked at the IMF's Research Department. Let us hope they put their dataset online.

One of the takeaways from the paper; it's the same old story. Look at what's happening in Argentina right now - a defacto partial default on domestic domestic debt by playing around with inflation numbers.

Five-year credit default swaps based on Argentina's debt increased 13 basis points to 576 basis points, the highest since March 17, according to Bloomberg data. That means it costs $576,000 to protect $10 million of the country's debt from default.

Related;
Lessons From Prior Banking Crises

The great emerging market inflation of 2007 and 2008

IMF asks Argentina to clarify inflation figures

Argentina 2008: Is the (already High) Inflation Rate Accelerating?

So far what the government is doing is clearly not going to control inflation. It does not anchor inflation expectation neither with its monetary policy, nor with its exchange rate policy or its fiscal policy. On the contrary, it looks more likely to make it get worse—inflation seems to be accelerating. The median voter seems to be happy with this policy, though. But it’s the policy maker’s role to appropriately consider and internalize the future effects of the current policies and adjust its present behavior accordingly—something not seen yet with the current administration.

It could be much better if the government would focus on reducing government expenditures (not just reduce the rate of growth to be lower than the growth rate of tax revenues—which are just casually high do the unusually high commodities’ prices) to achieve not only a higher and stronger primary fiscal surplus but also to enhance its sustainability. It should also let all relative prices be really free to adjust to equilibrate demand and supply (i.e. eliminate all the price controls and any type of capital controls) and let the exchange rate float. If relative prices are let to adjust, as well as the exchange rate, they will stop the growth rate of prices (i.e. inflation) and contribute, together with a non spurious fiscal surplus to contain inflation expectations—and thus wage negotiation adjustment (in quantity and frequency.) Core inflation would then be tackled with an inflation targeting regime, letting an independent central bank focus on its only goal: to preserve the value of the (domestic) currency. As of now, it will probably be better to raise interest rates to control the inflation in the short run while the rest of the reforms are put in place (including property rights that we could believe in—i.e. proper long-term institutions.). The question is, will this government be interested in implementing these and thus pursuing long-term and sustainable growth? I truly hope it. Unfortunately, I still have my doubts

Credit derivatives provide useful early warnings for the macroeconomy

Is Argentina turning the corner?- Dani Rodrik

Not at all clear, according to Guillermo Calvo. I am sitting at a colloqium on Argentina organized by my colleague Federico Sturzenegger. Argentina has recovered nicely from its crash and has been growing at Asian rates since. Calvo thinks this is just a process of recovery: the country is only making up for lost time. But could this time be different? What is encouraging is that this recovery is export and investment- led, and investment focuses on tradables instead of nontradables. The government has had an active policy of keeping the currency undervalued. So an alternative, more optimistic view would be that Argentina is turning itself into an Asian country. But there is a long way to go...

Don's Letters

Prof. Don Boudreaux's latest letter;

Among Robert Lighthizer's objections to principled free-traders is their opposition to protectionism "no matter how many jobs are lost" ("Grand Old Protectionists," March 6).

If Mr. Lighthizer is referring to overall employment, his facts are wrong. Free trade does not reduce net employment. But perhaps he's talking about specific jobs, such as those lost in Carolina textile mills when Americans buy more textiles from abroad. The argument seems to be that practical statecraft often justifies protecting such jobs even if doing so prevents the creation of other jobs in their place. If this is Mr. Lighthizer's point, he's too modest when calling for trade policies that allow for "practicality, nuance or flexibility." Because technology destroys far more jobs than does trade, Mr. Lighthizer should endorse also a "pragmatic" approach to innovation - empowering government with the flexibly and nuance to block firms' introduction of efficiency-enhancing production techniques that displace workers. Surely, according to Mr. Lighthizer's practical logic, we must reject the "dogma" that tolerates "unbridled" improvements in firms' operating efficiencies.

As you noticed I created a new category for the Prof. Don's letters.

Are economists subject to diminishing returns?

Your economic history exam for the weekend.

Here are some questions to test your knowledge of the useful history of economic thought. Some of them are only slightly impossible. While answering these questions, keep the following simple points in mind:

-If you don.t know the answers, just make them up, but only if they are outrageous and difficult to check.
-It is alright to cheat flagrantly, but do not on any account repeat yourself. If you are caught doing either of these things, become aggressive and threaten legal action, while claiming that no one told you that stupidity is stupid.
-Your answers may be allusive, but certainly not affected (well, only slightly).
-Above all, remember at all times the economist’s motto: don’t allow facts to get in the way of a good story.

Attempt as many questions as possible until you fall asleep, indicating the time and place.

1. Was Say closer to Malthus than Ricardo was to Marshall? You may prevaricate noisily, but remain seated at all times.

2. Was Adam Smith as important as is generally thought? Feel no obligation to stick to the subject.

3. Could William Petty have counted on the support of AdamSmith? And if not, how often?

4. How many Irish economists does it take to change Galbraith’s mind? You are allowed to scoff knowingly.

5. Who invented Pareto optimality? If not, who did? And was it the best he could come up with?

6. Can economic laws be effectively policed? If so, what is the opportunity cost? (Carefully avoid mention of Robert Peel).

7. Why didn’t Ricardo invent Political Arithmetic? Was he constructing one of his many numerical examples at the time?

8. Are there any economic subjects you regard as too boring to mention? Yawn loudly, but politely, as you think of them.

9. Is it true that Mirabeau was a handsome but narcissistic Frenchman who kept looking at his own reflection? How does this reflect on the Physiocrats?

10. Discuss vaguely, paying special attention to rumours to the contrary, the suggestion that economists don’t know any better.

11. Cantillon was baked by his cook after an argument. What has this got to do with Economics?

12. Deplore the failure of effective demand. You may place an order for more paper at this point in the exam.

13. Stigmatise Malthus’s theory of population growth. How did he conceive it? And who put him up to it?

14.Why did J.S. Mill find so many questions unsettling? Did he neglect to revise before his final exams, or did he just have a nervous disposition?

15. Economics is full of stylised facts without theories and theories without facts. Is this a fact or a theory? If so, how would a linguistic philosopher answer this question? (You are only allowed to use .it ‘all depends on what you mean’ fifty three times).

16. Who was right, Malthus or Ricardo? If so, does it matter? And what if it did?

17. Expatiate briefly on the idea that the utility of the calculus to utilitarians is decreasing at the margin. What does it all add up to? And what is the greatest number? (Does it exceed xy?).

18. Can apples give rise to theories that bear fruit? Did Edgeworth say .’cor blimey’. when he stumbled across the core of an economy? And did it drive Marshall nuts?

19. Is Ricardo.s theory of rent any use to landlords? Restrict your answer to illegible scribble in the right hand margin of the exam script.

20. Be mercifully brief about the labour theory of value. Do adherents invariably measure prices properly?

21. Comment abrasively on the suggestion that you don.t know what you are talking about in your answers to questions 3(b) and 7(c).

22. Complain loudly that economics was ever invented. What should take its place?

23. If all economists were placed end-to-end, would it be an unstable equilibrium? Would there be multiple equilibria?

24. Why are Smith and Marshall generally referred to as Adam Smith and Alfred Marshall, while Jevons and Edgeworth are know merely by their last names? Only deep philosophical and politically correct answers are permitted to this question.

25. What does it mean in the end to say that ends can’t be distinguished from means, and would Robbins agree or even care?

26. Did Mill and Cairnes form a non-competing group, and if so, against whom?

27. Is it realistic to assume that economists don't care about the realism of assumptions? And is this an example?

28. Comment elliptically on the suggestion that if Keynes was a post-Keynesian then Ricardo was a Sraffian and Smith was a general equilibrium theorist, and pigs really can fly.

29. Are economists subject to diminishing returns? Be careful, as this might be a trick question.

Thanks to Gabriel

Empirical Tests of the Ricardian trade model

• G. D. A. MacDougall, "British and American Exports: A Study Suggested by the Theory of Comparative Costs," Economic Journal, December 1951 (Part I: pp. 697–724) and September 1952 (Part II: pp. 487–521). Reprinted in R. E. Caves and H. G. Johnson, Readings in International Economics (Homewood, Ill.: Irwin, 1968), pp. 553–578.

• R. M. Stern, "British and American Productivity and Comparative Costs in International Trade," Oxford Economic Papers, October 1962, pp. 275–296.

• B. Balassa, "An Empirical Demonstration of Classical Comparative Cost Theory," Review of Economics and Statistics, August 1963, pp. 231– 238.

• S. S. Golub and C. T. Hsieh, "The Classical Ricardian Theory of Comparative Advantage Revisited," Review of International Economics, May 2000.

• Sources of International Comparative Advantage

Source: Salvatore, International Economics

Adam Smith Quote for the Day

Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.... When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons....

[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love....

[I]t is this same trucking disposition which originally gives occasion to the division of labour. In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armourer. Another excels in making the frames and covers of their little huts or movable houses. He is accustomed to be of use in this way to his neighbours, who reward him in the same manner with cattle and with venison, till at last he finds it his interest to dedicate himself entirely to this employment, and to become a sort of house-carpenter.... [T]he certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.

The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men... is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education... and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance. But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted. All must have had the same duties to perform, and the same work to do, and there could have been no such difference of employment as could alone give occasion to any great difference of talents.... By nature a philosopher is not in genius and disposition half so different from a street porter, as a mastiff is from a greyhound, or a greyhound from a spaniel, or this last from a shepherd's dog....

Among men... the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men's talents he has occasion for...

via Brad DeLong

On the Wealth of Nations

P.J. O’Rourke talk at Cato

Hoisted from comments- Saving Tim Harford!

Gavin Kennedy writes;

The problem with Tim Hardford’s account of the division of labour is this sentence:
“Adam Smith never actually visited a pin factory. While sitting at home in Kirkcaldy and penning the most famous passage in economics, he was inspired by an entry in an encyclopedia.”

Yet Adam Smith in Wealth Of Nations makes the specific statement that ‘I have seen a small manufactory of this kind [the process described as the ‘18 operations’ to produce pins] where ten men only were employed, and where some of them consequently performed two or three distinct operations’.

I have asked Tim Harford for the evidence for his assertion that he never visited a pin factory. He most likely took the French 18 operations from Diderot’s Encyclopedia (1755), which was also based on Chamber’s Cyclopaedia (1741).

But if Adam Smith states he visited a ‘small manufactory’ he almost certainly did. He most probably visited one of which there were several near him in Kirkcaldy (1766-73), though at the time when he first made notes on the division of labour in his ‘Early Draf’ (1762) he was teaching in Glasgow and there were many manufactories (small forges, etc.,) nearby.

I await Tim Harford’s explanation for his assertion

Harford refers to David Warsh's book, chapter 3 in the references. It is actually chapter 4.

“These first three chapters and the plan of the book provided the whole kernel of what we would call today a theory of growth. Much stress has been laid over the years on the significance of the description of the pin factory. In fact Smith never visited one. Apparently he based his account on an article in an encyclopedia. Never mind that Smith was widely traveled and sharply observant everywhere he went. His failure to expend much shoe-leather in this case has occasionally been cited to discredit him. Such cavils entirely miss the point.”
-Knowledge and Wealth of Nations, p. 40 ( you can go to Amazon’s search inside the book feature)

No Tim Harford didn't lie, he was just quoting David Warsh.

Listen to classics

Assorted audio;

The Art of War by Sun Tzu

The Awful German Language by Mark Twain

What Men Live By and Other Tales by Leo Tolstoy

The Philosophy of Style by Herbert Spencer (1820-1903)

Anthem by Ayn Rand

Common Sense by Thomas Paine

On Liberty by John Stuart Mill

Essays on Some Unsettled Questions of Political Economy
by Mill, John Stuart

The Communist Manifesto
by Karl Marx and Friedrich Engels

Principles of Economics, Book 1: Preliminary Survey
by Alfred Marshall

Principles of Economics, Book 2: Some Fundamental Notions
by Alfred Marshall

The Return of Sherlock Holmes
by Sir Arthur Conan Doyle

The Memoirs of Sherlock Holmes
by Sir Arthur Conan Doyle

The Adventures of Sherlock Holmes
by Doyle, Sir Arthur Conan

Democracy in America Vol. I
by Alexis de Tocqueville
translated by Henry Reeve

Captain MacWhirr’s dilemma

Latest John Kay column- No one remembers a cautious captain of industry;

I have been reading Joseph Conrad’s Typhoon, the least sentimental of Christmas stories. It describes how Captain MacWhirr and the crew of the Nan-Shan spent the day saving the ship from a storm in the South China Sea. The typhoon broke open the camphor chests belonging to the 200 Chinese labourers on board, leaving a pile of anonymous silver dollars.

The resulting problem has become known as Captain MacWhirr’s dilemma. How can you distribute a prize among a group when only the individuals concerned know the size of their contributions and must be expected to exaggerate them? Capt MacWhirr concluded that the only possible solution was to divide the money equally.

Game theorists have constructed a solution to Capt MacWhirr’s dilemma that gives an incentive to everyone on board to tell the truth. If you want the answer, I refer you to the Journal of Political Economy for 1981*. But the economists’ solution, arithmetically ingenious, is impracticable. Capt MacWhirr “got out of it very well for such a stupid man”, as his second officer observed.

The story of Capt MacWhirr is often interpreted as an account of how an unimaginative but determined individual can rise to the occasion. But Capt MacWhirr faced a second and even more common dilemma in which his intellectual limitations served him less well. He saw the signs of the oncoming storm but, having consulted the manuals of seamanship, ignored their recommendations. “Suppose”, he says, “I went swinging off my course and came in two days late, and they asked me ‘where have you been?’ ‘Went round to dodge the bad weather,’ I would say. ‘It must have been dam’ bad, they would say. ‘Don’t know,’ I would have to say, ‘I’ve dodged clear of it.’”

If Capt MacWhirr had followed the textbooks, he would have been known only as the skipper who failed to bring his ship into port on time. If Margaret Thatcher had acted to deter Argentina from invading the Falklands, rather than ordering a taskforce to remove the occupying forces after they had landed, she would probably have been remembered as an unsuccessful one-term prime minister....

Capt MacWhirr’s second dilemma explains the paradox illustrated by Jim Collins in Good to Great: more successful leaders attracted fewer column inches. Al Dunlap of Scott Paper declared his admiration for Rambo: “Here’s a guy who has zero chance of success and always wins.” But Mr Dunlap’s company was acquired by Kimberly-Clark, whose chief executive for 20 years, Darwin Smith, avoided the storm by taking the company out of the competitive coated paper businesses and into high-value-added consumer products.

Related;
A Superior Solution to Captain MacWhirr's Problem: An Illustration of Information Problems and Entitlement Structures by Gene E. Mumy

A New and Superior Process for Making Social Choices
T. Nicolaus Tideman; Gordon Tullock

Audio of book, Typhoon

Another Friedman Classic

Via Cafe Hayek

Solow reviews A Farewell to Alms

'Survival of the Richest'? By Robert M. Solow

The last section of the book, called (after Pomeranz) "The Great Divergence," starts off fairly well, but then peters out. During the long Malthusian plateau, average living standards differed somewhat from one part of the world to another, but the range of variation was not terribly wide. In each place, living standards were governed by the level of the subsistence wage, and so in large part by common human physiology. After the Industrial Revolution, however, some parts of the world took off into an era of sustained economic growth that is still going on and may occasionally have accelerated, while other parts of the world have stagnated or even declined, with living standards still close to preindustrial levels.

In 1800, Western Europe, North America, and Oceania—including the Pacific islands of Polynesia, Micronesia, and Melanesia—had 12 percent of the world's population and 27 percent of the world's income. In 2000 they still had 12 percent of the population —relatively more of it in North America—but 45 percent of the income. To take only the extreme contrast, Africa went from 7 percent of the population and 9 percent of the income to 13 percent of the population and 4 percent of the income. That is surely a great divergence. It is in some ways as hard to explain as the Industrial Revolution itself. (The story in Asia is more complicated, both temporally and geographically, but the details are not relevant here.)

Clark shows rather convincingly that the main source of this shocking gap is a large difference in productive efficiency, or what economists call "total factor productivity." That is jargon for the quantity of output that the economy is able to generate per unit of all input, including labor, capital, and natural resources. He goes on to make a reasonable, if sketchy, case that the primary culprit is not lack of access to technology or capital, both of which are available to poor countries that can use them effectively today, and have been available for a long time in a few places, especially imperial dependencies.

Nor, he claims, is it mainly a lack of manpower with the necessary skills. He also absolves management failure, on the ground that textile factories in colonial India with British managers did no better than those with Indian managers. (This is thin evidence, but perhaps other examples would show the same thing.) In the end, Clark puts the finger on the workers—not their skills or native ability but their attitudes and aptitudes, their willingness to show up on time, work hard with little supervision, exercise local ingenuity, and so on.

In this context, too, he dismisses the prevailing view that dysfunctional or corrupt economic, social, and political institutions explain the divergence in efficiency. He reasons: if a factory in a poor country produces less than an essentially identical factory in a rich country, how can that be attributed to institutional failure? Here, too, he may be a little hasty. Cronyism at the top, failure to enforce laws, promotion by favoritism, inequitable taxation, capricious hiring and firing—all those practices could easily breed disaffection or even sabotage, and thus inefficient production. Maybe.

Clark's pessimism about closing the gap between the successful and less successful economies may derive from the belief that nothing much can change unless and until the mercantile and industrial virtues seep down into a large part of the population, as he thinks they did in preindustrial England. That could be a long wait. If that is his basic belief, it would seem to be roundly contradicted by the extraordinary sustained growth of China and, a bit more recently, India. Embarrassingly for Clark, both of those success stories seem to have been set off by institutional changes, in particular moves away from centralized control and toward an open-market economy.

In an extensive industry-by-industry comparison of productive performance in Brazil, India, Korea, the US, and some European countries, the McKinsey Global Institute arrived at a conclusion somewhat different from Clark's. It found that large disadvantages in efficiency are traceable more often to failures of internal organization in the leading firms than to deficiencies of technology, capital, or workers' skills. This is not dramatically at odds with Clark's view, but puts much more emphasis on lack of sharp incentives for management than on the attitudes of workers. It is for that reason more optimistic about the prospects for change.

Toward the end of his book Clark spends a few paragraphs in stereotypical complaint about how modern economic theory has lost touch with any reality; its endless refinements are useless for dealing with the basic problems of economic growth that engage him and the world. This amounts to a severe bite at the hand that feeds him, since much of this sometimes fascinating and thought-provoking—and sometimes irritating—book is based quite precisely on applying the insights and methods of modern economic theory.

Related;
Time Management Tips from Bob Solow

Random Working Paper

American Economic Growth and the Voyage of Columbus
R. Preston McAfee, The American Economic Review, Vol. 73, No. 4. (Sep., 1983), pp. 735-740.

Paper for the Day

"but you must bind me hard and fast, so that I cannot stir from the spot where you will stand me ... and if I beg you to release me, you must tighten and add to my bonds." -The Odyssey

Myopia and Inconsistency in Dynamic Utility Maximization
by R. H. Strotz

Be careful with that growth regressions

Another interesting paper;
Jayant Ray and Francisco L. Rivera-Batiz, “An Analysis of Sample Selection Bias in Cross-Country Growth Regressions.”

Sample sizes in cross-country growth regressions vary greatly, depending on data availability. But if the selected samples are not representative of the underlying population of nations in the world, ordinary least squares coefficients (OLS) may be biased. This paper re-examines the determinants of economic growth in cross-sectional samples of countries utilizing econometric techniques that take into account the selective nature of the samples. The regression results of three major contributions to the empirical growth literature by Mankiw-Romer-Weil (1992), Barro (1991) and Mauro (1995), are considered and re-estimated using a bivariate selectivity model. Our analysis suggests that sample selection bias could significantly change the results of empirical growth analysis, depending on the specific sample utilized. In the case of the Mankiw- Romer-Weil paper, the value and statistical significance of some of the estimated coefficients change drastically when adjusted for sample selectivity. But the results obtained by Barro and Mauro are robust to sample selection bias...

In the Mankiw-Romer-Weil (1997) paper, we found that using their 75-country sample leads to the exclusion of a number of low-income and middle-income countries that results in a substantial sample selection bias. The value and statistical significance of the estimated growth equation coefficients reported by Mankiw-Romer-Weil for this sample of countries change drastically when adjusted for sample selectivity. But in re-examining these results using Mankiw-Romer-Weil’s 98-country sample, we found much smaller differences in estimated coefficients. The impact of sample selection bias on the Mankiw-Romer-Weil results is thus dependent on the choice of sample.

Related;
Growth Regressions and Policy Advising

I have long been skeptical about how much one can learn from cross-country growth regressions. In the early 1990s, I wrote one paper in that literature, coauthored with David Romer and David Weil, and to my surprise, it turned out to be my most cited paper by a very large margin. In a subsequent paper, The Growth of Nations, I tried to spell out the reasons for my skepticism. I emphasized three problems, which I called the simultaneity problem (it is hard to disentangle cause and effect), the multicollinearity problem (most of the potential determinants of growth are correlated with each other and imperfectly measured, making it hard to figure out which is the true determinant), and the degrees-of-freedom problem (there are more plausible hypotheses than data points). To some extent, the subsequent literature addresses some of my concerns. For example, there is more attention now to trying to find exogenous differences across countries, but the task is inherently difficult, so one should not expect to find definitive answers about the causes of growth from this literature.

Regressions: Why Are Economists Obessessed with Them?

Why are some countries richer than others? A skeptical view of mankiw-romer-weil's test of the neoclassical growth model

Memo to Self

Read,
The General Theory of Second Best, by R. G. Lipsey; Kelvin Lancaster, The Review of Economic Studies, Vol. 24, No. 1. (1956 - 1957), pp. 11-32

Educational Quality and Economic Growth

A great podcast-Hanushek on Educational Quality and Economic Growth

Related;
The Role of Education Quality for Economic Growth
ERIC A. HANUSHEK and LUDGER WOESSMANN

From the mid-1960s to today, international agencies have conducted many international tests of students’ performance in cognitive skills such as mathematics and science (see the appendix to this section for details). Employing a re-scaling method that makes performance at different international tests comparable (again, see appendix), we can use performance on these standardized tests as a proxy for the quality of education. Figure 4.1 presents average student performance on twelve testing occasions37 on the transformed scale which maps performance on each test to the scale of the recent PISA international test. This scale has a mean of 500 and a standard deviation of 100 among the OECD countries in PISA.38 As is obvious from the figure, the developing countries that ever participated in one of the tests perform dramatically lower than any country in the group of OECD countries. The variation in the quality of education that exists among OECD countries is already substantial, but the magnitude of the difference to developing countries in the average amount of learning that has taken place after a given number of years of schooling dwarfs any within-OECD difference.

Over the past ten years, empirical growth research demonstrates that consideration of the quality of education, measured by the cognitive skills learned, alters the assessment of the role of education in the process of economic development dramatically. When using the data from the international student achievement tests through 1991 to build a measure of educational quality, Hanushek and Kimko (2000) – first released as Hanushek and Kim (1995) – find a statistically and economically significant positive effect of the quality of education on economic growth in 1960-1990 that dwarfs the association between quantity of education and growth. Thus, even more than in the case of education and individual earnings, ignoring quality differences very significantly misses the true importance of education for economic growth. Their estimates suggest that one country-level standard deviation (equivalent to 47 test-score points in PISA 2000 mathematics, on whose scale Figure 4.1 is based) higher test performance would yield around one percentage point higher annual growth rates.

Why education is productive -- a parable of men and beasts

Mixed Signals: Why Becker, Cowen, and Kling Should Reconsider the Signaling Model of Education

Is we learning?

Ask the economists: Education - Learn more, earn more?

Quote of the Day- Adam Smith in 21st Century

By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England. The poorest creditable person of either sex would be ashamed to appear in public without them. In Scotland, custom has rendered them a necessary of life to the lowest order of men; but not to the same order of women, who may, without any discredit, walk about barefooted. In France they are necessaries neither to men nor to women, the lowest rank of both sexes appearing there publicly, without any discredit, sometimes in wooden shoes, and sometimes barefooted. Under necessaries, therefore, I comprehend not only those things which nature, but those things which the established rules of decency have rendered necessary to the lowest rank of people. All other things I call luxuries, without meaning by this appellation to throw the smallest degree of reproach upon the temperate use of them. Beer and ale, for example, in Great Britain, and wine, even in the wine countries, I call luxuries. A man of any rank may, without any reproach, abstain totally from tasting such liquors. Nature does not render them necessary for the support of life, and custom no-where renders it indecent to live without them.

-Adam Smith,

Another economist who love to fish

Peter Thompson

Recommended paper;
How Much Did the Liberty Shipbuilders Learn? New Evidence for an Old Case Study
Here's the data

Read also Lucas', 'Making a Miracle'

The Road Less Travelled on Economic Growth

A very good column by David Warsh;

Last week a group of Chicagoans met in Clemson, S.C., to mark the 20th anniversary of the appearance of the "Mechanics" paper. Lucas was there, as were his fellow University of Chicago professors Nancy Stokey, Kevin M. Murphy and Boyan Jovanovic; Isaac Erlich of the State University of New York at Buffalo; and Princeton's Esteban Rossi-Hansberg. Chicago's Gary Becker was called away. There was no preening at the conference, no speeches, no sociological claptrap, no press: just seven papers about aspects of the topic that Lucas had raised twenty years before.

(So much on the down-low was this Fourth Annual Development Conference at Clemson University kept that I learned of it only by accident: David Weil, of Brown University, was the star presence at the first, Acemoglu and Stanley Engerman, of the University of Rochester at the second; Oded Galor and John McDermott, both of Brown, and Joel Mokyr, of Northwestern University, at the third. Clemson chair Raymond (Skip) Sauer created the series.)

The meeting was organized by Robert Tamura, of Clemson, and fittingly so, for it was Tamura, more than any other, who fifteen years ago persuaded Lucas that the so-called demographic transition lay at the heart of the mystery of economic growth -- Tamura had been coauthor, with Murphy and Becker, of a model presented in 1988 at an influential meeting in Buffalo, at the height of the excitement, in which household decisions about the number of children to bear and the kinds of job skills to accumulate besides child-rearing were seen as inseparable from one another, and central to the advent of sustained income growth. (The so-called "quantity/quality" decision was originally described by Becker in 1960: you can have a lot of kids and let the ones who survive raise each other, or have a few and raise them yourself; as the number of children declines, the care devoted to them increases.) Today Tamura is a member of an up-and-coming Clemson department that has a strong Chicago flavor.

For a time the Becker-Murphy-Tamura fertility paper was overshadowed by Romer's "Endogenous Technological Change," which appeared in the same 1990 special issue of the Journal of Political Economy (edited by the same Isaac Erlich who edits the new start-up Journal of Human Capital). But gradually the fertility paper ("Human Capital, Fertility and Economic Growth") gained ground, especially after Lucas took up the issue in 1997, in his Simon Kuznets Lecture at Yale University. "The Industrial Revolution: Past and Future" serves as the capstone essay in Lucas' Lectures on Economic Growth. "I always thought that the Becker-Murphy-Tamura paper is a classic. I tried for weeks to understand it back when it came out and have read it again and again over the years," says Louis Johnson, College of St. Benedict/St. Johns University, who wrote to study guide for Robert Frank and Ben Bernanke's Principles of Economics. "I think there's one big problem with it: there's no simple version of the model that us mortals can work with. But the point about multiple equilibria determined by fertility and human capital levels surely has to be part of the growth and development story.”

The Clemson conference included papers by: Tamura and three co-authors (Chad Turner, of Nichols State Univrersity, Sean Mulholland of Mercer University, and Scott Baier, of Clemson) on the significance of black-white schooling differentials for productivity differentials; Chi-Wa Yuen, of the University of Hong Kong on alternative channels of human capital formation; Ehrlich on human capital and the demand for risky assets; Stokey on "catching up" and "falling behind;" Becker, Murphy and Tamura on certain features of the baby boom; Jovanovic and Peter Rousseau of Vanderbilt University, on the "Q-elasticity" of investment, with respect to old and new firms; and Rossi-Hansberg, on the importance of organization (in its most general sense) for growth.

Even confined to seven papers, the breadth of conference program was an effective demonstration of the wisdom of Charles (Chad) Jones, of the University of California at Berkeley, who observed as long ago as 1997 in his Introduction to Economic Growth that the "new growth" literature (of which Lucas's paper was among the most important specimens) had generated not one but three quite separate controversies, with a fundamentally different question at the center of each: "What is the engine of economic growth?" "Why are we so rich and they so poor?" And "How do we understand growth miracles?"

Rational Fools

Paper for discussion in class;
Rational Fools: A Critique of the Behavioral Foundations of Economic Theory, Amartya K. Sen, Philosophy and Public Affairs, Vol. 6, No. 4. (Summer, 1977), pp. 317-344;

There is not much merit in spending a lot of effort in debating the "proper" definition of rationality. The term is used in many different senses, and none of the criticisms of the behavioral foundations of economic theory presented here stands or falls on the definition chosen. The main issue is the acceptability of the assumption of the invariable pursuit of self-interest in each act. Calling that type of behavior rational, or departures from it irrational, does not change the relevance of these criticisms, though it does produce an arbitrarily narrow definition of rationality. This paper has not been concerned with the question as to whether human behavior is better described as rational or irrational. The main thesis has been the need to accommodate commitment as a part of behavior. Commitment does not presuppose reasoning, but it does not exclude it; in fact, insofar as consequences on others have to be more clearly understood and assessed in terms of one's values and instincts, the scope for reasoning may well expand. I have tried to analyze the structural extensions in the conception of preference made necessary by behavior based on reasoned assessment of commitment. Preferences as rankings have to be replaced by a richer structure involving meta-rankings and related concepts.

I have also argued against viewing behavior in terms of the traditional dichotomy between egoism and universalized moral systems (such as utilitarianism). Groups intermediate between oneself and all, such as class and community, provide the focus of many actions involving commitment. The rejection of egoism as description of motivation does not, therefore, imply the acceptance of some universalized morality as the basis of actual behavior. Nor does it make human beings excessively noble.

Nor, of course, does the use of reasoning imply remarkable wisdom.

It is as true as Caesar's name was Kaiser,
That no economist was ever wiser,

said Robert Frost in playful praise of the contemporary economist. Perhaps a similarly dubious tribute can be paid to the economic man in our modified conception. If he shines at all, he shines in comparison -in contrast-with the dominant image of the rational fool.

Related Videos;
Conversations with History: On Theory, with Amartya Sen

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