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August 2014 posts

Common Sense Economics

By Jonathan B. Wight

Everyone wears glasses of a sort.  Even if your eyesight is perfect, we are all figuratively myopic because of the narrowness of our own backgrounds and worldviews. Glasses

Joseph Schumpeter addresses at some length this built-in bias to every researcher’s mind (History of Economic Analysis 1954).  We all acquire an ideology of sorts that aids us in determining what is important and providing the preliminary vision necessary for undertaking a research project.

We have to be alert to the very idea that we all start from a biased position, and extra careful to maintain an open mind as new evidence and theories emerge.

Hence, pragmatic economics—particularly involving public policies—is necessarily more pluralistic than any single ideology might allow. 

Perhaps this is part of what Krugman is getting at when he writes:

 “[R]eal economics is the eclectic mix of ideas and techniques that seem to be useful, whether or not they have rigorous microfoundations.”

Thinking Big

By Jonathan B. Wight

From NPR we learn that Burger King is eying a Canadian merger that will allow it to move its headquarters over the border and avoid a lot of U.S. taxes.

 Such tax “inversions” or corporate “desertions” (according to President Obama) are a big hit, given the dissolution of patriotism in favor of CEO paychecks.

 Addressing this issue, Greg Mankiw thinks big when proposing to end corporate taxation and replace it with a value-added tax.

This is a good idea, but it is incomplete (as he admits when pairing it with rebates for the needy and continued income tax on high earners). 

I admit this is pie in the sky, but my preferred solution would be:

* Eliminate the corporate tax (sorry accountants!);

* Tax dividends and capital gains as ordinary income;

* Make up any shortfalls that result by somewhat increasing the income tax rate on high earners and by eliminating loopholes—most of the home mortgage interest deduction is a subsidy for wealthy families.

* Add a value-added tax.

 Nothing is perfect and this approach has lots of flaws.

 [Thanks to Maia Linask for the link to Mankiw.]

Fall of the House of Vanderbilt

By Jonathan B. Wight

We are living, we think, in a second Gilded Age, in which the sons and daughters of the obscenely rich frantically search for fame and airtime. Parents are struggling to instill values (see "No Silver Spoon")

And a Russian oligarch thinks nothing about spending $300 million for a yacht with faucets costing $40,000. 

But all of this is chump change, compared to the real big spenders—the Vanderbilts of the 19th Century. Cornelius Vanderbilt

Fortune’s Children: The Fall of the House of Vanderbilt, by Arthur T. Vanderbilt II, lays out this sad and sordid history. If you think you had bad parents, just read this book!

Cornelius Vanderbilt (1794-1877) is famous for being the stingiest, most foul-mouthed monopolist of the Robber Baron era.  (Okay, under duress he did fund Vanderbilt University, my alma mater, but that was for the pocket change of $1 million.)

Nicknamed “the Commodore” for his fleet of steamships that made his first fortune, Vanderbilt got ahead not only by extreme hard work and risk taking, he made much of his wealth from stifling competition—either by forcing out weaker companies through predatory pricing or by buying out stronger companies. 

His second fortune was made in railroads, using the same tactics. In several instances Vanderbilt feigned starting a competing line against another and was paid handsomely to withdraw from that competition.  Monopoly rents were the name of the game, then and now.

Vanderbilt, for all his business acumen, knew or cared little for being a father, despite having 13 children. The horror of growing up in that rich dysfunctional family went on for generations.  [Click to continue reading.]

Continue reading "Fall of the House of Vanderbilt" »

Professional Economic Ethics

By Jonathan B. Wight

Here is the preamble to the Society of Professional Economists (SPE) Code of Ethics:

Members of the Society of Professional Economists believe that public enlightenment is the forerunner of justice and the foundation of democracy.

The duty of the economist is to further those ends by seeking truth and providing a fair and comprehensive account of events and issues.

Conscientious economists from all specialties strive to serve the public with thoroughness and honesty.

Professional integrity is the cornerstone of an economist’s credibility. Members of the Society share a dedication to ethical behavior and adopt this code to declare the Society's principles and standards of practice.

Well, I lied.  This is actually from the Society of Professional Journalists (SPJ), which has been around since 1909.

Like economists, journalists have no accrediting body that can be used to enforce ethical norms.

Unlike economists, this has not prevented journalists from stating the overt group norms for honesty and integrity.

No Silver Spoon

By Jonathan B. Wight

Who said the rich can’t be virtuous? The Washington Post reports this morning that the super-rich are “rerouting vast fortunes from their kids.”  

Why? Because “It ruins people not having to earn money.”


Bill Gates, Warren Buffet, Sting, Philip Seymour Hoffman, and many others—smart and wise—decided to cut off their kids for their own goods.  This is the true meaning of paternalism: making a choice for your kids that they might not make for themselves.

Force them to enter the marketplace, and test their skills.

Force them to experience deprivation, and learn to develop genuine sympathy for co-corkers, customers, and suppliers.

Help them understand that a dollar earned is different from a dollar falling like manna from heaven.

This is not to suggest that the kids of the super-rich are at all deprived: they have the opportunity to get excellent educations, health care, trips around the world, and other experiences that make them highly employable simply for their connections (think Chelsea Clinton).

A few years ago in my principles class I was trying to get across the idea of scarcity. So I asked my students “What would you really love to buy but can’t afford?”

Students said things like: “A Rolls Royce, a trip to Hawaii, and so on.”

One woman in the class was from an oil-rich country and remained silent. I asked her to jump in to the discussion.

She said there was nothing she wanted that she could not have. Her father would buy her anything.

The class (and I) were shocked to encounter such unconstrained wealth. Did this make her happier than others?  I doubt it, because something is missing if rewards have not been earned.

Watch this interesting segment of the Twilight Zone, “A Nice Place to Visit.”  A burglar is killed and ends up in what he presumes to be heaven because he can have anything he wants.  See how long he lasts psychologically in this environment before he figures out he is actually in ….  (well, you know).

The Shocking Case of Ethical Misconduct in Economics

By Jonathan B. Wight

UPDATE (8/17/14):  David Warsh retracted the harsh critique of Debreu that I quoted below.  Warsh now states that Debreu did not delay in sending a referee's report on McKenzie's paper. He did, however, not inform Arrow of the paper's proof.  For more, see economicprinciples.com.

David Warsh (“The Startling Story behind a Famous Footnote”) calls attention to an apparently shocking case of ethical misconduct uncovered by Till Düppe and Roy Weintraub. 

In Finding Equilibrium: Arrow, Debreu, McKenzie and the Problem of Scientific Credit (2014), Düppe and Weintraub reveal that Gerard Debreu, while himself trying to write a paper on general equilibrium with Kenneth Arrow, had been the reviewer of a paper on that subject by Lionel McKenzie (photo). 

MckenieMcKenzie presented and published first, but Debreu never communicated with Arrow about McKenzie’s work, and never cited McKenzie’s contributions.

Did Debreu steal a Nobel from McKenzie?  Warsh reports that:

Further details had emerged, including an astonishing fact:  the anonymous referee, who bottled up McKenzie’s submission to Econometrica for a critical time, while Arrow and Debreu tidied up their proof, was none other than Debreu himself; and Debreu hadn’t disclosed his conflict of interest to the editor, Robert Solow. Debreu’s conduct was thus revealed as having been dishonorable.

Is it possible Debreu’s conduct can be justified?  Did Debreu think McKenzie’s work was sufficiently different so as to not merit citation?  Did he think McKenzie’s work was of such poor quality that it did not merit citation?

One cannot cite everything that one reads and omissions may seem obvious with hindsight that are not at all obvious at the time.

Still, this reminds us why journals need to lay out and follow strict guidelines for conflict of interest and to promote virtue ethics through exemplars and role models. 

Jane Austen and Adam Smith

By Jonathan B. Wight

 “I am not at all in a humour for writing, I must write on till I am.”

--Jane Austen

How we have all felt that way! Struggling through with discipline and grit is the life of every author.

Shannon Chamberlain, a doctoral candidate in English at the University of California, Berkeley, has written an interesting account of “The Economics of Jane Austen” in The Atlantic. Austin

What makes it interesting to me is her use of both The Theory of Moral Sentiments and The Wealth of Nations as backdrops for understanding Jane Austen’s life and novelistic views.

Chamberlain cannot directly tie Austin to Smith; instead, she relies upon the argument that Smith’s canon so infused her society that she must have absorbed it through cultural osmosis.

In particular is the question: does wealth confer happiness?

Smith, I argue, says no; Chamberlain argues that Smith is ambiguous on this topic.

I don’t know how ambiguous it can be when Smith says pursuing wealth is the “great deception” and that the beggar sunning himself by the roadside has the peace of mind not available to kings. 

That point aside, the article is interesting reading on the intersection of human psychology and wealth in great literature.

[Thanks to Mark White for this link. Image credit: http://www.english.upenn.edu/~traister/syl-austen.html