MFI conference salutes ‘economists’ economist’ Gary Becker

The University of Chicago News
February 25, 2011

The President of the Czech Republic, a former U.S. Secretary of State, a Nobel laureate, and distinguished economists saluted the work of Gary Becker as they took part in a daylong conference held in honor of his 80th birthday.

University faculty joined with other leading scholars in the Weymouth Kirkland Courtroom at the Law School to discuss the role of markets in the modern economy, economics and government policy, and new directions and continuing breakthroughs in the field.

The remarks frequently referenced the pioneering contributions of Becker, University Professor in Economics and 1992 recipient of the Nobel Memorial Prize for Economic Sciences.

“Gary Becker is not only one of the world’s leading economists, he is also one of the most influential scholars in the world,” said President Robert J. Zimmer in his opening remarks at the Friday, Feb. 11 gathering organized by the Milton Friedman Institute for Economic Research.

"In his intellectual fearlessness, which he has demonstrated time and time again, he is an exemplar of the aspirations of the University of Chicago," Zimmer continued.

Former U.S. Secretary of State George P. Shultz, who served as Dean of the Graduate School of Business, now Chicago Booth, was the first presenter at the conference. He discussed one of Becker’s proposals—confronting the failure of the war on drugs by legalizing and taxing drugs—and made suggestions for further research.

Shultz urged Becker to study the experience of Portugal, where drugs have been decriminalized and treatment programs offered to addicts, and to explore other ways to shift the demand curve. Shultz, who recently turned 90, joked that at 80, Becker is a promising younger scholar who has years ahead to follow up on these research suggestions.

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The canon of economics

Economist
February 24, 2011

One hundred years ago, in March 1911, the American Economic Review (AER) published its first article—on irrigation in the “sun-blistered” deserts of the western United States. The article described how the “fervid suns of May and June” melted “vast beds of snow and ice”, so that “springs and torrents rush down to the lowlands” and “the rivers overflow their banks”.

It is fair to say that the journal’s prose style has rushed downhill since those first lyrical pages. But if the AER’s opening article ranks among the best-written in the review’s history, it does not rank among the best. To mark its centenary issue, the journal asked six eminent economists to trawl through the thousands of papers that followed and pick the top 20. The results, with links to all 20 papers, are available online.*

The links are worth clicking on. Many of these papers are more cited than read. They are known not by their full titles, but by the author-and-date shorthand (Modigliani and Miller, 1958; Friedman, 1968; Diamond and Mirrlees, 1971) used in references. Reading them in the original yields some pleasing rediscoveries.

Unsurprisingly, the list includes the 1955 paper by Simon Kuznets explaining why inequality might first rise then fall in the course of economic development. Surprisingly, nowhere in the paper did he actually draw the “Kuznets curve” that is now inseparable from his name. (He described the arc of inequality as a “long swing” instead.) Robert Mundell’s 1961 theory of “optimum currency areas”, which lays out the conditions for a workable currency union, is now often cited by the euro’s critics. Ironic, therefore, to note that Mr Mundell wrote the paper to show why flexible exchange rates were impractical because many nations are not optimal currency areas either. Should every local “pocket of unemployment” have a “separate currency”, he snorted.

With one or two exceptions, the chosen papers convey an impression of economics as a tidy, coherent discipline. The subjects covered are traditional: consumption, tax, currencies, inflation, that sort of thing. There are no excursions into sumo or intestinal worms. The furthest off-piste they go is Anne Krueger’s 1974 article on rent-seeking, explaining why people may lobby for governments to distort the economy.

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See also

Huck and Jim and Law

by Eric A. Posner

New Republic
February 21, 2011

There is a story about the University of Chicago economist who complained in a seminar that he did not have any friends. “Buy one!" came a call from the back. A similar response will greet Ethan J. Leib’s new book, which argues that friendship should be promoted as a matter of public policy and subjected to legal regulation. If you think that friendship should be legally regulated, you just don’t understand friendship.

Leib anticipates this reaction and spends a great deal of time trying to refute it. Courts already do regulate friendships, he observes, and no one seems to have a problem with this. In many states, friends owe fiduciary duties to each other. This means that if you sell your old car to a friend, you have an obligation to mention the leaky carburetor and perhaps to charge a fair price—obligations that one does not owe to strangers. Friends who form business ventures and then fall out may discover that courts hold them to a higher standard of conduct. Since friends trust each other, they are vulnerable to being taken advantage of, and some courts take this factor into account when resolving cases. A stranger who breaches a contract is not as odious as a friend who betrays his trust: although their behavior may be identical, a court might come down harder on the friend than on the stranger.

Leib also points out that the most intimate relationships are shot through with legal regulation. We sometimes think that marriages are “outside” law. In fact, husbands and wives owe countless legal obligations to each other. They must provide care and support, and if the marriage falls apart, the state intervenes and arranges the most intimate details of their lives, such as how long each may spend with the children. In return, spouses get tax breaks (although sometimes they have a heavier tax burden) and they enjoy special legal privileges—to make life and death decisions when the other is in a coma, to refrain from testifying against each other at trial, to take leave from work when the other is sick. If husband and wife, why not friend and friend?

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Read the Response by Prof. Leib

Monopoly, Milton Friedman’s Way

by Damon Darlin

New York Times
February 19, 2011

When Hasbro showed a new version of Monopoly last week at the Toy Fair, people were aghast that an infrared tower in the center of the board would squawk instructions, track players’ money and make sure that everyone abided by the rules.

A generation of children may never learn to make change. They may never learn to argue about rules and change them. And they may never, as I and a group of Monopoly fanatics in college did in a great all-night game, learn important economic lessons. “There might not be the attention span for that anymore,” said Mike Zelenty, one of the players.

Monopoly was taken seriously in Shorey House at the University of Chicago in the late 1970s. A room was set aside as “The Monopoly Room.” But in that post-Vietnam, pre-Reagan era, all assumptions were questioned and a game our parents played was no exception. Rules were meant to be altered. The house even convened a “constitution convention” to change the official rules of the game to allow a person to build a hotel on a property without first having to own four houses. Mr. Zelenty, now a corporate lawyer in his native New Jersey, remembers holding a sign that said, “New Jersey Espouses / Hotels Without Houses.”

The other thing taken as seriously in that dorm was free-market economics or, more precisely, Milton Friedman, the University of Chicago economics professor. This was a house that frequently invited Professor Friedman and his wife, Rose, to sherry hours. House members ran a snack bar in the basement of the dormitory called Tanstafl, an abbreviation of a saying favored by Mr. Friedman, that “there ain’t no such thing as a free lunch.”

Mr. Zelenty owned the greatest of treasures any of us could imagine because it combined those two passions. He had asked Mr. Friedman to sign his Monopoly board at one of those sherry hours. The Nobel laureate did so, writing, “Down with” above the game’s name. We didn’t play on that board. No one ever played on that board. (Mr. Zelenty said he still has it and wants to donate the relic to the university one day. “It’s in a place of safety more than a place of honor,” he said.)

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Information Overload

by Carl Bialik

Wall Street Journal
February 18, 2011

The latest information about information overload is a lot to handle.

Wielding numbers that stretched to 20 or more digits, researchers recently reported on the world's massive ability to store, communicate and compute information. All three have grown at annual rates of at least 23% since 1986, according to a study published this month in Science.

Translated to a human scale, the massive numbers mean that the average person in 2007 was transmitting the informational equivalent of six newspapers per day, and receiving, in turn, 174 newspapers of data.

For data engineers, this might seem like cause for celebrating humanity's expanding universe of information. For the rest of us, it is another reminder that information is piling up at overwhelming rates.

But the digital avalanche isn't as massive as those numbers suggest. Much of the growth reflects the surge in high-resolution video and photos. In addition, while there is much more information available, each piece is being consumed, on average, by far fewer people than in the past.


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Fool Coverage

with Daffy Duck and Porky Pig

Story by Tedd Pierce
Directed by Robert McKimson

Not Having Enough Sex? Economic Theory May Help

Wall Street Journal
February 12, 2011

Couples have long squabbled over things from who does the dishes to how often to have sex. Kelsey Hubbard speaks to WSJ Editor Paula Szuchman who has co-authored a new book called Spousonomics which uses economic theories to solve everyday marital conflict.

Milbank Sending Midlevel Associates to Harvard Law for Business Training

National Law Journal
February 11, 2011

Associates at Milbank, Tweed, Hadley & McCloy are heading to Harvard.

The firm has agreed with Harvard Law School to launch what it believes is a first-of-its-kind associate development program. Midlevel associates will attend annual eight-day training sessions focused on business principles at the Cambridge, Mass., campus.

The program is called Milbank@Harvard.

It's not uncommon for law firms to send attorneys through intensive executive training courses at top academies such as the Wharton School and the University of Pennsylvania, but those programs often are geared toward leadership development for partners. Milbank's program will be open to all third- through seventh-year associates.

"We don't know of anyone who is doing something like this," said Milbank Vice Chairman Scott Edelman. "For one thing, it's going to involve every associate in the firm and a commitment over a period of years. It's not a one-year program."

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Influential economists The contemporary Keynes

Economist
February 10, 2011

Dismal economies are often dismal for economists. Respected figures find themselves defending discredited theories or justifying why they failed to see trouble coming. But calamity can also clear paths for new ideas. The Depression was the backdrop for the work of John Maynard Keynes. The stagflationary 1970s vindicated Milton Friedman: a generation of liberalisation followed.

The Economist asked members of “Economics by invitation”, our online forum of more than 50 prominent economists, to nominate colleagues with the most important ideas for a post-crisis world. The respondents came up with nearly 20 different names. None won an absolute majority, but a few cropped up more often than others (see table).

First among them is Raghuram Rajan of the University of Chicago, whose book Fault Lines argues that rising inequality led governments to facilitate credit growth, contributing to the crisis. Robert Shiller of Yale University has long warned of the dangers of irrational exuberance, and urges colleagues to consider “animal spirits” in assessing economic fluctuations. Kenneth Rogoff’s work on debt bubbles with Carmen Reinhart placed the crisis in an 800-year continuum of borrowing and collapse: his papers have earned the most academic citations of the table-toppers in our poll. Barry Eichengreen has written excellent works on the history of the gold standard and the danger of fixed-exchange-rate regimes. Nouriel Roubini earned the nickname “Dr Doom” for warning of an impending global crash.

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The Poverty of Dictatorship

by Dani Rodrik

Project Syndicate
February 9, 2011

Perhaps the most striking finding in the United Nations’ recent 20th anniversary Human Development Report is the outstanding performance of the Muslim countries of the Middle East and North Africa. Here was Tunisia, ranked sixth among 135 countries in terms of improvement in its Human Development Index (HDI) over the previous four decades, ahead of Malaysia, Hong Kong, Mexico, and India. Not far behind was Egypt, ranked 14th.

The HDI is a measure of development that captures achievements in health and education alongside economic growth. Egypt and (especially) Tunisia did well enough on the growth front, but where they really shone was on these broader indicators. At 74, Tunisia’s life expectancy edges out Hungary’s and Estonia’s, countries that are more than twice as wealthy. Some 69% of Egypt’s children are in school, a ratio that matches much richer Malaysia’s. Clearly, these were states that did not fail in providing social services or distributing the benefits of economic growth widely.

Yet in the end it did not matter. The Tunisian and Egyptian people were, to paraphrase Howard Beale, mad as hell at their governments, and they were not going to take it anymore. If Tunisia’s Zine El Abidine Ben Ali or Egypt’s Hosni Mubarak were hoping for political popularity as a reward for economic gains, they must have been sorely disappointed.

One lesson of the Arab annus mirabilis, then, is that good economics need not always mean good politics; the two can part ways for quite some time. It is true that the world’s wealthy countries are almost all democracies. But democratic politics is neither a necessary nor a sufficient condition for economic development over a period of several decades.

Despite the economic advances they registered, Tunisia, Egypt, and many other Middle Eastern countries remained authoritarian countries ruled by a narrow group of cronies, with corruption, clientelism, and nepotism running rife. These countries’ rankings on political freedoms and corruption stand in glaring contrast to their rankings on development indicators.

In Tunisia, Freedom House reported prior to the Jasmine revolution, “the authorities continued to harass, arrest, and imprison journalists and bloggers, human rights activists, and political opponents of the government.” The Egyptian government was ranked 111th out of 180 countries in Transparency International’s 2009 survey of corruption.

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The Politics of Revolutionary Surprise

by Timur Kuran

Project Syndicate
February 8, 2011

In setting himself ablaze following a humiliating encounter with the police, the university-educated Tunisian vegetable seller Mohamed Bouazizi triggered a wave of protests across the Arab world. Several Arab dictators who had held power for decades have already been ousted or forced to announce that they will retire.

But protesters in Cairo, Tunis, and Sana want much more. They also seek efficient governance, economic reforms to stimulate growth, the ouster of collaborators, democratic rights, freedom of religion (and perhaps also from religion) – in short, a comprehensive social transformation.

Everywhere, incumbent regimes have mounted resistance. The unforgettable scene of camel- and horse-riding Mubarak supporters beating tech-savvy Egyptian protesters signals that the old order will not yield without a fight.

The revolts themselves caught seasoned observers, even Arab leaders, off guard. Had the United States known what lay ahead, Secretary of State Hillary Clinton would not have remarked, after demonstrations broke out in Egypt, that the Egyptian government was “stable.” Arab leaders now showering their key constituencies with pay raises and food subsidies would have done so earlier, thus avoiding the impression of vulnerability.

Longtime regime opponents, too, were caught off guard. For days after Egypt erupted, the Muslim Brotherhood did not know how to react, making it seem out of touch with the “Arab street.”

For decades, most Arabs, however unhappy, kept their political grievances private, for fear of persecution if they turned against their leaders publicly. Through private discussions with trusted friends, everyone sensed that discontent was common, yet no one knew, or could know, the extent of it.

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