Happy birthday Ronald Coase!

Ronald Harry Coase, the Clifton R. Musser Emeritus Professor of Economics at the University of Chicago Law School and the 1991 Nobel Laureate in Economics has his 102nd birthday today!

Ronald H. Coase was born on December 29, 1910 in Willesden, a London suburb. His article “The Problem of Social Cost” published at the Journal of Law & Economics in 1960 was the founding stone of Law & Economics.

Everyone who had the luck to meet him, even once, will never forget his intelligence, humor and liveliness.

Happy birthday Prof. Coase and thank you for everything!

U of C Law Profile

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The Ronald Coase Institute

Nobel

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When women dare to outearn men

Economist
December 18, 2012

Of the many glass ceilings constraining women's careers, one is particularly important yet often overlooked: the wage of the husband. In a new paper, Marianne Bertrand, Emir Kamenica (both University of Chicago) and Jessica Pan (National University of Singapore) show how thick this ceiling really is.

In a country like America, in which men on average earn more than women, it follows almost naturally that the wife often earns less. However, the pattern of relative income of men and women at young(ish) ages in a marriage is striking: there are many young couples in which the wife earns slightly less than her husband, or just as much, but far fewer as relative income reverses, that is, when the wife earns more. And this pattern is not driven by older couples; the researcher only use couples around the time of first marriage (22-34) for this part of the study. Despite some progress in recent decades, the social norm "men should earn more than their wives" seems to be alive and well.

That is not only a curious fact; it has consequences, too. The researchers show that women with the potential to earn more than their husbands quit their job altogether more often than otherwise similar women in comparable families. If they do work, they use their earnings potential to a lower degree. That's bad news for the economy.

The paper offers some hints as to why women who could outearn their husbands choose not to work at all, or to work less. For instance, norms affect the division of household chores, but economically in the wrong direction. If a husband earns less than his wife, she might rightfully expect him to take on some additional responsibilities at home. In reality, however, if she earns more, she spends more time taking care of the household and their children than otherwise similar women in comparable families, who earn less than the husband. One wonders whether such women feel compelled to soothe their husbands' unease at earning less.

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Peter Temin, "The Roman Market Economy"

Princeton University Press
December 2012

The quality of life for ordinary Roman citizens at the height of the Roman Empire probably was better than that of any other large group of people living before the Industrial Revolution. The Roman Market Economy uses the tools of modern economics to show how trade, markets, and the Pax Romana were critical to ancient Rome's prosperity.

Peter Temin, one of the world's foremost economic historians, argues that markets dominated the Roman economy. He traces how the Pax Romana encouraged trade around the Mediterranean, and how Roman law promoted commerce and banking. Temin shows that a reasonably vibrant market for wheat extended throughout the empire, and suggests that the Antonine Plague may have been responsible for turning the stable prices of the early empire into the persistent inflation of the late. He vividly describes how various markets operated in Roman times, from commodities and slaves to the buying and selling of land. Applying modern methods for evaluating economic growth to data culled from historical sources, Temin argues that Roman Italy in the second century was as prosperous as the Dutch Republic in its golden age of the seventeenth century.

The Roman Market Economy reveals how economics can help us understand how the Roman Empire could have ruled seventy million people and endured for centuries.

Peter Temin is the Gray Professor Emeritus of Economics at the Massachusetts Institute of Technology. His books include The World Economy between the World Wars.

Income and Democracy: Lipset's Law Revisited

by Anke Hoeffler, Robert H. Bates and Ghada Fayad

International Monetary Fund
Working Paper No. 12/295
December 17, 2012

We revisit Lipset‘s law, which posits a positive and significant relationship between income and democracy. Using dynamic and heterogeneous panel data estimation techniques, we find a significant and negative relationship between income and democracy: higher/lower incomes per capita hinder/trigger democratization. Decomposing overall income per capita into its resource and non-resource components, we find that the coefficient on the latter is positive and significant while that on the former is significant but negative, indicating that the role of resource income is central to the result.

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Saving Economics from the Economists

by Ronald Coase

Harvard Business Review
December 2012

Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship. The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate.

That was not the case in the past. When modern economics was born, Adam Smith envisioned it as a study of the “nature and causes of the wealth of nations.” His seminal work, The Wealth of Nations, was widely read by businessmen, even though Smith disparaged them quite bluntly for their greed, shortsightedness, and other defects. The book also stirred up and guided debates among politicians on trade and other economic policies. The academic community in those days was small, and economists had to appeal to a broad audience. Even at the turn of the 20th century, Alfred Marshall managed to keep economics as “both a study of wealth and a branch of the study of man.” Economics remained relevant to industrialists.

In the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economization and giving up the real-world economy as its subject matter. Today, production is marginalized in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.

This separation of economics from the working economy has severely damaged both the business community and the academic discipline. Since economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions. In times of crisis, when business leaders lose their self-confidence, they often look to political power to fill the void. Government is increasingly seen as the ultimate solution to tough economic problems, from innovation to employment.

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Urging Economists to Step Away From the Blackboard

by Brendan Greeley

Bloomberg
November 29, 2012

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

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

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

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

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

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Timur Kuran, "The Long Divergence: How Islamic Law Held Back the Middle East"

Princeton University Press
2010

In the year 1000, the economy of the Middle East was at least as advanced as that of Europe. But by 1800, the region had fallen dramatically behind--in living standards, technology, and economic institutions. In short, the Middle East had failed to modernize economically as the West surged ahead. What caused this long divergence? And why does the Middle East remain drastically underdeveloped compared to the West? In The Long Divergence, one of the world's leading experts on Islamic economic institutions and the economy of the Middle East provides a new answer to these long-debated questions.

Timur Kuran argues that what slowed the economic development of the Middle East was not colonialism or geography, still less Muslim attitudes or some incompatibility between Islam and capitalism. Rather, starting around the tenth century, Islamic legal institutions, which had benefitted the Middle Eastern economy in the early centuries of Islam, began to act as a drag on development by slowing or blocking the emergence of central features of modern economic life--including private capital accumulation, corporations, large-scale production, and impersonal exchange. By the nineteenth century, modern economic institutions began to be transplanted to the Middle East, but its economy has not caught up. And there is no quick fix today. Low trust, rampant corruption, and weak civil societies--all characteristic of the region's economies today and all legacies of its economic history--will take generations to overcome.

The Long Divergence opens up a frank and honest debate on a crucial issue that even some of the most ardent secularists in the Muslim world have hesitated to discuss.

Timur Kuran is professor of economics and political science and the Gorter Family Professor of Islamic Studies at Duke University. He is the author of Islam and Mammon: The Economic Predicaments of Islamism (Princeton).

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Data protection at the cost of economic growth?

by Elina Pyykko

Centre for European Policy Studies
November 16, 2012

The Data Protection Regulation proposed by the European Commission contains important elements to facilitate and secure personal data flows within the Single Market. A harmonised level of protection of individual data is an important objective and all stakeholders have generally welcomed this basic principle. However, when putting the regulation proposal in the complex context in which it is to be implemented, some important issues are revealed. The proposal dictates how data is to be used, regardless of the operational context. It is generally thought to have been influenced by concerns over social networking. This approach implies protection of data rather than protection of privacy and can hardly lead to more flexible instruments for global data flows.

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For Investors, Costly Academic Studies

by Daniel Akst

Wall Street Journal
November 7, 2012

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

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

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

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The End of ‘Marriage’

by Laurie Shrage

New York Times
November 4, 2012

The institution of marriage has become the focus of public debate and reform, not just in the state-by-state political battles familiar to us in the United States, but across the world. Some of the longstanding practices currently being scrutinized both here and in other countries include parental approval in the choice of a spouse, permission for a husband to take more than one wife (polygyny), temporary marriage, close relative (incestuous) marriage, strict or permissive divorce terms, mandatory bride virginity, child marriage or betrothal and gender-structured marriage in which wives and husbands have different duties and privileges and therefore must be gender “opposites.”

Marriage reform is typically part of a larger agenda for social change. In earlier eras, challenges to bans on interfaith and interracial marriage were tied to political movements promoting religious, ethnic and racial equality and social integration. In the Middle East, Africa and Asia today, marriage reformers often aim to expand the rights and liberty of girls and women, while in the Americas and Europe, their primary aim is to advance social equality and respect for lesbians and gay men.

While marriage reform is moving forward in many countries (for example, to extend access to same-sex couples), many prominent legal and political theorists — such as Cass Sunstein, Richard Thaler, Martha Fineman, Tamara Metz, Lisa Duggan, Andrew March, and Brook Sadler (to name only some of those who have put their views in writing) — are proposing that the institution of marriage be privatized. More specifically, they propose that we eliminate the term “marriage” from our civil laws and policies, and replace it with a more neutral term, such as “civil union” or “domestic partnership.” The state would then recognize and regulate civil unions rather than civil marriage, and people would exchange marriage-like rights and duties by becoming “civilly united.” Some private organizations, such as religious institutions, might still perform and solemnize marriages among their congregants, but these marriages would have no official state recognition.

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Free Birth Control Cuts Abortion, Teen Pregnancy

by Daniel Akst

Wall Street Journal
October 5, 2012

A new study from Washington University in St. Louis finds that giving women free contraception sharply reduces abortions and teen pregnancy compared to the general population. Among participants, abortion was less than half as frequent. And the rate of teenage births was 6.3 per 1,000, far less than the national rate of 34.1 per 1,000.

Unlike the general population, most study participants chose implants or IUD devices, suggesting that when initial cost is not a barrier, women are much more likely to pick these highly reliable means of contraception. The study also suggests that the provision of “Obamacare” giving women in workplace health plans access to contraception without co-pays may be effective in reducing unwanted pregnancies.

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Why Should Regulators Have to Listen to You?

by Cass Sunstein

Bloomberg
October 4, 2012

The U.S. Bill of Rights declares that no one may be deprived of life, liberty or property “without due process of law.” The core meaning of this provision is that the government cannot hurt you -- by taking away your freedom or what you own -- without giving you an opportunity to have your say.

This right helps to define liberty under law. Public officials are fallible, and before they take action against you, they should hear you out to make sure that they have the facts straight. Human beings should also be treated with respect. If public officials proceed against you without giving you a chance to be heard, they are treating you disrespectfully.

In light of the defining importance of the due process clause, many people are stunned to learn a remarkable fact: When the government issues regulations, the Constitution doesn’t require officials to listen to you, even if your liberty and your property are at stake.

That is what the U.S. Supreme Court ruled in 1915, in a case with the somewhat ominous name of Bi-Metallic Investment Co. v. State Board of Equalization. The great jurist Oliver Wendell Holmes Jr. made it clear that while the government must give hearings to aggrieved individuals, the matter is different when a lot of people are simultaneously affected: “Where a rule of conduct applies to more than a few people, it is impracticable that everyone should have a direct voice in its adoption.”

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Το Άγος Της Προσοδοθηρίας

του Δημήτρη Δημητράκου

Ratio Vincit
1 Οκτωβρίου 2012

Αξίζει να διαβαστεί το άρθρο του Πάσχου Μανδραβέλη «Το έλλειμμα ανταγωνισμού στην αγορά» στην Καθημερινή της 30-9-12. Παραθέτω ένα χαρακτηριστικό απόσπασμα:

Μπορεί μάλιστα να περίμεναν [σ.σ. τα μέλη της τρόικας] ότι μειώνοντας τα εισοδήματα θα έπεφταν και οι τιμές· έτσι γίνεται σε όλο τον κόσμο, αυτό λέει και η οικονομική λογική. Αμ, δε! Σε μια χώρα που έχουν καταστρατηγηθεί όλοι οι νόμοι, θα την γλίτωνε ο νόμος της προσφοράς και της ζήτησης; Υπάρχουν, απίθανες -και συνήθως μεταμεσονύκτιες- διατάξεις που φτιάχνονται επίτηδες με στρυφνούς νομικούς όρους και παραπομπές σε παλαιότερους νόμους, έτσι ώστε νόμιμα να εξυπηρετούνται πελατειακά συμφέροντα. Και τα πελατειακά συμφέροντα του πολιτικού συστήματος δεν είναι μόνο οι δημόσιοι υπάλληλοι ή οι ταξιτζήδες. Είναι και οι επιχειρήσεις που διά νόμων λυμαίνονται μονοπωλιακά ή ολιγοπωλιακά κάποιες αγορές, απολαμβάνοντας υψηλά κέρδη.

Έτσι λειτουργεί η προσοδοθηρία : με την τακτική των (μεταμεσονυκτίων) τροπολογιών, οι οποίες έχουν εύστοχα ονομαστεί «ντροπολογίες». Πρόκειται για πρόσθετες παραγράφους που «τρυπώνουν» σε ένα νομοσχέδιο, με σκοπό να ευνοηθεί κάποια ομάδα συμφερόντων. Τα συμφέροντα αυτά μπορεί να είναι επιχειρηματικά, συντεχνιακά, επαγγελματικά κάθε είδους. Είναι κατά κύριο λόγο πελατειακά. Και οι εμβόλιμες διατάξεις που τα ευνοούν χαρακτηρίζονται σεμνότυφα ως «ευεργετικές». Κάποιοι, , δηλαδή, ωφελούνται εις βάρος των υπολοίπων, πράγμα που σκοπίμως αποσιωπάται με τη χρήση του επιθέτου «ευεργετικός». Κάποιοι πληρώνουν για αυτή την ευεργεσία και αυτοί δεν είναι οι πολιτικοί που εισηγούνται και ψηφίζουν τις διατάξεις αυτές. Οι πολιτικοί ευεργετούν με τα λεφτά των άλλων. Πληρώνουν οι ανυπεράσπιστοι, δηλαδή, οι φορολογούμενοι.

Οι «ευεργετικές» αυτές διατάξεις στρεβλώνουν την αγορά και βλάπτουν πολλαπλώς το κοινωνικό σύνολο. Δίνουν την ευκαιρία να εισπράξουν κάποιοι περισσότερα από όσα θα λάμβαναν αν δεν υπήρχε η πολιτική εύνοια. Αυτή αποκτάται με κάποιο κόστος. Το κόστος αυτό, όμως, είναι υπό τις τρέχουσες συνθήκες, μικρότερο από πού θα αντιστοιχούσε στην προσπάθεια βελτίωσης της παραγωγικότητας μιας επιχείρησης. Συνεπώς, ο προσοδοθήρας, σε αντίθεση με τον υγιή επιχειρηματία, έχει περισσότερα να κερδίσει επενδύοντας σε πολιτική εύνοια από το να επενδύσει σε εξοπλισμό ή σε ανθρώπινο κεφάλαιο. Αποσκοπεί όχι στο κέρδος – που είναι υγιές κίνητρο σε μια οποιαδήποτε επιχειρηματική δραστηριότητα, αλλά στην πρόσοδο, δηλαδή, εισόδημα το οποίο εισπράττεται εκτός παραγωγής, που είναι έξω ή πέρα από την πραγματοποιημένη εργασία ή την επιχειρηματικότητα.

Είναι τόσο κακό αυτό; Ναι, είναι! Διότι βασίζεται σε μονοπωλιακές ή ολιγοπωλιακές καταστάσεις που δημιουργούνται τεχνητά και το όφελος του επιχειρηματία είναι εις βάρος άλλων. Το ίδιο, φυσικά, ισχύει και για μη επιχειρηματικούς κλάδους, όπως είναι τα συνδικάτα, διάφορες επαγγελματικές ομάδες και γενικότερα όσοι είναι σε θέση να αποσπούν «ευεργετικές» διατάξεις με απεργίες ή διασάλευση της τάξης. Η «ευεργεσία» παρέχεται εκεί με γνώμονα τη «δύναμη βλάβης» που διαθέτουν οι ομάδες αυτές, και όχι την παραγωγικότητά τους. Αυτό θα παρασύρει τον υγιή επιχειρηματία, αλλά και τον έντιμο επαγγελματία και μισθωτό, στο να επιδοθεί κι αυτός στην θήρα πολιτικής εύνοιας. Επί τέσσερις δεκαετίες η ευγενής αυτή τέχνη έχει αποφέρει καρπούς σε ορισμένους και έχει περιορίσει και τελικώς παραλύσει τους περισσότερους. Και οι περισσότεροι, κάθε φορά, μη αντιλαμβανόμενοι ότι μέσω της παντοδυναμίας του Δοβλετιού παράγεται και ενδυναμώνεται η προσοδοθηρία, εκτρέφουν το τον κρατισμό, ελπίζοντας ότι θα αποκτήσουν μέρος της προσόδου.

Περισσότερα

To Encourage Biking, Cities Lose the Helmets

by Elisabeth Rosenthal

New York Times
September 29, 2012

One spectacular Sunday in Paris last month, I decided to skip museums and shopping to partake of something even more captivating for an environment reporter: Vélib, arguably the most successful bike-sharing program in the world. In their short lives, Europe’s bike-sharing systems have delivered myriad benefits, notably reducing traffic and its carbon emissions. A number of American cities — including New York, where a bike-sharing program is to open next year — want to replicate that success.

So I bought a day pass online for about $2, entered my login information at one of the hundreds of docking stations that are scattered every few blocks around the city and selected one of Vélib’s nearly 20,000 stodgy gray bikes, with their basic gears, upright handlebars and practical baskets.

Then I did something extraordinary, something I’ve not done in a quarter-century of regular bike riding in the United States: I rode off without a helmet.

I rode all day at a modest clip, on both sides of the Seine, in the Latin Quarter, past the Louvre and along the Champs-Élysées, feeling exhilarated, not fearful. And I had tons of bareheaded bicycling company amid the Parisian traffic. One common denominator of successful bike programs around the world — from Paris to Barcelona to Guangzhou — is that almost no one wears a helmet, and there is no pressure to do so.

In the United States the notion that bike helmets promote health and safety by preventing head injuries is taken as pretty near God’s truth. Un-helmeted cyclists are regarded as irresponsible, like people who smoke. Cities are aggressive in helmet promotion.

But many European health experts have taken a very different view: Yes, there are studies that show that if you fall off a bicycle at a certain speed and hit your head, a helmet can reduce your risk of serious head injury. But such falls off bikes are rare — exceedingly so in mature urban cycling systems.

On the other hand, many researchers say, if you force or pressure people to wear helmets, you discourage them from riding bicycles. That means more obesity, heart disease and diabetes. And — Catch-22 — a result is fewer ordinary cyclists on the road, which makes it harder to develop a safe bicycling network. The safest biking cities are places like Amsterdam and Copenhagen, where middle-aged commuters are mainstay riders and the fraction of adults in helmets is minuscule.

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Don’t Blame Trade for Climate Change

by Daniel Akst

Wall Street Journal
September 28, 2012

Could limiting trade, perhaps through emissions tariffs, combat global warming? Some people think so, since Western nations typically import items that produce significant greenhouse emissions in developing countries.

But two European climate change experts are doubtful such tariffs would do much good. In fact, in a new paper, they suggest that, absent international trade, developing nations such as China might emit even more greenhouse gases than they already do.

Looking at trade between the United States and China, it’s clear that carbon emissions embodied in imports from China far exceed those embodied in exports to that country, but mainly this is due to the size of the U.S. trade deficit. The authors figure that only about 20 percent of carbon transfers from China are attributable to China’s manufacturing emphasis on more polluting goods. And climate tariffs would have an impact only that portion of China’s exports to the U.S., the researchers report.

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Democracy’s Burning Ships

by Luigi Zingales

Project Syndicate
September 24, 2012

Since the late 1970’s, the academic diffusion of game theory has led macroeconomists to emphasize the importance of “commitment,” a strategy that aims to enhance long-term economic outcomes by restricting policymakers’ discretion. The idea seems counterintuitive: How can less produce more?

While not historically accurate, one of the best examples of a strategic commitment is provided by the legend of Hernán Cortés, according to which, in his quest to conquer Mexico, he decided to burn the ships that had brought his expedition from Spain. At first, this might seem like a crazy move: Why intentionally destroy the only possible way out in case of defeat? Cortes allegedly did it to motivate his troops. With no escape route, soldiers were highly motivated to win. Alexander the Great is said to have done something similar when conquering Persia.

To produce its benefit, a commitment strategy should be credible – that is, it cannot be reversed quickly. In this sense, Cortés’s strategy was perfect: in case of defeat, the Spanish would have no time to rebuild the burned ships. To work properly, a commitment strategy should also be costly in case of failure: had Cortés lost, no Spanish soldier would have escaped alive. It is precisely this cost that helped motivate his soldiers.

The problem is that we are bound to hear about only the successful historical examples of such a strategy. Had Cortés’s strategy failed, he would have gone down in history – if he was remembered at all – as an arrogant fool who thought that he could defeat a great empire.

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Trade facilitation matters!

by Gary Clyde Hufbauer, Martin Vieiro and John S.Wilson

Vox
September 14, 2012

Economists celebrate trade not only because they love watching ships cross the Pacific and cargo planes land at Paris Charles-de-Gaulle but also because increased trade demonstrably raises income and improves living standards. This column argues that a powerful way to boost trade is by focusing on trade facilitation, i.e. improving both hard infrastructure like ports and railways, and soft infrastructure such as shipping logistics.

Once upon a time, most economists thought that tariffs, quotas and exchange controls were the alphas and omegas of trade policy. Hence their consensus recommendations: slash tariffs, eliminate quotas, float the exchange rate and commerce would blossom. Not quite so! It turns out that trade costs decisively separate countries that participate fully in the world economy and countries that are marginalised. Perhaps the biggest new idea is that trade transaction costs are not simply a matter of geography and fate. Targeted policies – grouped under the label of trade facilitation – can sharply cut the burden even for landlocked countries. Singapore takes first place in trade facilitation rankings, not only because of a fantastic natural port but also because of superb governance. More surprising, perhaps, is that landlocked Austria ranks 11th, entirely owing to government emphasis on quality infrastructure and efficient border management.

Even the international politics of trade facilitation are positive. The potential gains from trade facilitation are so large and 'self-balanced' that it has been one of the brighter spots of the otherwise dim Doha Round of negotiations at the WTO. Even 'narrow' investments in trade facilitation lead to enormous rates of return. Helble et al. (2009) estimate that every dollar spent in aid-for-trade recipient countries on reforming trade policy and regulation (e.g. customs clearance, technical barriers, etc.) increases the country’s trade by $697 dollars annually.

While agreement on trade facilitation tops the list of any potential 'early harvest' package, Brazil, South Africa, and India have led a push against this proposal, arguing that any deal on trade facilitation must be coupled with an agreement on agriculture reform. Most recently, support is gathering for a stand-alone trade facilitation agreement outside the auspices of the WTO.

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The Stunning Triumph of Cost-Benefit Analysis

by Cass R. Sunstein

Bloomberg
September 13, 2012

It is not exactly news that we live in an era of polarized politics. But Republicans and Democrats have come to agree on one issue: the essential need for cost- benefit analysis in the regulatory process.

In fact, cost-benefit analysis has become part of the informal constitution of the U.S. regulatory state. This is an extraordinary development.

To understand the point, a little history is in order.

When Ronald Reagan became president in 1981, he was greatly concerned about excessive regulation. He was also aware that the federal bureaucracy was large, decentralized and sprawling. He was the boss, but he had limited tools by which to oversee federal rulemaking.

As one of his very early actions, Reagan issued an executive order with two essential components. First, he told executive agencies that to the extent permitted by law, they must not issue a regulation unless the potential benefits to society “exceed the potential costs to society.” Second, he directed the Office of Management and Budget to oversee a process to ensure compliance with the cost-benefit requirement (among others) and to promote consistency with the president’s goals. The Office of Information and Regulatory Affairs, within OMB, soon assumed that responsibility.

At the time, both the cost-benefit requirement and the OIRA process were exceptionally controversial, especially among Democrats and groups on the left. Some activists argued that the result would be to undermine important public protections, designed to safeguard health, safety and the environment.

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Investing in Good Governance

by Lucian A. Bebchuk

New York Times
September 12, 2012

Can investors generally beat the market by concentrating their portfolios on companies that practice good corporate governance? There is evidence that good-governance features included in standard governance indexes do improve the performance of companies – but that their significance is already reflected in market prices.

In a well-known study issued a decade ago, Paul Gompers, Joy Ishii and Andrew Metrick identified a trading strategy that would have produced abnormally high returns in the 1990s. The strategy was based on an index, the G-Index, consisting of 24 governance provisions that weaken shareholder rights.

In a subsequent study, Alma Cohen, Allen Ferrell and I showed that, among the 24 provisions, only six – including staggered boards, poison pills and supermajority requirements – really mattered. As a result, we constructed an E-Index based on these six “entrenching” provisions.

Those studies showed that buying shares in the 1990s of companies that scored well on the governance indexes and shorting companies that scored poorly would have beaten the market. The correlation between governance and stock returns has attracted interest from researchers, and the G-Index and E-Index have subsequently been used in hundreds of studies by financial economists.

In a recent study that will be published by The Journal of Financial Economics, Alma Cohen, Charles Wang and I document that the correlation between governance and stock returns in the 1990s did not persist in later years. This correlation disappeared because markets learned to distinguish between good-governance and poor-governance firms (as defined by the governance indexes) and to price the difference into stock values.

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Μεταχρονολογημένης επιταγής εγκώμιον

του Γιώργου Προκοπάκη

Protagon.gr
8 Σεπτεμβρίου 2012

Στην ελληνική οικονομία συνέβαινε μια παγκόσμια πρωτοτυπία (τουλάχιστον ως προς την έκτασή της). Επί χρόνια η αγορά ζούσε με ένα σημαντικό μέρος του τζίρου της σε μεταχρονολογημένες επιταγές. Η χρηματοδότηση της ρευστότητας γινόταν:

1. Από τις τράπεζες με το πιστωτικό όριο που έδινε κάθε τράπεζα στον επιχειρηματία πελάτη της – ουσιαστικά κυλιόμενα και ανακυκλούμενα δάνεια.

2. Από την ίδια την αγορά, η οποία αποδεχόμενη τις μεταχρονολογημένες επιταγές των δραστηριοποιούμενων στο πλαίσιό της, παρείχε ουσιαστικά το ισοδύναμο των κεφαλαίων κίνησης.

Η αγορά η ίδια λοιπόν παρείχε το «φθηνό χρήμα» στους επιχειρηματίες που ξεπερνούσε τις δυνατότητες των τραπεζών ή αρνιόταν να παράσχει το τραπεζικό σύστημα. Εκτιμήσεις ανεβάζουν τις δύο γραμμές χρηματοδότησης σε περίπου €30 δισ την κάθε μία, μέχρι τις αρχές της κρίσης. Δηλαδή, η αγορά, με τα επίπεδα φερεγγυότητας στα οποία είχε ισορροπήσει, είχε φτιάξει εκ των ενόντων ένα δεύτερο σύστημα βραχυχρόνιων χορηγήσεων. Ας θυμηθούμε πως κάθε τόσο έβγαινε στις εφημερίδες η είδηση ότι «οι ακάλυπτες επιταγές έφτασαν το τάδε ποσόν». Το ποσό αυτό μέχρι το 2009 ήταν της τάξεως των €100 με €150 εκατ. Τα «κόκκινα δάνεια» μέσα στην ίδια την αγορά ήταν μόλις μισό τοις εκατό! Ο μόνος λόγος που οι τράπεζες δεν ζήλευαν τις επιδόσεις της ίδιας της αγοράς, ήταν οι εγγυήσεις που έπαιρναν από τους πελάτες τους και οι οποίες κάτι άξιζαν. Το ενδιαφέρον βέβαια είναι πως, οι μεν χορηγήσεις των τραπεζών καταγράφονταν, έστω διαχεόμενες, στα βιβλία των τραπεζών. Το σύστημα χορηγήσεων με τις μεταχρονολογημένες επιταγές, υπήρχε, κινούσε (σε κάποιο βαθμό) την οικονομία, αλλά δεν καταγραφόταν πουθενά. Κι όμως ήταν καθημερινή πρακτική. Είναι χαρακτηριστικό πως η ελληνική νομοθεσία δεν αναγνωρίζει την έννοια «μεταχρονολόγηση» στις επιταγές. Αν πήγαινε όμως κάποιος να εισπράξει μια μεταχρονολογημένη επιταγή πριν την ώρα της, η ίδια η τράπεζα, παρανομούσα, τον έδιωχνε! Κυρίως, γιατί μετείχε σ’ αυτό το σύστημα παρα-χορηγήσεων «σπάζοντας» στο 80% τις επιταγές πελατών της. Ισορροπία του συστήματος!

Περισσότερα

The Crisis of Capitalist Democracy

with Judge Richard A. Posner

Elmhurst College
The Democracy Forum
September 6, 2012

Richard Allen Posner is a judge on the U.S. Court of Appeals, Seventh Circuit; a senior lecturer at the University of Chicago Law School; and the author of nearly 40 books on an astonishing array of topics, including economics, jurisprudence, aging, terrorism, literature, plagiarism and sex. The Journal of Legal Studies calls him the most cited legal scholar of the last century. He now turns what The New York Times calls his "indefatigable intellect" to the ongoing economic crisis and the efforts of the "cumbersome, clotted, competence-challenged" American system of government to respond to it. A Democracy Forum Lecture.

Bargain bosses: American chief executives are not overpaid

Economist
September 8, 2012

The idea that American bosses are obscenely overpaid is conventional wisdom, and not just among the true believers at the Democratic convention. The New York Times complains of “fat paychecks [awarded] to chief executives who, by many measures, don’t deserve them.” Forbes, hardly the in-house journal of Occupy Wall Street, frets that CEO pay is “gravity-defying”. An issue in April gave warning that “our report on executive compensation will only fuel the outrage over corporate greed.”

This orthodoxy rests on three propositions: that CEO pay just keeps on going up; that it is not tied to performance; and that boards are not doing their job of holding fat cats’ paws to the fire. These propositions in turn rest on a bigger argument: that CEOs are using their political power to rig the system, and that an efficient market for talent would produce very different results.

Steven Kaplan of Chicago’s Booth School of Business has been poking holes in this orthodoxy for years. He has now gathered his research together in a new paper (“Executive Compensation and Corporate Governance in the US: Perceptions, Facts and Challenges”).

His argument is well-grounded and intricate. He distinguishes, for example, between “estimated” and “realised” pay. Estimated pay is the estimated value of the CEO’s pay, including stock options, when the board does the hiring. Realised pay is what the CEO actually makes when he exercises his options. There is a big difference. It is now impossible to talk sensibly about this subject without first grappling with Mr Kaplan.

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Ending the Financial Arms Race

by Kenneth Rogoff

Project Syndicate
September 6, 2012

People often ask if regulators and legislators have fixed the flaws in the financial system that took the world to the brink of a second Great Depression. The short answer is no.

Yes, the chances of an immediate repeat of the acute financial meltdown of 2008 are much reduced by the fact that most investors, regulators, consumers, and even politicians will remember their financial near-death experience for quite some time. As a result, it could take a while for recklessness to hit full throttle again.

But, otherwise, little has fundamentally changed. Legislation and regulation produced in the wake of the crisis have mostly served as a patch to preserve the status quo. Politicians and regulators have neither the political courage nor the intellectual conviction needed to return to a much clearer and more straightforward system.

In his recent speech to the annual, elite central-banking conference in Jackson Hole, Wyoming, the Bank of England’s Andy Haldane made a forceful plea for a return to simplicity in banking regulation. Haldane rightly complained that banking regulation has evolved from a small number of very specific guidelines to mind-numbingly complicated statistical algorithms for measuring risk and capital adequacy.

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Democracies and debt: Voters are now facing a harsh truth

Economist
September 1, 2012

Almost half the world’s population now lives in a democracy, according to the Economist Intelligence Unit, a sister organisation of this newspaper. And the number of democracies has increased pretty steadily since the second world war. But it is easy to forget that most nations have not been democratic for much of their history and that, for a long time, democracy was a dirty word among political philosophers.

One reason was the fear that democratic rule would lead to ruin. Plato warned that democratic leaders would “rob the rich, keep as much of the proceeds as they can for themselves and distribute the rest to the people”. James Madison, one of America’s founding fathers, feared that democracy would lead to “a rage for paper money, for an abolition of debts, for an equal division of property and for any other improper or wicked projects”. Similarly John Adams, the country’s second president, worried that rule by the masses would lead to heavy taxes on the rich in the name of equality. As a consequence, “the idle, the vicious, the intemperate would rush into the utmost extravagance of debauchery, sell and spend all their share, and then demand a new division of those who purchased from them.”

Democracy may have its faults but alternative systems have proved no more fiscally prudent. Dictatorships may still feel the need to bribe their citizens (eg, via subsidised fuel prices) to ensure their acquiescence while simultaneously spending large amounts on the police and the military to shore up their power. The absolute monarchies of Spain and France suffered fiscal crises in the 17th and 18th centuries, and were challenged by Britain and the Netherlands which, though not yet democracies, had dispersed power more widely. Financial problems contributed to the collapse of the Soviet Union.

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How to reduce high incarceration rates

by Ben Vollaard

Vox
August 24, 2012

How to reduce incarceration rates without fuelling a crime boom? This column argues that by being more selective over whom to lock up and for how long, scarce public funds can be put to better use.

Incarceration is costly – easily €100 to €200 per night per prisoner, depending on the country and the prison regime. That makes €36,500 to €73,000 per prisoner per year, excluding fixed costs of building prisons, and all other costs such as time not spent at work or with the family.

Given the pressure on government budgets, many states and countries are looking into reductions in prison expenditures. The short-term solution is to reduce the number of prisoners by way of early release. The longer-term solution is to change sentencing policy. This is all easier said than done, however, given public concerns about the effect of lower incarceration rates on crime. Incarceration also provides important benefits to society after all, including deterrence (Durlauf and Nagin 2011) and incapacitation (Owens 2009) of offenders.

We argue that a reduction in the number of inmates taxes these benefits of incarceration the least if it happens selectively. Being more selective in whom to incarcerate for how long puts scarce public resources to their best use.

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What explains political institutions? Evidence from colonial British America

by Elena Nikolova

Vox
August 17, 2012

Why do some states develop as democracies while others remain authoritarian? The question continues to puzzle social scientists. This column presents new data from 13 British American colonies from before the American Revolution. It shows that democratic institutions had a lot to do with the need to attract workers.

Under what circumstances do democratic as opposed to authoritarian institutions emerge? Although a large literature has tackled this question (see Acemoglu et al. 2001, Acemoglu and Robinson 2012, Engerman and Sokoloff 2000), we still have an imperfect knowledge of how representative institutions originate and change. Political institutions are difficult to study not only because they are usually endogenous to other variables, such as inequality, culture, or geography, but also because institutional change is rare or may happen very gradually.

In a recent paper (Nikolova 2012), I argue that institutional change depends on labour market conditions: elites opt for liberal representative institutions when labour is scarce, and vice versa. I use a unique data set covering a period of relatively rapid change in representative institutions in the thirteen British American colonies from their very establishment to the American Revolution. In contrast to theories arguing that inequality is the primary determinant of the quality of political institutions (Boix 2003, Acemoglu and Robinson 2005), I show that liberal representative institutions may arise even in cases of high inequality, as the positive impact of labour scarcity outweighs the usual negative relationship between inequality and democracy. The relative fluidity of political institutions in this setting and time period also questions the validity of arguments linking institutions to historical persistence. In terms of implications for contemporary countries, the theory predicts that as autocratic regimes – such as China – face more binding labour constraints, democracy will be more likely to emerge.

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What determines democracy? And what helps to maintain it?

by Martin Gassebner, Michael J. Lamla and James Raymond Vreeland

Vox
August 11, 2012

Will democracy establish itself in the Middle East? This column looks at what is needed to start democracies are what is needed to keep them going. It argues that that it is the level of economic development – not short-run economic growth – that is needed for democracy to survive.

Democracy is on the move in the Arab world. Whether democratic regimes will emerge and survive remains an open question, and the intense media coverage of the Arab Spring has revived public interest in the determinants of democracy. The quest to understand why democracy emerges and survives, however, has long been on the agenda of economists and political scientists.

Scientific findings suggest that life is better with more democracies in the world. People living under democracy have higher incomes and tend to enjoy more human rights than people living under authoritarian regimes (Hathaway 2003). Democracies also don’t go to war against each other, and make better trade partners (Russett and Oneal 2001).

So the promotion of democracy is laudable, but do we really know how to ‘cause’ democracy? Scholars have proposed and empirically tested many theories. Yet, no conclusive picture has emerged. Moreover, it is not clear whether the same set of variables that drives the democratisation process also guarantee its sustainability.

Economic explanations of democracy date back to Lipset (1959) who is often cited as father of 'modernisation theory'. The theory contends that as countries develop economically, social structures become too complex for authoritarian regimes to manage. At some point, dictatorship collapses and democracy emerges as the alternative. Przeworski et al. (2000) contend, however, that the emergence of democracy is random with respect to economic development. The correlation between development and democracy is driven instead by the survival of democracy. Przeworski (2005, 253) argues that "democracy prevails in developed societies because too much is at stake in turning against it." Conversely, in poor democracies, "the value of becoming a dictator is greater and the accumulated cost of destroying capital stock is lower" (Przeworski and Limongi 1997, 166). So democracy emerges idiosyncratically, but it survives in countries with high levels of economic development.

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Why the Dismal Science Deserves Federal Funding

by Gary S. Becker and James J. Heckman

Wall Street Journal
August 10, 2012

The federal deficit has ballooned in recent years, and even larger deficits are coming due to the expected growth of entitlement spending. There is little disagreement among members of both political parties that federal spending should be reduced. In such an environment it is crucial that the right criteria guide the cuts that will be made. Across-the-board cuts are not a thoughtful way to make choices.

The guiding principle is basic and obvious: We should cut federal government activities that can be performed at least as well by the private sector, and maintain, or even increase, productive federal activities that the private sector alone cannot handle effectively. There is legitimate disagreement about which activities belong in which category, but the great majority of economists have long agreed that the federal government should have an important role in the sponsorship of basic research. For-profit companies have weak incentives to invest in basic research partly because the results are not patentable, and partly because the culture of basic researchers, and the journals they publish in, makes the results of basic research available to all.

For these reasons the U.S. government has long played a leading role in supporting research in physics, chemistry, biology and medicine, and to a smaller extent in economics and other social sciences. It has also played a leading role in creating objective databases on which to make wise policy. This research and data have paid great dividends in helping to provide a better understanding of DNA, genetics and the human genome, and many other phenomena crucial to the modern world.

Indeed, the remarkable growth in life expectancy in the developed world in the past 60 years has been the result of the combined efforts of federally supported basic researchers at universities and elsewhere, and applied researchers in for-profit drug and biotech companies, and nonprofit institutes.

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The Perfect Non-Crime

by Michael L. Rich

New York Times
August 6, 2012

Even if we could make it impossible for people to commit crimes, should we? Or would doing so improperly deprive people of their freedom?

This may sound like a fanciful concern, but it is an increasingly real one. The new federal transportation bill, for example, authorized funding for a program that seeks to prevent the crime of drunken driving not by raising public consciousness or issuing stiffer punishments — but by making the crime practically impossible to commit. The program, the Driver Alcohol Detection System for Safety (Dadss), is developing in-vehicle technology that automatically checks a driver’s blood-alcohol level and, if that level is above the legal limit, prevents the car from starting.

The Dadss program is part of a trend toward what I call the “perfect prevention” of crime: depriving people of the choice to commit an offense in the first place. The federal government’s Intelligent Transportation Systems program, which is creating technology to share data among vehicles and road infrastructure like traffic lights, could make it impossible for a driver to speed or run a red light. And the Digital Millennium Copyright Act of 1998 has already criminalized the development of technologies that can be used to avoid copyright restrictions, making it effectively impossible for most people to illegally share certain copyrighted materials, including video games.

Or consider a more speculative scenario: some pharmaceuticals show the promise of blunting the “high” of cocaine use or reducing antisocial thoughts of the sort that often lead to crime. Widespread dissemination of such drugs — say, putting them in the public water supply — could make some crimes impossible by eliminating a potential offender’s desire to commit them.

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Scott Menchin

China's Growth: Planning or Private Enterprise?

by Paul Gregory

Library of Economics & Liberty
August 6, 2012

Introduction

China appears to have come through the world economic crisis better than many other countries. China's admirers claim that, under China's "state capitalism," planners have guided large state companies rationally and wisely through the rough seas of the world economy. The Chinese Communist Party (CPC) plans, oversees, and administers the interwoven network of state banks, airlines, railroads, utilities, oil companies, and large manufacturers, all of which make up the economy's "commanding heights" (to use Lenin's term). As Europe and the United States slump, the CPC can speedily launch infrastructure projects or shift millions of migrant workers from one locality to another. There is no messy democracy to gum up the works. New York Times columnist Thomas Friedman extols: "A one party system can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century."

But Ludwig von Mises in the 1920s and F. A. Hayek in the 1930s discredited the idea that planners can manage an entire economy. Hayek pointed out that central planners lack "the knowledge of the particular circumstances of time and place." Because the planners do not have the information that rests with hundreds of thousands of companies and millions of consumers, planning fails, as it did spectacularly in the Soviet Union. Interestingly, even socialist economist Robert Heilbroner admitted as much. China is not an exception. Its economic growth has occurred despite the government's economic planning and because of its large, dynamic private sector.

China's Economic Growth

As Figure 1 shows, China's Gross Domestic Product grew from 1979 to the present at an average of slightly over 8.5 percent per annum. Although Japan and the Four Tigers (Hong Kong, Singapore, South Korea, and Taiwan) matched that growth rate at various points in the past, more than thirty years of such high growth is unique. The CPC would like us to believe its growth is due to its peculiar brand of socialism with a Chinese face. In fact, what deserves credit is the entrepreneurship of the Chinese people.

Figure 1. China's Growth Rate of GDP, 1983-2011

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What If Jurors Don’t Understand Standards of Evidence?

A scene from Twelve Angry Men

by Christopher Shea

Wall Street Journal
August 3, 2012

“Beyond a reasonable doubt,” a “preponderance of evidence”: Forests of trees have been sacrificed as judges and lawyers have hammered out the standards for evidence that should apply in different types of cases. The trouble is, as a new study demonstrates, in many instances it’s ultimately up to laypeople on juries to apply those standards. And ordinary people may not grasp the distinctions lawyers place so much weight on:

Three standards—preponderance of evidence, clear and convincing evidence, and beyond a reasonable doubt—are used by different jurisdictions in trials involving liability for punitive damages. We investigated whether individual mock jurors apply these standards appropriately by instructing them to read two personal injury trial summaries and to use one of three standards in either qualitative or quantitative format when deciding punitive liability. Results showed that jurors tended not to incorporate the standard into their judgments: defendants were just as likely to be found liable when the plaintiff’s burden was high (“beyond a reasonable doubt”) as when the burden was low (“preponderance of evidence”). The format of the instruction also had a negligible effect. We suggest that nonuse of the standard of proof is related to jurors’ preferences for less effortful or experiential processing in situations involving complicated or ambiguous material.

That last sentence sounds like a polite way of saying: If the question is too complicated, jurors wing it. Or, as the authors put it, in the conclusion of their paper, “[J]urors’ judgments in civil cases involving punitive damages may be influenced by their biases and commonsense interpretations of the law.”

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The Bad History Behind ‘You Didn’t Build That’

by Virginia Postrel

Bloomberg
August 3, 2012

The controversy surrounding President Barack Obama’s admonishment that “if you’ve got a business -- you didn’t build that. Somebody else made that happen” has defied the usual election-year pattern.

Normally a political faux pas lasts little more than a news cycle. People hear the story, decide what they think, and quickly move on to the next brouhaha, following what the journalist Mickey Kaus calls the Feiler Faster Thesis. A gaffe that might have ruined a candidate 20 years ago is now forgotten within days.

Three weeks later, Obama’s comment is still a big deal.

Although his supporters pooh-pooh the controversy, claiming the statement has been taken out of context and that he was referring only to public infrastructure, the full video isn’t reassuring. Whatever the meaning of “that” was, the president on the whole was clearly trying to take business owners down a peg. He was dissing their accomplishments. As my Bloomberg View colleague Josh Barro has written, “You don’t have to make over $250,000 a year to be annoyed when the president mocks people for taking credit for their achievements.”

Hectoring Entrepreneurs

The president’s sermon struck a nerve in part because it marked a sharp departure from the traditional Democratic criticism of financiers and big corporations, instead hectoring the people who own dry cleaners and nail salons, car repair shops and restaurants -- Main Street, not Wall Street. (Obama did work in a swipe at Internet businesses.) The president didn’t simply argue for higher taxes as a measure of fiscal responsibility or egalitarian fairness. He went after bourgeois dignity.

Bourgeois Dignity is both the title of a recent book by the economic historian Deirdre N. McCloskey and, she argues, the attitude that accounts for the biggest story in economic history: the explosion of growth that took northern Europeans and eventually the world from living on about $3 a day, give or take a dollar or two (in today’s buying power), to the current global average of $30 -- and much higher in developed nations. (McCloskey’s touchstone is Norway’s $137 a day, second only to tiny Luxembourg’s.)

That change, she argues, is way too big to be explained by normal economic behavior, however rational, disciplined or efficient. Hence the book’s subtitle: “Why Economics Can’t Explain the Modern World.”

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Robert D. Cooter & Hans-Bernd Schäfer, "Solomon's Knot: How Law Can End the Poverty of Nations"

Princeton University Press
August 2012

Sustained growth depends on innovation, whether it's cutting-edge software from Silicon Valley, an improved assembly line in Sichuan, or a new export market for Swaziland's leather. Developing a new idea requires money, which poses a problem of trust. The innovator must trust the investor with his idea and the investor must trust the innovator with her money. Robert Cooter and Hans-Bernd Schäfer call this the "double trust dilemma of development." Nowhere is this problem more acute than in poorer nations, where the failure to solve it results in stagnant economies.

In Solomon's Knot, Cooter and Schäfer propose a legal theory of economic growth that details how effective property, contract, and business laws help to unite capital and ideas. They also demonstrate why ineffective private and business laws are the root cause of the poverty of nations in today's world. Without the legal institutions that allow innovation and entrepreneurship to thrive, other attempts to spur economic growth are destined to fail.

Robert D. Cooter is the Herman F. Selvin Professor of Law at the University of California, Berkeley. His books include The Strategic Constitution (Princeton). Hans-Bernd Schäfer is professor of law and economics at the Bucerius Law School in Hamburg, Germany, and professor emeritus at the University of Hamburg. His books include The Economic Analysis of Civil Law.

Endorsements

Growth spurts that catapult a country or region to economic preeminence are fascinating but poorly understood. Cooter and Schäfer show that such spurts tend to track legal changes that facilitate the protection of property, the enforcement of contracts, and, most important, the launching of innovative business ventures. Consistently creative, insightful, and entertaining, Solomon's Knot makes a major contribution to the growing literature on the evolution of international differences in wealth."

Timur Kuran, Duke University

Cooter and Schäfer provide a thorough introduction to growth economics through the lens of law and economics. They do a masterful job of weaving in historical anecdotes from all over the world, detailed discussions of historical transformations, theoretical literature, empirical studies, and numerous clever hypotheticals. Scholars as well as general readers will find this book to be very useful and informative.

Henry N. Butler, George Mason University

Romney Hasn’t Done His Homework

by Jared Diamond

New York Times
August 1, 2012

Mitt Romney's latest controversial remark, about the role of culture in explaining why some countries are rich and powerful while others are poor and weak, has attracted much comment. I was especially interested in his remark because he misrepresented my views and, in contrasting them with another scholar’s arguments, oversimplified the issue.

It is not true that my book Guns, Germs and Steel, as Mr. Romney described it in a speech in Jerusalem, “basically says the physical characteristics of the land account for the differences in the success of the people that live there. There is iron ore on the land and so forth.”

That is so different from what my book actually says that I have to doubt whether Mr. Romney read it. My focus was mostly on biological features, like plant and animal species, and among physical characteristics, the ones I mentioned were continents’ sizes and shapes and relative isolation. I said nothing about iron ore, which is so widespread that its distribution has had little effect on the different successes of different peoples. (As I learned this week, Mr. Romney also mischaracterized my book in his memoir, No Apology: Believe in America.)

That’s not the worst part. Even scholars who emphasize social rather than geographic explanations — like the Harvard economist David S. Landes, whose book The Wealth and Poverty of Nations was mentioned favorably by Mr. Romney — would find Mr. Romney’s statement that “culture makes all the difference” dangerously out of date. In fact, Mr. Landes analyzed multiple factors (including climate) in explaining why the industrial revolution first occurred in Europe and not elsewhere.

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