Surprised though I am that other contributors to this post haven't beaten me to the punch, the prospect of massive government intervention in the financial sector is too tantalizing to pass up. I will exercise restraint only insofar as sticking to a rather esoteric academic point, albeit a very important practicial consideration. Others can pile on to those public figures unwitting enough to already be embroiled. (If only those drawing lessons had panned out--today would be a great day to be an editorial cartoonist.)
Judging from the recent behavior of the current and prospective future administrations, Congress in all its sordid manifestations, sundry pundits of all stripes, and our central bank(ers), I'd venture that little thought has been given to the implementation of any bailout plan. Full stop. So what is the optimal way to throw $700 billion at the financial sector? Carpet-bombing Wall Street with bags of cash? Opening the "bad security" window to all comers? To all domestic comers? Targeting certain actors? (magnificant corruption/campaign contribution potential) Or should the eggheads engineer a reverse auction? Perhaps, to borrow a bit of jargon, we need to design a market for bad debt? Or we could all hearken back to our darkest days of solving mechanism design problems, and identify the social welfare function we seek to maximize. Actually, that might be a really good thing for Hank Paulson to do...
Tuesday, September 23, 2008
Monday, September 22, 2008
Book Review: Gridlock Economy
Michael Heller coined the term “anticommons” to describe the inefficient over-allocation of property rights in post-Soviet Russia. In Gridlock Economy, he expounds in a popular setting (albeit thoroughly-referenced) on the ideas he has developed in the legal literature and elsewhere.
The seminal example of thriving sidewalk kiosks adjacent to the well-lit but empty Moscow storefronts receives an entire chapter. The reader is encouraged not to blame the thoroughly-credentialed World Bank advisors who helped create the legal labyrinth that was to blame for the underuse of the valuable storefronts (Heller for the World Bank advisors, and he, obviously, didn’t screw anything up—ignore the fact that the Russians lacked any people with a memory of capitalism, even of a Tsarist flavor, and had to rely on their Western advisors for advice in quickly establishing functional market structures under political constraints). The takeaway from that and most of the other stories is that anticommons problems are much more likely when the government tries to create new property rights from scratch, and doesn’t quite get it right. Beware PES. Sorry, experts.
The more interesting examples pertain to the cutting edge of the economy: the ultraviolet spectrum and the patenting of biomedical technologies. In the first case, the inefficient overallocation of the spectrum in the U.S. is implicated in the sub-standard quality of wireless broadband telecommunications. The second case is the crux of a debate over proprietary versus open-source research output, especially when prior work is requisite (as in the case of particular gene sequences) for further advances. Is the cure for cancer going undiscovered because researchers fear patent trolls?
The least satisfying chapter is the final one, in which Heller explores the economic history of oysters. While the common-property dimensions of the problem are apparent, and vividly illustrated in the rent dissipation of oyster wars, what is not clear is how we should think about oysters as an anticommons problem. Is it just that the Chesapeake is divided between Virginia and Maryland? Or that it took nearly two hundred years to negotiate a settlement? Prudhoe Bay took a long time to unitize, but not because of commons and bilateral monopoly problems as opposed to anticommons issues. Early in the book Heller acknowledges Buchanan and Yoon’s model of the anticommons as the theoretical analogue of the commons. However, the evidence that he presents in anecdotes throughout the book isn’t always clear about which problem has the upper hand. The spectrum and biomedical patent examples are transparent, as the spatial and legal anticommons in land. But in other cases, like oysters, it’s not so clear.
Heller’s core suggestions are well-taken. We should think about the costs of overdefining property rights in counterproductive ways. We should expand the English vocabulary in ways that word processors inject fewer squiggles under descriptors like underuse, anticommons, and overdefine. But the challenge of theoretically and empirically refining the anticommons concept remains. That said, numerous interesting research lines present themselves.
The seminal example of thriving sidewalk kiosks adjacent to the well-lit but empty Moscow storefronts receives an entire chapter. The reader is encouraged not to blame the thoroughly-credentialed World Bank advisors who helped create the legal labyrinth that was to blame for the underuse of the valuable storefronts (Heller for the World Bank advisors, and he, obviously, didn’t screw anything up—ignore the fact that the Russians lacked any people with a memory of capitalism, even of a Tsarist flavor, and had to rely on their Western advisors for advice in quickly establishing functional market structures under political constraints). The takeaway from that and most of the other stories is that anticommons problems are much more likely when the government tries to create new property rights from scratch, and doesn’t quite get it right. Beware PES. Sorry, experts.
The more interesting examples pertain to the cutting edge of the economy: the ultraviolet spectrum and the patenting of biomedical technologies. In the first case, the inefficient overallocation of the spectrum in the U.S. is implicated in the sub-standard quality of wireless broadband telecommunications. The second case is the crux of a debate over proprietary versus open-source research output, especially when prior work is requisite (as in the case of particular gene sequences) for further advances. Is the cure for cancer going undiscovered because researchers fear patent trolls?
The least satisfying chapter is the final one, in which Heller explores the economic history of oysters. While the common-property dimensions of the problem are apparent, and vividly illustrated in the rent dissipation of oyster wars, what is not clear is how we should think about oysters as an anticommons problem. Is it just that the Chesapeake is divided between Virginia and Maryland? Or that it took nearly two hundred years to negotiate a settlement? Prudhoe Bay took a long time to unitize, but not because of commons and bilateral monopoly problems as opposed to anticommons issues. Early in the book Heller acknowledges Buchanan and Yoon’s model of the anticommons as the theoretical analogue of the commons. However, the evidence that he presents in anecdotes throughout the book isn’t always clear about which problem has the upper hand. The spectrum and biomedical patent examples are transparent, as the spatial and legal anticommons in land. But in other cases, like oysters, it’s not so clear.
Heller’s core suggestions are well-taken. We should think about the costs of overdefining property rights in counterproductive ways. We should expand the English vocabulary in ways that word processors inject fewer squiggles under descriptors like underuse, anticommons, and overdefine. But the challenge of theoretically and empirically refining the anticommons concept remains. That said, numerous interesting research lines present themselves.
Tuesday, September 16, 2008
Market Design: An Update?
If McMillan were updating his paper today (he died well before his time), he might add a few examples to his list. Among the highlights:
RGGI --> 9 days till the first auction!
Pending FAA slot auctions --> The FAA has finally come around to the advice of academic economists. If only Charles Schumer and the Port Authority would get out of the way...
Key Word Auctions --> Microsoft employs Susan Athey as their chief economist. This is a very big-dollar new market institution that has plenty of design elements from the academic literature.
RGGI --> 9 days till the first auction!
Pending FAA slot auctions --> The FAA has finally come around to the advice of academic economists. If only Charles Schumer and the Port Authority would get out of the way...
Key Word Auctions --> Microsoft employs Susan Athey as their chief economist. This is a very big-dollar new market institution that has plenty of design elements from the academic literature.
Monday, September 15, 2008
Market Design: worthwile reading
McMillan's proceedings paper from the 2003 meetings is still worth reading. I can't introduce the topic of market design better than McMillan does:
Herbert Stein, advisor to presidents, noted that "most of the economics that is usable for advising on public policy is about at the level of the introductory undergraduate course." My subject is the remainder of usable economics: the part that is not elementary.
McMillan reviews several instances of the economist acting as engineer (a turn of phrase that I think is properly attributed to Roth). I list them in my own order, descending roughly in the order of most-to-least designed, i.e. where economists had the most direct influence to where they had the least.
* Spectrum sales (FCC to start with; now UK and Continental Euro markets as well)
* Electricity sales (peak load pricing, etc.)
* FTC divestitures
* Treasury experiments (uniform vs. discriminatory when there is multi-unit demand)
Note here: The notion of demand-reduction is what makes the uniform format no longer truth-revealing. This was pointed out by Ausubel and Cramton in what now must be the most well cited unpublished manuscript ever. Anybody know another?
...
and the rest:
* Procurement at the Pentagon
* Privatization of British Telecoms and former Soviet economies (the whole shebang)
Herbert Stein, advisor to presidents, noted that "most of the economics that is usable for advising on public policy is about at the level of the introductory undergraduate course." My subject is the remainder of usable economics: the part that is not elementary.
McMillan reviews several instances of the economist acting as engineer (a turn of phrase that I think is properly attributed to Roth). I list them in my own order, descending roughly in the order of most-to-least designed, i.e. where economists had the most direct influence to where they had the least.
* Spectrum sales (FCC to start with; now UK and Continental Euro markets as well)
* Electricity sales (peak load pricing, etc.)
* FTC divestitures
* Treasury experiments (uniform vs. discriminatory when there is multi-unit demand)
Note here: The notion of demand-reduction is what makes the uniform format no longer truth-revealing. This was pointed out by Ausubel and Cramton in what now must be the most well cited unpublished manuscript ever. Anybody know another?
...
and the rest:
* Procurement at the Pentagon
* Privatization of British Telecoms and former Soviet economies (the whole shebang)
Monday, September 8, 2008
Book Review: The Price of Everything
While The Price of Everything is a work of fiction, its subject matter is economics and its author is an academic economist. The book was the subject of a recent podcastby author Russ Roberts as part of his regular EconTalk series. So while he chose to package his message in a fictionalized setting, the subject matter is clearly economic. In this sense he follows a path previously followed by the aptly-pseudonymed Marshall Jevons, whose economic murder-mysteries have been around for some years. I remember one of them being assigned reading in an undergraduate economics course. The fact that I remember in itself suggests that fiction may be an effective means to communicate economic ideas.
Roberts' point is that decentralized systems can give rise to emergent order. Through the character if Ruth Lieber, Stanford provost and professor of economics, he lays out the case for the efficiency of prices as system of conveying information. This argument closely follows Hayek's 1945 AER article that everyone should read at least twice. The plot follows two elite Stanford athletes (who are, of course, madly in love with one another, and who apparently are so good that they needn't practice or travel to competition as much as I remember or one would suspect) as they are introduced to and eventually won over by the advantages of market interactions as advocated by the charismatic Lieber.
Roberts scores points on two fronts. First, his underlying point is of course an excellent one. Today smart people around the world are constantly arguing for intervention for one thing or another without fully recognizing the advantages of the decentralized market. That is, change for the sake of change, not change because we can actually expect to improve on the current outcome. Second, he manages to do this in far less verbose fashion than other authors; for example Ayn Rand, who can and does address this topic, would attempt it in no less than 350 pages. See Atlas Shrugged.
That said, while fiction proves a useful vehicle to Roberts, as a piece of literature I am reminded of an English prof who taught possibly the most instructive class that I took in college. I believe that he would have described the structure (and details) of the narrative as "putrid." I agree. This is not good fiction, let alone literature. However, to harp about the tree and miss the forest is a tragedy in this case, since part of the emergent systems argument is based on the advanatges of specialization. Roberts is a full professor of economics at George Mason. If his calling were as a novelist, his life likely would have played out differently.
Roberts' point is that decentralized systems can give rise to emergent order. Through the character if Ruth Lieber, Stanford provost and professor of economics, he lays out the case for the efficiency of prices as system of conveying information. This argument closely follows Hayek's 1945 AER article that everyone should read at least twice. The plot follows two elite Stanford athletes (who are, of course, madly in love with one another, and who apparently are so good that they needn't practice or travel to competition as much as I remember or one would suspect) as they are introduced to and eventually won over by the advantages of market interactions as advocated by the charismatic Lieber.
Roberts scores points on two fronts. First, his underlying point is of course an excellent one. Today smart people around the world are constantly arguing for intervention for one thing or another without fully recognizing the advantages of the decentralized market. That is, change for the sake of change, not change because we can actually expect to improve on the current outcome. Second, he manages to do this in far less verbose fashion than other authors; for example Ayn Rand, who can and does address this topic, would attempt it in no less than 350 pages. See Atlas Shrugged.
That said, while fiction proves a useful vehicle to Roberts, as a piece of literature I am reminded of an English prof who taught possibly the most instructive class that I took in college. I believe that he would have described the structure (and details) of the narrative as "putrid." I agree. This is not good fiction, let alone literature. However, to harp about the tree and miss the forest is a tragedy in this case, since part of the emergent systems argument is based on the advanatges of specialization. Roberts is a full professor of economics at George Mason. If his calling were as a novelist, his life likely would have played out differently.
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