Archive for the ‘Economics’ Category

Iraq Stock Exchange Starts Electronic Trading

April 20, 2009

A signal day.  Without fanfare, the ISX has opened electronic trading in five companies, with more to follow.  Here are Reuters and USA Today.

“This is an important step to opening ourselves up to foreign investment,” said Taha Ahmed Abdul Salam, chief executive of the exchange. “We are starting to create the transparency and systems that will make Iraq attractive to investors outside of Iraq.”  [That’s from USA Today.  The AP got the CEO mixed up with the head regulator.]


First I Was a Hippie

March 3, 2009

… then I was a stockbroker, now I am a hippie again.

In the words of The Bobs.

Here is the album.

A Modest Proposal for the Prevention of Stock Price Bubbles

February 19, 2009

A modest proposal to reduce the probability of future stock bubbles.

This is inspired by commenter sociologicalimagination on this post by Tyler Cowen:

mid-term question: how many NBER papers on the efficient market hypothesis could I print out every week (with my stimulus money) that have been proven utterly false in the past 6 months?

The efficient-market hypothesis comes in three flavors: strong, semi-strong, and weak.  Strong says that prices reflect all information, public and private, so no one can earn “excess returns” (better-than-average returns gained by crafty trading).  Semi-strong says that prices adjust rapidly and completely to newly-available public information, so no one can earn excess returns by analyzing public information or past prices.  Weak says only that future prices cannot be predicted from past prices.

I take sociologicalimagination’s comment to mean that the strong form is certainly false.  A lot of firms took on risk that very few recognized or understood.  What could protect us from future emperor-has-no-clothes moments with the likes of Bear, Lehman, AIG, and Countrywide?

We need a better way to let the people inside those firms let us know when something bad (or good) is happening.  Let’s legalize insider trading so they can send us price signals.  And to be safe, let’s let them short their employers’ stocks too.  That would get us closer to an efficient market.

I don’t know whether insiders could have sent a strong enough signal to head off the crashes of 2008.  (If they did, we wouldn’t know we had dodged a bullet.)  Insiders can herd just like independent investors.  Maybe the risks were too systemic, and simply not visible from the perspective of any one firm.  Some insiders will probably make unfair profits by selling ahead of bad news.  And we’ll have to appologize to Martha Stewart.  But think of how much we’re going to pay for extra enforcement over the next few years.  Wouldn’t it be better to give millions of dollars over years to insiders, in exchange for braking the market, rather than losing hundreds of billions in destroyed market value and future taxation?

(Brief sojourn into non-Iraq economics blogging.  As always, not the opinion of the U.S. Dept. of State or any other entity.  Semi-regular Iraq blogging to return soon, I hope.)

Advice for Young Economists

June 2, 2008

Oxonian and blogger David Adesnik reveals his recent whereabouts:

I’ve mentioned in passing that I’ve been travelling abroad for the past few months. Well, that was a euphemism. I was in Iraq, working as an analyst for the Coalition’s counter-IED task force. [Via Instapundit.]

Good on you, David. David’s post crystallized a response I had in mind for a recent post at Marginal Revolution:

A loyal MR reader asks:

I am now beginning the process of choosing classes for next year. I thought your advice might again be useful. I am in the unusual position of finding nearly all fields potentially interesting.

If you are a young economist, anthropologist, or political scientist, my advice to you is: come to Iraq. If you want to see the interplay between economic growth and governance, the competition of state and non-state structures, practical challenges in aid and development assistance, microeconomics with weak contract enforcement and rule of law – this is the place. I guarantee you will get ideas and material for a dozen smashing papers.

It might be hard to find a slot if you don’t already have background in the Middle East, but there is always work for smart, creative, pragmatic people. There are many private sector and non-profit organizations here. Here is one place to start.

Aside from personal and professional benefits, in Iraq you will get the satisfaction of helping people who are sacrificing everything to overcome enormous difficulties.

UPDATE 6/2/08: Marginal Revolution has another relevant post with advice for an aspiring development economist, visiting a developing country. As to the question of street food, I eat the street food here, and have no problems.

Governance and Growth

May 5, 2008

Harvard development economist Dani Rodrik has some interesting things to say about governance and economic development – two topics of great interest to counterinsurgents. From his remarks from an April 15 World Bank panel:

A deep insight that has emerged out of the disappointments of the Washington Consensus is that successful policy reform is at its core governance reform. Reforms in the areas of, say, trade or fiscal policy require much more than just cuts in tariffs and a balancing of the budget. If you want to achieve lasting change and have a real impact on the behavior of those agents that determine the success of reform, you must change the “rules of the game”—the manner in which trade policy is made or fiscal policy is conducted. This insight, assisted and reinforced by the academic literature on institutions and growth, has in turn produced a new development agenda focusing on a broad list of governance reforms.

Dr. Rodrik goes on to distinguish between “politics-as-an-end” and “politics-as-a-means.” The former is “transparency, effectiveness, rule of law, lack of corruption, voice and participation… at their core social, political, and legal arrangements which markets-and economic analysis-typically presuppose… deeply embedded in the history, traditions, and politics of a society.”

The latter is the value that good governance creates by providing “producers and households with greater clarity on the rules of the game and investors with greater assurance that they can appropriate the returns to their efforts.” Good governance may or may not be necessary for growth – growth is achieved by removing the most binding constraints, and in some countries governance is not most binding.

Economists and development professionals (says Dr. Rodrik) can give useful advice on governance-as-a-means but not necessarily governance-as-an-end. What’s more, the path to pursue one might not be congruent with the path to pursue the other – there may be tradeoffs.

For most countries the “good governance” and the “governance for growth” agendas are likely to differ substantially. Economists have precious little to say about how to achieve the first of these, but plenty to contribute to the second. From a growth standpoint, the risk is that the governance agenda takes an independent life of its own, and that it becomes divorced from the particular governance challenges that are most closely linked to stimulating and sustaining economic growth.

In Iraq, of course, the Coalition is pursuing “governance-as-an-end” – democratization. At the same time, economic development is seen as important for the later phases of counterinsurgency. It demonstrates the government’s capabilities, reduces grievances (as Austin Bay would say) and absorbs accelerants (military-aged men). Therefore, our Provincial Reconstruction Teams have both political and economics sections.

Here are the comments from the full panel (pdf) via Tyler Cowen. Includes Daron Acemolgu and Francis Fukuyama, but I haven’t had time to go through them.

Industrial Policy

August 14, 2007

Marginal Revolution is sparring with Dani Rodrik over Dr. Rodrik’s post “Should industrial policy be fit for polite company?” in which he said that since we tolerate massive state intervention in the spheres of education, health care, and so on, we shouldn’t rule it out so dogmatically in the sphere of industrial development.

This drew a sharp response from Alex Tabarrok at Marginal Revolution, who commented:

“politicians… are prone to corruption and rent-seeking by powerful groups and lobbies.”

Absolutely correct. The obvious conclusion? Industrial policy is a good idea. I kid you not.

I should have thought Dr. Rodrik’s post was relatively pedestrian. I think I’m a pretty doctrinaire free-markets advocate, but there’s no question that state policy has sometimes played a positive role in industrialization – hard as it was for me to swallow as an undergraduate. From Governing the Market (1990) by Robert Wade:


Quick Links

August 14, 2007

Here are a couple of interesting economic links:

Review: In Praise of Commercial Culture

July 14, 2007

In his 1998 book In Praise of Commercial Culture, Tyler Cowen, the prolific co-author of Marginal Revolution, makes two arguments. The first, about the effects of capitalism on art, is convincing, but the second, about critiques of art, is not.

Dr. Cowen argues that production and distribution via market mechanisms benefits artists and art consumers. Competition and consumer taste do a good job of selecting the best artists and eliciting innovation and masterworks. Technological advances and increasing wealth open up new possibilities and greater independence for artists. Many great artists of the past, from the Renaissance to the Impressionists, explicitly operated as businessmen in a market. On the whole, market forces have been salutary for art and artists; therefore commentators should not fear commercialism in film, publishing, music, or other art markets.

This is the primary argument of the book and Dr. Cowen supports it well. Recent applications of technology to facilitate “long tail” markets provide yet another illustration of the benefits of capitalism for the arts.

However, Dr. Cowen also spends a lot of space beating up “cultural pessimists,” which I found less convincing. Cultural pessimists seem to come in two flavors: those that say the market corrupts, homogenizes, or otherwise damages the production of art, and those that decry the perceived moral or political effects of certain artworks.


The Great Depression in Memory

June 25, 2007

In this week’s New Yorker, John Updike mounts a rearguard fight against Amity Shales’s The Forgotten Man: A New History of the Great Depression.

Mr. Updike begins with a warning against “Great Depression nostalgia” but a few hundred words later he succumbs himself:

Roosevelt made such people feel less alone. The impression of recovery—the impression that a President was bending the old rules and, drawing upon his own courage and flamboyance in adversity and illness, stirring things up on behalf of the down-and-out—mattered more than any miscalculations in the moot mathematics of economics. Business, of which Shales is so solicitous, is basically merciless, geared to maximize profit. Government is ultimately a human transaction, and Roosevelt put a cheerful, defiant, caring face on government at a time when faith in democracy was ebbing throughout the Western world.

These 95 words are a good precis of the core defects of twentieth-century liberalism. Government succeeds when people “feel” better, regardless of policies’ actual outcomes. Appearance of action is more important than the action itself. Business is “merciless” and “maximizes profit,” while government is “a human transaction.” (Mr. Updike should compare the experiences of shopping at Target and renewing a driver’s license.)


Review: Games Prisoners Play

June 8, 2007

Marek Kaminski’s Games Prisoners Play: The Tragicomic World of Polish Prison is a fascinating work of applied game theory. An underground publisher for Solidarity, Mr. Kaminski was arrested and jailed for five months in the mid-1980s. Turning lemons to lemonade, he used his term of “temporary imprisonment” to study the prisoners’ secret culture, including the elaborate and (to a rookie) bizarre secret codes and customs of the ruling inmate caste or society, the grypsmen.

I decided to make the best of my personal misfortune and use it as a unique opportunity to study this fascinating society-within-society. My goals were clear: I did not want to write nostalgic memoirs or point an accusing finger at the regime that had jailed me. I wanted to conduct an extensive and uncompromising research project, using all of my methodological skills. … Surprisingly, “researching prison” turned out to be an excellent survival strategy. … It helped me to socialize into my new role as an inmate and, at the same time, maintain a healthy distance from it. If you, my reader, are ever unfortunate enough to be jailed, I highly recommend the strategy of “researching prison.”

Mr. Kaminski found that even the most grotesque behavior of inmates was in fact the product of strictly calculated optimization. To explain the choices made by “hyperrational” prisoners (“ardent optimizers”), Mr. Kaminski turned to game theory, and the book includes many examples of interesting games with private information, hidden choices and moves, incorrectly estimated payoffs, and so on.

Games Prisoners Play may not be for the faint of heart – Mr. Kaminski treats every topic with a prisoner’s frankness. But the book is a gem for the economist and game theoretician, while remaining accessible – if not gripping – for the general reader.  Mr. Kaminiski’s dry humor is never far from the surface, as may be seen in this excerpt from the Acknowledgments:

Finally, this research would have been impossible without the collective hard work of thousands of anonymous policemen, prosecutors, and judges who tirelessly jailed and imprisoned thousands of Polish and other Eastern European dissidents during the reign of communism. Their efforts are unlikely ever to get the attention they deserve.

Here’s another review that relates Kaminski’s work to Gary Becker’s 1968 paper, “Crime and Punishment: An Economic Approach.” Here is the book’s page at Princeton University Press.