poly: Econ, the final frontier...

From: Damien R. Sullivan <phoenix@ugcs.caltech.edu>
Date: Sun Dec 21 1997 - 18:52:31 PST

...of knowledge.

Not quite, but a few days ago I tried out on some friends Robin's puzzle
of why people have emphatic opinions about economic and social issues
they don't know much about, and not about physics issues. The response
was the usual "Ha! What's to know about economics!" I then thought
that I had very little idea of what was happening in economics; in
physics I can at least hand-wave something about supertrings and
11-dimensional M(embrane) theory. So perhaps I should go look at some
journals. I did so, and eventually it was exciting.

At first I looked at the (Sept 97) Journal of Economic Theory. Much of
that seemed to be pure esoteric mathematics, probably connected to game
theory. The first article was on "infinite convex games". Not good.

But then there was Suarez and Sussman, who described a very simple model
economy, with purely rational actors, which went into a persistent
boom-bust cycle, driven solely by the moral hazard incurred by the model
entrepreneurs borrowing money for investment. They also found that the
state could level things out, but the benefits could not be
redistributed in a Pareto-optimal fashion (i.e. no one loses) because
doing so would defeat the intervention somehow. To me all this seems to
have sigificant macro-economic implications, but I don't know enough
context to know how important the result is.

I believe there was also an article on CEO compensation, and how
sensitive the compensation of model CEOs was to the performance of their

Eventually I switched to the Journal of Economic Behavior and
Organization, which had more fun topics. May 1997:

Anderson and Swimmer looked at the property access rights of "first
peoples" (hunter-gatherers, I think) and how those correlated with the
authors' estimates for the most rational way to exploit the property.
If the benefits of private property are outweighed by exclusion costs
then shared property (by the family, tribe, or other subgroup) will be
better. If governance costs (to mitigate shirking or overexploitation)
are high then an open system will be better. It's easy to exclude
someone from your tools or weapons or a small house; hard to exclude
someone from the open forest. They claimed there were significant
correlations. So traditional societies might have less to do with
traditional culture and wisdom and more to do with traditional lack of

Konrad and Skaperdas (sp? can't read my notes) looked at the problem of
credible extortion threats when the gang can't demonstrate its
investment in violence by any means short of punishing someone.
Conclusion: if there's one gang, and one shop, the gang shouldn't invest
and the shopkeeper should refuse payment. I forget the rest, except
they hinted that it could be shown that low levels of police protection
make life worse for the shopkeepers, but didn't actually show it.

N. Gaston joined what is apparently a growing body of literature on the
role of managers in firms. When reputation isn't perfect shareholders
have trouble plausibly committing to deferred compensation for workers,
and the manager, as an entrenched separation between ownership and
control, can plausibly be more honest. Or even overfavor the workers;
Gaston claimed to show that corporate debt could be a mechanism for
limiting the manager's overpayments to workers, by raising the chance of
bankruptcy, which is presumed to hurt the manager. (As I thought of
myself as browsing I did not try following all of the proofs.) Note
that tying the manager's compensation to stock value makes her interests
align with the owners, and removes the benefits of separate control.

There was also an implication that the normal manager would tolerate
shirking. All this seems to mirror the supopsed shift in corporate
America: managers get more stock options, more people get fired, get
less money.

And in the March 1990 JEBO, Douglas Allen had a piece on the economics
of cohabitation and marriage. Cohab. reduces the transaction costs of
goods that are hard to trade on the normal market, like sexual favors
and the production of children. Marriage -- third party (church or
state) standardization and regulation of cohabitation -- makes it easier
to enter into cohab. with limited info, when such arrangements have a
standard structure. That is legal marriage has less to do with
the persistence of religious attitudes and more to do with the state
helping out contract formation in an lousy market.

I took a lot of notes on that one, and won't try summarizing them fully
now. It does remind me of DDFR's end chapter in _Hidden Order_.

Independently, I have a review (Cass Sunstein) of _Greed, Chaos,
and Governance: Using Public Choice to Improve Public Law_, by Jerry L.
Mashaw. Mashaw apparently makes an unusual case that bureaucracies make
better laws than legislatures, and should be allowed to make important
policy decisions. Again, I can't properly summarize right now.
(Although I have seen the Bundesbank praised as the one voice of
effective sanity between Europe and a disastrous leap into the
straitjacket of the euro.)

I hope this stimulates some new directions of discussion.

-xx- GCU I'm Color Blind; I Only See Grey X-)

Received on Mon Dec 22 02:44:00 1997

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