bluuebunny/crossref_metadata_2025 huggingface dataset:
Symposium on the Budget Deficit
Authors: Yellen Janet L
Published: August 2012

Is the ballooning federal budget deficit a serious economic problem? The papers in this symposium provide four perspectives on this issue. Robert Barro and Robert Eisner disagree sharply with the “majority” opinion concerning deficits. In contrast, Edward Gramlich and Douglas Bernheim are more sympathetic to the view that budget deficits lower national saving and thus contribute to a reduction in future living standards.
Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders
Authors: Hahn Robert W
Published: August 2012

In this paper, I consider two tools which have received widespread support from the economics community: marketable permits and emission charges. Until the 1960s, these tools only existed on blackboards and in academic journals, as products of the fertile imaginations of academics. However, some countries have recently begun to explore using these tools as part of a broader strategy for managing environmental problems. This paper chronicles the experience with both marketable permits and emissions charges. It also provides a selective analysis of a variety of applications in Europe and the United States and shows how the actual use of these tools tends to depart from the role which economists have conceived for them.
The Role of Potential Competition in Industrial Organization
Authors: Gilbert Richard J
Published: August 2012

Potential competition is important as a mechanism to control market power. I assess the strengths and limitations of alternative theories of potential competition by examining the available theoretical, empirical and institutional knowledge. I consider four major schools of thought: the traditional model of limit pricing, dynamic limit pricing, the theory of contestable markets, and the market efficiency model. Traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult. Dynamic limit pricing is similar, but emphasizes that markets can only be temporarily protected from entry. Contestability theory, in its pure form, asserts that potential competition is as effective as actual competition in controlling market performance. The efficient markets hypothesis, broadly interpreted, states that markets are workably competitive and that the market structure reflects differential efficiency, not strategic behavior.
Thomas Robert Malthus and David Ricardo
Authors: Dorfman Robert
Published: August 2012

This article will describe the enduring relationship between Thomas Malthus and David Ricardo initiated by a letter Malthus sent to Ricardo in June 1811. It was, very likely, the most remarkable and most fruitful collaboration in the history of economics. It appears that their long and intimate collaboration, and their friendship as well, thrived on their continual disputations. They were two men obsessed by a common enthusiasm, tirelessly pursuing a common goal: to understand the economy. But they did not share a common vision of the good society and thus were condemned to wrestle interminably, though remarkably fruitfully, over the roles of the social classes. Their struggles to convey to each other their views of the forces that drove their economy are an inspiring case study in both the difficulty and the possibility of human communication.
Puzzles: The Arbitrage Mirage, Wait Watchers, and More
Authors: Nalebuff Barry
Published: August 2012

This feature begins with three puzzles motivated by the paradox of the “greener envelope,” which was described in detail in the Winter 1989 issue. Following these exchange paradoxes are two longer puzzles, also with answers provided at the end. The longer puzzles focus on externality problems: how to design social conventions and toll systems to minimize inefficient waiting in line. Answers can be found at the end of the problems.
Auctions and Bidding: A Primer
Authors: Milgrom Paul
Published: August 2012

The “Winner's Curse,” is just one of the surprising and puzzling conclusions turned up by modern research into auctions. Another is the theoretical proposition that, for example, a sealed-bid Treasury bill auction in which each buyer pays a price equal to the highest rejected bid would yield more revenue to the Treasury than the current procedure in which the winning bidder pays the seemingly higher amount equal to his own bid. There are also subtle results that demonstrate the equivalence of such apparently different institutions as the standard sealed-bid auction and the Dutch auction. Other results explain the use of standard auctions as the selling schemes that maximize the welfare of the bid–taker, or as schemes that lead to efficient allocations, minimize transaction costs, guard against corruption by the bid-taker's agents, or mitigate the effects of collusion among the bidders. Finally, for some environments, the theory makes sharp, testable predictions about the bids and profits of various classes of bidders. This paper relies mainly on theory to study these issues, but it will also review some experimental evidence and recent empirical studies testing the predictions of the theory.
In Honor of Robert M. Solow: Nobel Laureate in 1987
Authors: Blinder Alan S
Published: August 2012

Bob Solow shares Galbraith's skill with the pen, Friedman's dexterity with the spoken word, and Samuelson's way of making mathematics sing economics. Take pity on the poor soul—me—who has to stand here and pay tribute to such a man without sounding trite. Here is a man who has done everything, garnered every honor an economist can get, and yet has managed to earn not only the profound respect and admiration of his peers but also their deep affection. It is truly no exaggeration to say that many in our profession look upon him like a brother or like a father, and that economists' faces all over the world lit up when his Nobel Prize was announced.
The Reform of Federal Deposit Insurance
Authors: White Lawrence J
Published: August 2012

In early 1989, the system of deposit insurance in the United States was in crisis. The Federal Savings and Loan Insurance Corporation (FSLIC), the U.S. government agency that provided deposit insurance for savings and loan (thrift) institutions, had sustained massive losses from the insolvencies of hundreds of thrifts. Tens of billions of dollars of general Treasury revenues will be necessary to make good the losses in the insurance fund, which had previously been financed solely through premiums assessed on thrifts' deposits. The Federal Deposit Insurance Corporation (FDIC), which provides similar insurance for deposits in commercial banks, has sustained much smaller losses but is considered to be in poor enough financial condition that its premium assessments will increase substantially. This article will review the current system of deposit insurance and advocate a set of necessary reforms.
Retrospectives: Adam Smith's Invisible Hands
Authors: Persky Joseph
Published: August 2012

After more than two centuries, Adam Smith's famous simile comparing the market system to an invisible hand continues to convey the essential message of Anglo-American political economy. In fact, Smith's buoyant optimism in the efficacy of his system of “natural liberty” has a quite modern ring in this age of deregulation, free trade, and perestroika. For many, the seductive idea of the invisible hand has mutated from analysis to mythology. Given the almost transubstantial view of the invisible hand that sometimes prevails, it may come as something of a shock to discover that Adam Smith required a few awkward and historically specific assumptions to make his argument. Apparently, invisible hand stories have never been all that easy to describe, as a perusal of Smith's original text demonstrates.
Symposium on Federal Deposit Insurance for S&L Institutions
Authors: Jaffee Dwight M
Published: August 2012

Federal deposit insurance was introduced to eliminate the bank runs of the Great Depression: the FDIC (Federal Deposit Insurance Corporation) was created in 1933 to insure commercial bank deposits, and the FSLIC (Federal Savings and Loan Insurance Corporation) was created in 1934 to insure savings and loan association (S&L) deposits. Following a decade of neglect, the Bush administration and Congress moved early in 1989 to resolve the most serious problems yet to confront federal insurance of U.S. bank deposits. How did S&L losses expand so rapidly and unexpectedly? How should FSLIC be redesigned to avoid a reoccurance? Who is going to pay for the existing FSLIC losses? What are the future prospects for the S&L industry?
Seniority, Wages and Productivity: A Turbulent Decade
Authors: Hutchens Robert M
Published: August 2012

Why does a worker's wage tend to grow with seniority in the firm, and what does this have to do with productivity? Two decades ago, neoclassical labor economists thought that the theory of human capital provided a good answer to this question. The last decade has, however, been one of puzzles and doubt. At this point few would give an unambiguous answer. This paper provides a tour of key points in the ongoing debate over the relationship between seniority, wages, and productivity.
Self-Enforcing Contracts, Shirking, and Life Cycle Incentives
Authors: Carmichael H. Lorne
Published: August 2012

The labor market is a rich and complicated place. When a worker takes a job he expects to earn a wage, but will also care about rates of wage growth, fringe benefits, levels of risk, retirement practices, pensions, promotion and layoff rules, seniority rights, and grievance procedures. In return, the worker must give up some time, but he is also asked to upgrade his skills, train other workers, provide effort and ideas, and defer to authority in questions of how his time is spent. Great changes are occurring in the way labor market institutions such as these are modeled. Central to the new approach is the concept of a self-enforcing implicit contract. The focus of this essay is on developments in the theory of self-enforcing contracts, and how these can be used to derive predictions about labor market institutions.
Spontaneous Order
Authors: Sugden Robert
Published: August 2012

In a fishing village on the Yorkshire coast, there used to be an unwritten rule about the gathering of driftwood after a storm. Whoever was first onto a stretch of the shore after high tide was allowed to take whatever he wished without interference from later arrivals and to gather it into piles above the high-tide line. Provided he placed two stones on the top of each pile, the wood was regarded as his property for him to carry away when he chose. If, however, a pile had not been removed after two more high tides, this ownership right lapsed. My concern is to try to explain how rules regulating human action can evolve without conscious human design and can maintain themselves without there being any formal machinery for enforcing them. I want to be able to say something about the kinds of rules that are likely to evolve and survive. And I want to find how these rules link with rationality and with morality.
Currency Fluctuations in the Post-Bretton Woods Era
Authors: Meese Richard
Published: August 2012

The international monetary landscape that has emerged since the felling of Bretton Woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float. This system has relatively flexible exchange rates between major countries, active central bank intervention in the market for the major currencies, and predominantly fixed exchange rates (relative to the dollar or to some basket of currencies) for less developed countries and newly industrializing nations. The majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime. My thesis is that this research has been unsuccessful. The proportion of (monthly or quarterly) exchange rate changes that current models can explain is essentially zero. Even after-the-fact forecasts that use actual values (instead of forecasted values) of the explanatory variables cannot explain major currency movements over the post-Bretton Woods era. This result is quite surprising.
Great and Almost-Great Magnitudes in Economics
Authors: Simon Julian L
Published: August 2012

Which ratios and key magnitudes should an educated economist know? An inevitably personal selection is offered below. The list is presented in the form of a quiz to liven up the exercise of pondering them, and therefore a question mark follows each title. 1) The ratio of savings (personal and total) to income? 2) Labor's share of output? 3) The capital-output ratio? 4) Ratio of the value of output of agricultural land to its market price? 5) The “real” riskless rate of interest in various eras? 6) The rate of return on common stocks? 7) The price-earnings ratio for common stocks? 8) The velocity of money? 9) The shares of the labor force in the farming, manufacturing, and service sectors, now and in earlier times? For those of you whose eyes share with mine the sinful propensity of straying to the “answer” before you have formulated your own, the ratios are partially concealed in paragraphs of explanation.
Puzzles: Slot Machines, Zomepirac, Squash, and More
Authors: Nalebuff Barry
Published: August 2012

This issue of puzzles can only be described as eclectic. The topics of the puzzles range from medical statistics to TV game shows to Las Vegas slot machines to squash to running around in squares. As usual, most puzzle answers are at the back. However, the first and last puzzles are unsolved. I offer a conjecture for one—the right answer could prove quite valuable.
Cleaning up Third World Debt Without Getting Taken to the Cleaners
Authors: Bulow Jeremy , Rogoff Kenneth
Published: August 2012

Should taxpayers of wealthy countries finance a leveraged buyout of third world debt? The case for establishing an international debt discount facility rests on the belief that the overhang of foreign commercial bank debt is stifling growth in the Highly Indebted Countries, and that coordination problems among private sector banks are blocking efficiency-enhancing debt reduction schemes. Thus there is scope for a multilateral government agency to step in, buy up the debts, and pass on the efficiency gains to struggling debtors. Our contention is that a debt discount facility would in fact be a black hole for aid funds, and would yield only minimal efficiency benefits. Our assessment of the debt crisis suggests a very different approach. Development aid should be divorced from debt negotiations and instead should be tied to countries' performance in areas such as environmental policy, drug interdiction, and population control. Future aid allocations should not be disguised as loan guarantees, and the massive bond obligations of existing multilateral lenders ought to be placed on the books. Finally, we recommend reversing a number of legal and regulatory changes made in the 1970s that served to encourage the loans in the first place.
Line-Item Veto: Where Is Thy Sting?
Authors: Carter John R , Schap David
Published: August 2012

Proponents of giving the president the authority to use a line-item veto argue that the institutional change is needed to limit special-interest legislation and restrain spending. Opponents respond that it would grant too much added power to the president, thereby upsetting the delicate balance wisely crafted by the founding fathers. This article focuses on the presumption, evidently shared by both sides in the debate, that adoption of item-veto authority will have significant consequences in terms of budget outcomes and the distribution of power. Curiously, there presently exists little empirical support for the presumption that item-veto authority is important. Most studies comparing states with various types of veto authority have failed to detect significant effects associated with item veto. Additional tests of our own are consistent with these results. After reviewing the empirical evidence, we reconsider the alleged effects of itemveto authority by seating the popular depiction in an explicit model of the budgetary process. Formal modeling exposes logical inconsistencies contained in popular veto discourse. Further, the model makes clear that the predicted consequences of item veto, commonly projected as ubiquitous, in fact arise only in select settings.
Symposium on Bubbles
Authors: Stiglitz Joseph E
Published: August 2012

The papers in this symposium represent the divergent views of economists on an important issue: the extent to which prices of assets represent “fundamental” values. While the papers in the symposium present different formal definitions of what a bubble is, the basic intuition is straightforward: if the reason that the price is high today is only because investors believe that the selling price will be high tomorrow—when “fundamental” factors do not seem to justify such a price—then a bubble exists.
Retrospectives: Ceteris Paribus
Authors: Persky Joseph
Published: August 2012

In Webster's Dictionary is an example of how to use “ceteris paribus “: [S]taple-growing states are, ceteris paribus, more favorable to slave labor than manufacturing states.” I suspect it would take a minor treatise to elucidate fully the ceteris paribus conditions here. And once this was done, it would be doubtful that holding all these cetera constant would have much analytical meaning. Unfortunately, this is always the potential problem with the expression. In too many cases one is unsure of exactly what restraints are being imposed and by what authority the exercise is legitimated. Fittingly, the history of ceteris paribus is a history of studied ambiguity.
Famous First Bubbles
Authors: Garber Peter M
Published: August 2012

Before economists relegate a speculative event to the inexplicable or bubble category, we must exhaust all reasonable economic explanations. Among the “reasonable” or “market fundamental” explanations I would include the perception of an increased probability of large returns. The perception might be triggered by genuine economic good news, by a convincing new economic theory about payoffs, or by a fraud launched by insiders acting strategically to trick investors. It might also be triggered by uninformed market participants correctly inferring changes in the distribution of dividends by observing price movements generated by the trading of informed insiders. While some of these perceptions might in the end prove erroneous, movements in asset prices based on them are fundamental and not bubble movements. I aim in these pages to propose market fundamental explanations for the three most famous bubbles: the Dutch tulipmania (1634–37), the Mississippi Bubble (1719–20), and the closely connected South Sea Bubble (1720). Though several authors have proposed market fundamental explanations for the well-documented Mississippi and South Sea Bubbles, these episodes are still treated in the modern literature as outbursts of irrationality.
On the Antitrust Treatment of Production Joint Ventures
Authors: Shapiro Carl , Willig Robert D
Published: August 2012

The U.S. Congress is currently considering several bills to alter the antitrust treatment of collaborative production activities among rival firms. This paper sketches the tradeoffs involved in altering U.S. antitrust treatment of joint venture production activities among rival firms. This requires understanding the nature, benefits, difficulties and dangers to competition of production joint ventures; identifying their degrees of prevalence in the U.S. and elsewhere; summarizing the current antitrust treatment of joint ventures; and analyzing the interactions between U.S. competitiveness and antitrust treatment of production joint ventures. We discuss these topics below, after which we assess some proposed alterations to the antitrust treatment of production joint ventures. We conclude that current antitrust law and enforcement policy with regard to production joint ventures are working quite well and hardly can be considered a hindrance to innovation or “competitiveness.” We support some modest changes in antitrust law that may serve to encourage pro-competitive joint production ventures, but we do not endorse the more sweeping legislative changes by Jorde and Teece in this issue.
The Affinity Between Ownership Forms and Coordination Mechanisms: The Common Experience of Reform in Socialist Countries
Authors: Kornai János
Published: August 2012

The world is witnessing a great upheaval in socialist countries, where dramatic events have been happening since 1988. The present paper concentrates on evaluating past experience in the hope that a correct understanding of the past will help in devising sound policies for the future. In the following, I distinguish two prototypes of socialism. The first one is classical socialism: the form of socialism that prevailed under Stalin, Mao Zedong, and their disciples in other countries. The second one is reform socialism: the new form of socialism that evolved (in chronological order) under Tito in Yugoslavia, Kádár in Hungary, Deng Xiaoping in China, and Gorbachev in the USSR; some further countries could be named as well. The reform socialist countries made some steps toward liberalization in the political sphere, somewhat decentralized the control of their state-owned sector, and allowed a somewhat larger scope for the private sector. At the same time, these countries still maintained the fundamental attributes of a socialist system: the Communist party did not share power with any other political force, the state-owned sector still played a dominant role in the economy, and the main coordinator of economic activities was the centralized bureaucracy, even though coordination was effected with the aid of less rigid instruments. In this paper, I am concerned with reform socialism, and do not discuss the problems of “post-socialist” revolutionary systemic transformation.
Market Failure and Government Failure
Authors: Datta-Chaudhuri Mrinal
Published: August 2012

For several decades a debate has been raging in development economics on the relative virtues of the free market as opposed to state intervention, with neither side convincing the other. While this sterile debate continues, experiences accumulated from research and action in the real world during the last 40 years have led to important new thinking on the roles of market and nonmarket institutions in the process of economic growth. The planned economies of the socialist world have learned that market institutions are not exclusive to the capitalist mode of production, and that the threat of entry and the fear of exit remain irreplaceable stimuli for cost and quality consciousness in production. Researchers in market economies have learned that price quotations on marketed commodities do not always carry sufficient information for economic decisions, and that institutions matter. This paper pieces together some lessons from the development experiences of the last four decades to enrich our understanding of the role of the state in the process of economic development.
Symposium on the State and Economic Development
Authors: Bardhan Pranab
Published: August 2012

The role of the state in economic development is one of the oldest topics in economics, yet controversies rage with similar passion and camps are divided on lines today broadly similar to the early writings. Though the authors of the papers in this symposium present different views, they all refuse to pose the question as a simple choice between the market mechanism and state intervention. Larry Westphal and Albert Fishlow evaluate the South Korean and the Latin American experience, respectively, in their essential complexity. Mrinal Datta-Chaudhuri draws upon a comparative study of the Indian and East Asian cases to bring out the contradictions and complementaries in the relationship between the state and the economy. Anne Krueger's paper reflects on how the comparative advantages and disadvantages of state action flow from its organizational and incentive characteristics.
Innovation and Cooperation: Implications for Competition and Antitrust
Authors: Jorde Thomas M , Teece David J
Published: August 2012

This paper begins by describing the nature of the innovation process. We then explore socially beneficial forms of cooperation that can assist the development and commercialization of new technology, and suggest modifications to current U.S. antitrust law that would remove unnecessary impediments to organizational arrangements that support innovation and stimulate competition in the United States. The modifications we propose would create “safe harbors” for various forms of cooperative activities among competitors in unconcentrated markets, and they would permit cooperation in concentrated markets if commercialization and appropriability were thereby facilitated. These modifications would bring U.S. antitrust laws closer to what is already in place in Europe and Japan and would promote competition more assuredly than would existing law.
Antitrust Law and Innovation Cooperation
Authors: Brodley Joseph F
Published: August 2012

Should innovation collaboration among high technology firms be subject to the antitrust laws? My own analysis concludes that innovation collaboration, particularly when it encompasses production and marketing, can create anticompetitive risks, and should be subject to the antitrust laws. It appears unlikely that actual antitrust enforcement inhibits technological collaboration in any direct way because government enforcement is extremely permissive and no successful private cases have been brought in recent years. To the extent that misguided perceptions of antitrust risk may have discouraged some types of innovation collaboration, a few narrowly targeted reforms are sufficient to correct the problem.
Remembering Joseph A. Pechman, 1918–1989
Authors: Aaron Henry J
Published: August 2012

Joe Pechman joined the staff of the Brookings Institution in 1960. He graduated from the City College of New York in 1937 and the University of Wisconsin in 1942. During World War II, he worked in the war time Office of Price Administration and later served in the U.S. Army. After the war he worked in the Treasury Department, the staff of the Council of Economic Advisers, and the Committee for Economic Development, a policy-oriented organization sponsored by major businesses. Before and after coming to Brookings he taught at M.I.T., Yale, Stanford (twice), Georgetown, Dartmouth, and Williams College. He was a fellow at the Center for Advanced Studies in the Behavioral Sciences and at the Hoover Institution, both at Stanford University.
Retrospectives: A Dismal Romantic
Authors: Persky Joseph
Published: August 2012

Economists like to think of their discipline as queen of the social sciences. Unfortunately, our vocation is more likely to be berated as “the dismal science.” This witticism has a checkered history. In the popular mind, economists are viewed as “dismal” largely because of our acute sensitivity to budget constraints and opportunity costs. Within the profession, the expression is often linked to the pessimistic demographics of Thomas Malthus. But the epithet “dismal science” was far more than gentle fun at the expense of the Reverend Malthus. Instead, it was a rallying cry of a mid-19th century attack on liberal political economy. The term originated from an odd jumble of romanticism, reaction and racism with which the flamboyant social critic Thomas Carlyle sought to discredit both democratic government and the market system. His attack on political economy was incidental to the larger enterprise.
Family Change Among Black Americans: What Do We Know?
Authors: Ellwood David T , Crane Jonathan
Published: August 2012

The changes in family structures of black American households over the past three decades have been remarkable. In 1960, 33 percent of black children were not living with two parents. By 1988, the figure had risen to 61 percent. During the same period, the fraction of all black children born to an unmarried mother rose from 23 percent to over 60 percent. This paper examines the patterns of family change, briefly discusses their economic implications, and explores what is known about the economic reasons for those changes.
Efficient Transportation Infrastructure Policy
Authors: Winston Clifford
Published: August 2012

This paper offers a perspective on paying for and investing in the transportation infrastructure. The following example illustrates the need to move away from the current national mind set. Pick any pothole-laden, congested two-lane road in an urban area. Suppose public funds are used to widen the road to four lanes and to repave it. Benefits will immediately flow from this investment in the form of lower travel time and less vehicle damage, but before long, the road will again fill to capacity and deteriorates. This cycle can be broken only if infrastructure is priced and invested in more efficiently. If the pothole-laden road is kept to two lanes when it is repaved but vehicles are required to pay efficient tolls based on congestion and pavement wear, then the road's capacity is far less likely to be exceeded during peak periods and its pavement will remain in good condition. Making efficient use of current transportation capacity will reduce the need for massive public investment in airports and roads and will prevent the recurrence of infrastructure problems.
Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective
Authors: Davidson Paul
Published: August 2012

Mainstream perspectives involving uncertainty presume that expectations are based on either a statistical analysis of past data, with market signals providing information about objective probabilities, or on subjective perceptions of these probabilities founded on the axioms of expected utility theory. Post Keynesians, following Keynes, have developed a different perspective, where probability distributions are not the basis for comprehending real world behavior under uncertainty. According to this analysis, there are many important situations where “true” uncertainty exists regarding future consequences of today's choices. Whenever conditions of true uncertainty prevail, human behavior may differ systematically from what is implied by the standard expected utility perspective. This paper explains how the Post Keynesian perspective differs from the orthodox probability theory approach, thereby providing a more general theory which can explain long-run decisions regarding liquidity demands, investment decisions, the existence of long period underemployment equilibrium, the long-run nonneutrality of money, and the unique and important role Keynes assigned to nominal contracts and especially the money wage contract.
Grade Inflation and Course Choice
Authors: Sabot Richard , Wakeman-Linn John
Published: August 2012

A conflict exists between the incentives offered to students and the institutional goal of increased science and math education. Students make their course choices in response to a powerful set of incentives: grades. These incentives have been systematically distorted by the grade inflation of the past 25 years. As a consequence of inflation, many universities have split into high- and low-grading departments. Economics, along with Chemistry and Math, tends to be low-grading. Art, English, Philosophy, Psychology, and Political Science tend to be high-grading. This paper presents evidence from nine colleges and universities that grade inflation has led to a divergence among departments in grading policies. We then discuss the results of an econometric study we conducted at Williams College of the influence of grading policies on course choice. The impact that differences in grading policies across departments have on the distribution of enrollments was also estimated, and policy implications of the findings are discussed.
Distinguished Fellow: An Appreciation of Guy Orcutt
Authors: Watts Harold W
Published: August 2012

Guy Henderson Orcutt, Distinguished Fellow of our Association. has now moved to a new phase of his career (retirement). Most of Guy's career has been at four universities: Michigan, where he earned all three degrees, Harvard, Wisconsin, and Yale. In between, he spent periods at MIT, Cambridge University in England, the International Monetary Fund, the World Bank, and The Urban Institute. To me, Guy is several persons rolled into one: inventor, visionary, empiricist, mentor, and friend.
Standing on the Shoulders of Giants: Cumulative Research and the Patent Law
Authors: Scotchmer Suzanne
Published: August 2012

Most innovators stand on the shoulders of giants, and never more so than in the current evolution of high technologies, where almost all technical progress builds on a foundation provided by earlier innovators. Most economics literature on patenting and patent races has looked at innovations in isolation, without focusing on the externalities or spillovers that early innovators confer on later innovators. But the cumulative nature of research poses problems for the optimal design of patent law that are not addressed by that perspective. The challenge is to reward early innovators fully for the technological foundation they provide to later innovators, but to reward later innovators adequately for their improvements and new products as well. This paper investigates the use of patent protection and cooperative agreements among firms to protect incentives for cumulative research.
Taking Stock: A Critical Assessment of Recent Research on Inventories
Authors: Blinder Alan S , Maccini Louis J
Published: August 2012

Empirical and theoretical aspects of inventory behavior became hot topics in the 1950s and early 1960s. No one seemed to notice the tension that was developing between the emerging macroeconomic and microeconomic views of inventories. Macroeconomists routinely thought of inventories as a destabilizing factor, yet the prevailing micro theory viewed inventories as a stabilizing factor. It was a fascinating question that was barely explored. Instead somewhat inexplicably, interest in inventories dried up, as if inventories were of minor economic significance and little intrinsic interest. By the early 1980s, then, economists once again knew something they had known in the 1950s: that inventory investment is of first-order importance in business cycles. But they were also beginning to realize that the standard production-smoothing/buffer-stock model of inventories was in deep trouble. This paper focuses on developments since that realization.
Economic Perspectives on Privatization
Authors: Vickers John , Yarrow George
Published: August 2012

Despite being one of the most fundamental issues in political economy, the question of the appropriate boundary between public and private enterprise received relatively little attention in mainstream economic analysis until quite recently. In the 1980s, however, programs of ownership reform were started in many developed and developing countries. Dramatic though some of these policies have been, they are likely to be overshadowed in the 1990s by even greater privatization in the reforming socialist economies. The opening sections of this paper are organized around three broad and interrelated questions. How does ownership matter for the efficiency of enterprise performance? What is the role for privatization in financing public debts and deficits? What are the distributional and political implications of privatization? Finally we examine privatization in practice in three countries: Britain, Chile, and Poland.
Historical Research on International Lending and Debt
Authors: Eichengreen Barry
Published: August 2012

The parallels between debt crises past and present have attracted a large number of social scientists to the history of foreign lending and default. In this article, I describe the findings of the recent literature on the subject. The questions posed have obvious relevance to the current policy debate over the debt of less-developed countries. What features of international capital markets have long rendered them vulnerable to generalized crisis? What events tend to spawn debt-servicing difficulties and to provoke default? What have been the consequences of default for lenders and borrowers? What approaches historically have proven most effective at clearing away the residue of debt crises? I concentrate on 20th century experience: on the lending of the 1920s, on the debt crisis of the 1930s, and on the recovery of capital markets after World War II.
Nobel Laureate: The Many Other Allais Paradoxes
Authors: Munier Bertrand R
Published: August 2012

Maurice Allais is know for the 1952 “Allais paradox,” but other very important parts of his work remain virtually unknown to most economists. As Paul Samuelson (1983) wrote, “Had Allais' earliest writings been in English, a whole generation of economic theory would have taken a different course.” Perhaps the Nobel award will encourage economists to examine his work more closely. Let me first give a quick portrait of Maurice Allais, and then list some of his major contributions to the theory of markets, to the theory of capital, to decision making under risk and to monetary dynamics.
Retrospectives: Challenges to Free Trade
Authors: Irwin Douglas A
Published: August 2012

The recent theoretical literature on strategic trade policy suggests that government intervention in international trade has the potential to be welfare improving. Government promotion of exports from imperfectly competitive industries, for example, may enable domestic firms to capture economic rents from foreign firms, thereby increasing national welfare. In addition, active responses to foreign protection, by a policy of reciprocity, may be required to prevent a loss of domestic welfare. Although these findings may bring into question the traditional economic case for free trade, many economists doubt that these theories provide sound guidance for trade policy. Economists in the nineteenth century also argued about whether theoretical justifications for tariffs compromised the case for free trade. This paper discusses two older debates somewhat related to the current focus on strategic industries and reciprocity, and concludes with an observation about how developments in economic theory affect economists' view of policy.
Fallibility in Human Organizations and Political Systems
Authors: Sah Raaj K
Published: August 2012

This paper presents a perspective on some organizational consequences of human fallibility. It may be easier to get a flavor of the relevant issues by examining the role of fallibility in specific settings, rather than through abstract arguments. So, in the next three sections, I consider several different settings: the question of diversification versus concentration of political authority, the managerial succession process in organizations, and the choice of ideas and projects (including innovation-oriented projects) in organizations. In the last section, I highlight some aspects of the approach underlying the analyses of human fallibility, in particular: the premises concerning an individual decisionmaker, the potential association between the motivation of an organization's employees and their fallibility, and the nature and the aims of the analysis of organizations.
The Liability Insurance Market
Authors: Winter Ralph A
Published: August 2012

This paper offers an overview of the U.S. liability insurance market and the link between its performance and developments in tort law. Over the last few decades, the dominant feature of the insurance market has been the insurance cycle: intermittent periods of rapidly rising premiums and cutbacks on the availability of coverage. The insurance cycle appears to be increasing in amplitude and, since the 1960s, has been concentrated increasingly in liability lines. The dynamic behavior of the insurance market can be fully explained in a model that emphasizes uncertainty and informational asymmetries, as outlined in this paper. I conclude the paper with a discussion of some policy implications as well as the impact of liability insurance on the incentive role, as opposed to the insurance role, of the tort system.
A Flawed Ideological Critique
Authors: Walstad William B
Published: August 2012

In their critique of the Test of Economic Literacy (TEL), Nelson and Sheffrin draw the conclusion that the TEL is an ideological test. In making their case, however, they neglect to cite the TEL Examiner's Manual by John Soper and myself (1987). In the 67 pages of that achievement test manual are the multiple choice questions, written rationales for the correct answers, explanations of the test development and structure, psychometric data, item analysis, and instructions on test administration and use. This information is necessary for anyone making a careful assessment of the test or using it with high school students. A brief description of the development and major features of the TEL is also necessary for analyzing the critics' complaints about TEL questions. The TEL is not perfect, but the charge that the TEL is an ideological test, however, is an extreme one and without foundation.
Retrospectives: Animal Spirits
Authors: Koppl Roger
Published: August 2012

John Maynard Keynes argued that when the conditions for rational action are not present, people are driven by “animal spirits.” This article briefly considers Keynes' argument, and the history of the term.
Symposium on the Economics of Liability
Authors: Shapiro Carl
Published: August 2012

Has the U.S. liability system run amok? Many commentators feel it has, as do many executives who feel that the liability “tax” discourages innovation and ultimately fails to promote safety. On the other hand, economists have ceaselessly pointed out that when one party is made liable for injury caused to another, an externality has been internalized. This symposium is intended to clarify just what economists know about the U.S. liability system: its worth as well as its flaws. The resulting picture is not a pretty one. Often liability is imposed on injurers as a means of compensating and insuring victims, despite the fact that such compensation and insurance could be accomplished much more effectively using direct accident insurance. Liability is an expensive means of providing compensation, since the legal liability system involves large transaction costs, mainly in the form of litigation expenses. Overall, America's institutions for assigning liability are poorly designed to promote economic efficiency.
Financial Control in the Transition from Classical Socialism to a Market Economy
Authors: McKinnon Ronald I
Published: August 2012

The transition from socialism to capitalism poses severe problems of financial management that have yet to be resolved in principle, let alone in practice. One unfortunate consequence is continual financial turmoil as socialist economies of the Soviet Union and Eastern Europe attempt reform. Inflation, either open or repressed, first accompanies and then undermines attempts to decentralize decision-making. But why should the transition from central planning to a market economy be inflationary? Understanding the system of financial control in the preexisting regime of “classical” socialism is the key to understanding what might go wrong in the transition. I discuss how in a more deliberate transition, domestic tax and monetary arrangements might be managed to keep the average price level stable as the market prices of individual goods and services become free to fluctuate, and suggest complementary policies governing tariffs and foreign exchange convertability in the move toward free foreign trade.
Microeconomic Issues in the Transition to a Market Economy
Authors: Svejnar Jan
Published: August 2012

The socialist system introduced microeconomic distortions that probably transcend those observed in the third world. The recent developments in Poland, Yugoslavia, and the Soviet Union also support the hypothesis that macro stabilization will be difficult to achieve in the transforming socialist economies in the absence of adequate micro adjustments. In this paper, I address what I consider to be the most important micro issues related to the transition from socialist to market economies. First I summarize the initial microeconomic conditions, covering labor, capital, and energy markets; the product markets, industrial organization, and trade; and the market for land and housing. Then, I describe the main changes that have taken place in the early stages of the transition. Finally, I discuss the micro policy agenda that needs to be addressed if the transition is to be successful
Credit Markets, Credibility, and Economic Transformation
Authors: Calvo Guillermo A , Frenkel Jacob A
Published: August 2012

This paper focuses on the special role that capital markets play in the transformation of centrally planned economies into well-functioning market economies. We demonstrate that underdeveloped credit markets inhibit the effectiveness of price reform, monetary and credit policies, and trade liberalization. We explore various ways to overcome the difficulties associated with the underdeveloped credit markets. In this regard, we examine the implications of “cleaning” the balance sheets of enterprises and banks from nonperforming loans, as well as ways to enhance credibility. The paper concludes with a brief discussion of sequencing of economic reform measures.
Agriculture and the Transition to the Market
Authors: Brooks Karen , Guasch J. Luis , Braverman Avishay , Csaki Csaba
Published: August 2012

Agricultural sectors in Eastern and Central Europe are large, and a substantial number of people are directly affected by changes in producer prices, farm employment, and land ownership. Retail food markets are among the most distorted in the pre-transition economies, and the needed adjustments are correspondingly large. The decollectivization of agriculture and return of land to former owners are among the most dramatic and emotive elements of the economic transition. The agricultural transition requires substantial adjustments on the demand and on the supply sides of the food economy. Decollectivization and distribution of property rights in land is an important component of the supply adjustment, and merits careful attention. The essence of the agricultural transition, however, is the withdrawal of the state from its traditional role as residual claimant of (positive and negative) rents to the use of agricultural resources. That role will pass in stages to owners of land, where it ordinarily resides in a market economy. In this paper we place the agricultural transition in its larger context, and treat the distribution of land more briefly.
The Rise and Decay of the Socialist Economy in Bulgaria
Authors: Jackson Marvin
Published: August 2012

The political reconstruction of Bulgaria has gone on more slowly than in Central Europe, but the role of the former communists is weaker than in neighboring Romania or Serbia and, of course, much more so than in the Soviet Union (except for the Baltic Republics). This paper discusses the economy before communist rule; economic institutions and policy options under the communists; economic decay and the dangers of procrastination; and the new government's program and its prospects.