Showing papers in "Journal of Economic Perspectives in 1993"

Does Studying Economics Inhibit Cooperation

Abstract: F rom the perspective of many economists, motives other than self-interest are peripheral to the main thrust of human endeavor, and we indulge them at our peril. In Gordon Tullock's (1976) words (as quoted by Mansbridge, 1990, p. 12), "the average human being is about 95 percent selfish in the narrow sense of the term." In this paper we investigate whether exposure to the self-interest model commonly used in economics alters the extent to which people behave in self-interested ways. The paper is organized into two parts. In the first, we report the results of several empirical studies-some our own, some by others -that suggest economists behave in more self-interested ways. By itself, this evidence does not demonstrate that exposure to the self-interest model causes more self-interested behavior, since it may be that economists were simply more self-interested to begin with, and this difference was one reason they chose to study economics. In the second part of the paper, we present preliminary evidence that exposure to the self-interest model does in fact encourage self-interested behavior.

Political Regimes and Economic Growth

Abstract: Arguments that relate regimes to growth focus on property rights, pressures for immediate consumption, and the autonomy of dictators. While everyone seems to agree that secure property rights foster growth, it is controversial whether democracies or dictatorships better secure these rights. The main mechanism by which democracy is thought to hinder growth is pressure for immediate consumption, which reduces investment. Only states that are institutionally insulated from such pressures can resist them, and democratic states are not. The main argument against dictatorships is that authoritarian rulers have no interest in maximizing total output. These views are summarized in turn.

Human Development in Poor Countries: On the Role of Private Incomes and Public Services

Abstract: Development is often taken to mean rising incomes. Discussions of the "goals of development" now often emphasize the reduction of poverty, rather than raising average incomes per se. The role of social services—particularly basic health and education—has also received greater emphasis in the 1980s, viewed mainly as instruments for raising the incomes of the poor. But, in all these approaches, income growth of one sort or another is what development is all about. A rather different view of the meaning of development has recently found expression in the 1990 Human Development Report (HRD) produced by the United Nations Development Programme. A conceptual underpinning for this approach can be found in the work of Amartya Sen. The essence of this view is that human development—what people can actually do and be—is the overriding purpose of economic development. Underdevelopment is viewed as the lack of certain basic capabilities, rather than lack of income per se. We do not aim here to advocate one of these approaches over the other, but rather to explore their implications for development policy. For instance, what does the human development approach imply about the role of economic growth and, in particular, about reducing income poverty? Should development priorities shift toward the provision of public services in poor countries, even if such a shift is at the expense of income growth?

The Causes of Metropolitan Suburbanization

Abstract: The authors analyze causes and consequences of metropolitan suburbanization with a focus on trends in the United States. The effect of employment transportation and travel considerations is compared with the impact of urban problems such as taxes public school quality crime and environmental quality. (ANNOTATION)

Do Students Go to Class? Should They?

Abstract: Lectures and other class meetings are a primary means of instruction in almost all undergraduate courses. Yet almost everyone who has taught an undergraduate course has probably noticed that attendance at these meetings is far from perfect. There is surprisingly little systematic evidence, however, about attendance and its effects. There are three natural questions. What is the extent of absenteeism? How much, if at all, does absenteeism affect learning? Should anything be done about absenteeism? This article presents quantitative evidence on the first two of these questions, and speculative comments on the third. First, attendance counts in economics courses at three relatively elite universities indicate that absenteeism is rampant: usually about one-third of students are not at class. Second, regression estimates of the relation between attendance and performance in one large lecture course suggest that attendance may substantially affect learning: considering only students who do all of the problem sets and controlling for prior grade point average, the difference in performance between a student who attends regularly and one who attends sporadically is about a full letter grade. In light of these results, steps to increase attendance, including making attendance mandatory, may deserve serious consideration.1

The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy

Abstract: Recent developments in microeconomic theory have shown that the self-interested behavior underlying neoclassical theory is artificially truncated: it depicts a charmingly Victorian but Utopian world in which conflicts abound but a handshake is a handshake. But a handshake is not always a handshake. Studies of principal-agent analysis, the economics of information, radical political economy, mechanism design, and transactions cost economics have all focused on the difficulties involved in policing and enforcing the actual process of market exchange. Abandoning the Victorian world of neoclassical theory will redirect economists to an older conception of their profession: what once was called political economy. By taking optimizing more seriously, post-Walrasian economics has inspired a revolution in economic thought fostering both new theoretical departures and alternative conceptions of the capitalist economy. We will offer our own interpretation of this literature, focusing on the widely recognized fact that the terms arising from exchange are not generally enforceable at zero cost to the exchanging parties. Where some aspect of the good or service supplied is both valuable to the buyer and costly to provide, the absence of third-party enforcement of claims gives rise to endogenous enforcement strategies. We refer to this relationship as a "contested exchange" because, unlike the transactions of Walrasian economics, the benefit the parties derive from the transaction depends on their own capacities to enforce competing claims.

Coping with Asymmetries in the Commons: Self-Governing Irrigation Systems Can Work

Abstract: Many analysts presume that the appropriators of a common-pool resource are trapped in a Hobbesian state of nature and cannot themselves create rules to counteract the perverse incentives they face in managing the resource. The logical consequence of this view is to recommend that an external authority—"the" government—take over the commons. But considerable empirical evidence from field and experimental settings holds that appropriators frequently do constitute and enforce their own rules, and that these rules work. Our research agenda is to develop a coherent understanding of the set of conditions that enhance or detract from self-organizing capabilities when individuals differ substantially from one another. For the sake of concreteness, this paper focuses on the asymmetry present in most irrigation systems between those who are physically near the source of water (the head-enders) and those who are physically distant from it (the tail-enders). This paper first explores the interaction between head-end and tail-end farmers, particularly their decisions about whether to devote resources to the upkeep of the irrigation system, and how bargaining between the parties can benefit all sides. Finally, we examine empirical evidence from a study of irrigation institutions in Nepal and discuss the broader practical significance of our findings.

Supply-side and demand-side cost sharing in health care.

Abstract: In health markets, the price paid by insured consumers when health care services are demanded can be set separately from the price paid to providers when services are supplied. This fact suggests two alternate strategies for controlling the costs of health care: demand-side cost sharing, where patients must pay more in co-payments or deductibles, and supply-side cost sharing, which seeks to alter the incentives of health care workers to provide certain services. We review the rationale, limits, and comparative advantage of demand- and supply-side cost sharing in health care while primarily focusing on the short-run pursuit of consumer financial risk protection and efficiency. We then turn briefly to the long-run issue of technology adoption, as well as the how supply- and demand-side cost sharing may affect the fairness of the health system.

Managing Local Commons: Theoretical Issues in Incentive Design

Abstract: Local commons encompass a wide range of resources whose shared feature is the need for some form of collective management. In what follows, we shall be concerned mainly with the problems of implementing a collective management plan. Whatever the mechanisms invoked, many recent contributions to the literature have stressed that relatively informal collective management of common property resources can in the right circumstances avoid the severe resource degradation predicted by "the tragedy of the commons." Nevertheless, both empirical and theoretical arguments suggest that cooperative behavior may be only partial, and the incentives of short-term self-interest only partially held in check. Under what circumstances, then, can more formal implementation mechanisms make good the deficiency? And, given that formal incentives are typically stronger than informal ones, are there any reasons why informal incentives might nevertheless sometimes be preferred?

Pricing, Profits, and Technological Progress in the Pharmaceutical Industry

Abstract: The decades-old debate over pharmaceutical industry prices, profits, and innovation has again intensified. A number of events coalesced to refocus public interest on pharmaceuticals. Contributing to public concern were Bureau of Labor Statistics price index increases for pharmaceuticals far outpacing those for the products of other industries. Another prominent characteristic of the pharmaceutical industry has been its extraordinarily high reported profitability. This article examines the phenomena that precipitated the current pharmaceuticals debate, their historical antecedents, and the principal questions at issue. In the author's considered judgment, a pell-mell march toward regulation of pharmaceutical industry pricing could seriously impair the industry's incentives for investment in new products.

The Impact of Economic Development on Democracy

Abstract: Any account of the social and economic conditions of democracy must come to terms with the central finding of the cross-national statistical research: a sturdy (though not perfect) association between economic development and democracy. To tackle these questions of causation, we adopted a strategy of analytic induction based on comparative historical research. Our program of comparative historical research confirmed the conclusion of the cross-national statistical analyses of the correlates of political democracy: the level of economic development is causally related to the development of political democracy. However, the underlying reason for the connection, in our view, is that capitalist development transforms the class structure, enlarging the working and middle classes and facilitating their self-organization, thus making it more difficult for elites to exclude them politically. Simultaneously, development weakens the landed upper class, democracy's most consistent opponent.

Reflections on the Economics of Climate Change

Abstract: A lbert Einstein's reaction to quantum mechanics was "God does not play dice with the universe." Yet mankind is playing dice with the natural environment through a multitude of interventions-injecting into the atmosphere trace gases like the greenhouse gases or ozone-depleting chemicals, engineering massive land-use changes such as deforestation, depleting multitudes of species in their natural habitats even while creating transgenic ones in the laboratory, and accumulating sufficient nuclear weapons to destroy human civilizations. As natural or social scientists, we need to understand the human sources of these global changes, the potential damage they cause to natural and economic systems, and the most efficient ways of alleviating or removing the dangers. Just as towns in times past decided on the management of their grazing or water resources, so must we today and in the future learn to use wisely and to protect economically our common geophysical and biological resources. This task of understanding and controlling interventions on a global scale can be called managing the global commons. The issue analyzed in this symposium is the threat of greenhouse warming. Climatologists and other scientists warn that the accumulation of carbon diox

Global Environmental Risks

Abstract: The need to manage climate risks is not a new: it has shaped social institutions for many centuries In medieval England, a peasant farmer’s land was broken into many widely-dispersed parcels Economic historians interpret this as a way of hedging climate risk (see references in Bromley [9]) Land in different locations would be affected differently by droughts, floods and frosts By spreading land holdings over different locations, as well as by organizing agricultural cooperatives and buying insurance, farmers have managed climate risk for many centuries

New and Old Keynesians

Abstract: The purpose of this paper is to describe one strand of New Keynesian literature which explores how increased flexibility of wages and prices might exacerbate the economy's downturn, and to contrast it with other strands of New Keynesian literature. This strand of literature holds that even if wages and prices were perfectly flexible, output and employment would be highly volatile. It sees the economy as amplifying the shocks that it experiences and making their effects persist. It identifies incomplete contracts, and, in particular, imperfect indexing, as central market failures, and it attempts both to explain the causes and consequences of these market failures. The models described here contain three basic ingredients: risk-averse firms; a credit allocation mechanism in which credit-rationing, risk-averse banks play a central role; and new labor market theories, including efficiency wages and insider-outsider models. These building blocks should help to explain how price flexibility contributes to macroeconomic fluctuations and to unemployment. In particular, the first two building blocks will explain why small shocks to the economy can give rise to large changes in output, while the new labor market theories will explain why those changes in output (with their associated changes in the demand curve for labor) result in unemployment.

Price Flexibility and Output Stability: An Old Keynesian View

Abstract: In this symposium I shall play the role in which I was cast, the unreconstructed old Keynesian. Considering the alternatives, I do not mind being billed as a Keynesian, an old Keynesian at that. But old Keynesians come in several varieties, and I speak for no one but myself. Nor do I defend the literal text of The General Theory. Several generations of economists have criticized, amended, and elaborated that seminal work. I shall argue for the validity of the major propositions that distinguish Keynesian macroeconomics from old or new classical macroeconomics.

The Nation in Depression

Abstract: T he economic cataclysm of the 1930s was an international phenomenon experienced by countries in all parts of the globe Countries as diverse as the United States, Germany, Chile, and Japan all experienced significant depressions in the 1930s Thus, the title of Charles Kindleberger's classic book The World in Depression (1973) captures an important feature of the Great Depression These international aspects, especially the importance of the gold standard in causing the downturn and transmitting depression from one country to another, have been emphasized in recent years in excellent books by Peter Temin (1989) and Barry Eichengreen (1992) These books have rightly received widespread attention and have successfully changed the focus of much analysis of the Great Depression from the United States to the world economy While such a change from American provincialism is surely healthy and warranted, adopting an international perspective on the Great Depression risks losing sight of the many ways in which the US depression differed in timing and severity from depressions elsewhere More important, it may obscure the many uniquely American causes of America's Great Depression This paper examines the ways in which the US experience during the 1930s resembled that of other countries in some regards, and fundamentally differed in other aspects I also evaluate the evidence on the causes of the Great Depression in the United States and the sources of the eventual recovery I suggest that the path of American output and unemployment before 1931 can be explained quite well with only domestic factors Even after 1931,

Financial Factors in the Great Depression

Abstract: eginning with Irving Fisher (1933) and John Maynard Keynes (1931 B [1963]), macroeconomists have argued that financial markets were important sources and propagators of decline during the Great Depression. Turning points during the Depression often coincided with or were preceded by dramatic events in financial markets: stock market collapse, waves of bankruptcy and bank failure, and contractions in the money stock. But the mechanism through which financial factors contributed to the Depression has been a source of controversy, as has been the relative importance of financial factors in explaining the origins and persistence of the Depression. This essay reviews the literature on the role of financial factors in the Depression, and draws some lessons that have more general relevance for the study of the Depression and for macroeconomics. I argue that much of the recent progress that has been made in understanding some of the most important and puzzling aspects of financial-real links in the Depression followed a paradigm shift in economics. A central, neglected theoretical piece of the story for financial factors was the allocative effects of imperfections in capital markets, which can imply links between disruptions in financial markets and subsequent economic activity. Also, the increasing emphasis on learning and "path-dependence" in economics has helped to explain why financial shocks during the 1930s were so severe and why policy-makers failed to prevent the Depression.

The New Keynesian Synthesis

Abstract: The new Keynesians made more rapid progress in understanding the microeconomics of unemployment than in understanding the microeconomics of nominal price rigidity. But the past five years have seen important breakthroughs in this second area. This paper will describe these breakthroughs, discuss our current understanding of nominal rigidity, and assess the work that remains to be done.

American and European Economics and Economists

Abstract: America and Europe differ with regard to what economics is understood to be, how it is practiced, and how professional academic economists behave. Specifically, 1) American (U.S. and Canadian) economists contribute by far the largest share of journal publications and are cited much more often than European economists, while (West-) European economists consider other aspects of their professional activities more relevant, in particular participating in local and national affairs; 2) economic research by Americans tends to focus on abstract issues defined within the profession itself and involves fads, while the activities of European economists (though not necessarily their research) are more concerned with practical issues and follow a more steady course: and 3) American academics are geared to postgraduate teaching, while in Europe they are mostly engaged in undergraduate teaching. These differences can be explained by the different market conditions faced by American and European economists: in America, the academic market is much larger, and the degree of government intervention is typically much smaller. This paper explores how this leads to different focuses for European and American economists. In addition, it asks whether the ongoing economic unification in Europe may not alter these patterns.

Costs of Reducing Global Carbon Emissions

Abstract: Po rojecting the costs of reducing carbon emissions is extremely important, and exceedingly difficult. Such projections are an integral component of cost-benefit analyses of alternative policies; for example, for the global climate policy analysis described by William Nordhaus in this symposium. Moreover, the nature of the climate change problem dictates that costs be incurred long before benefits can be realized or accurately measured. Consequently, the political spotlight predictably focuses on the cost estimates whenever specific policy options are contemplated. Projecting the costs of reducing carbon emissions is difficult because many assumptions must be made about how the world will evolve over a very long period of time with and without a control program. Typically, some of these assumptions, like population growth, are taken from outside sources. Other factors, like the response of energy demand to changes in economic output or energy prices, are the result of modeling the behavior of economic actors in response to exogenous stimuli. Considerable uncertainty exists about both the exogenous factors and the best way to model the behavioral responses. The global nature of the climate change problem adds yet another complication to the cost analysis. Scientists have concluded that it is the global concentration of carbon in the atmosphere that influences climate. Moreover, since carbon in the atmosphere gets mixed more or less uniformly, emissions anywhere change concentrations everywhere, but with a long lead time. Current global carbon emissions are estimated to be only about 4 percent of the stock of CO2 in the atmosphere attributable to human activity (and about

Symposium on Management of Local Commons

Abstract: In the public image of industrially advanced countries, the commons problem relates to global warming, acid rain, depletion of the ozone layer and the like. In the developing countries, the daily livelihood of the poor depends more substantially and directly on the local commons: irrigation, forestry, grazing, in-shore fisheries and so on. These (restricted-access) common property resources usually involve small local communities, which opens the possibility for local-level community organizations to manage resources and resolve conflicts, as an alternative to the polar opposites of private and state control which usually hog the limelight in public policy discussion. In fact, many developing countries have a long history of balanced resource management under highly informal local community institutions. In these countries, the erosion of the local commons set in only with major demographic and institutional changes in recent years, often accelerated by private commercialization or bureaucratic appropriation of the traditional historical rights of local communities over these resources.

Employment and Unemployment in the 1930s

Abstract: The Great Depression is to economics what the Big Bang is to physics. As an event, the Depression is largely synonymous with the birth of modern macroeconomics, and it continues to haunt successive generations of economists. With respect to labor and labor markets, these facts evidently include wage rigidity, persistently high unemployment rates, and long-term joblessness. Traditionally, aggregate time series have provided the econometric grist for distinguishing explanations of the Great Depression. Recent research on labor markets in the 1930s, however, has shifted attention from aggregate to disaggregate time series and towards microeconomic evidence. This shift in focus is motivated by two factors. First, disaggregated data provide many more degrees of freedom than the decade or so of annual observations associated with the depression, and thus may prove helpful in distinguishin g macroeconomic explanations. Second, disaggregation has revealed aspects of economic behavior hidden in the time series that may be essential to their proper interpretation and, in any case, are worthy of study in their own right. Although the substantive findings of recent research are too new to judge their permanent significance, I believe that the shift towards disaggregated analysis is an important contribution. The paper begins by reviewing the conventional statistics of the United States labor market during the Great Depression and the paradigms to explain them. It then turns to recent studies of employment and unemployment using disaggregated data of various types. The paper concludes with discussions of

Land and Stock Prices in Japan

Abstract: In late 1991, the total land value in Japan was estimated at nearly $20 trillion. This was more than 20 percent of the world's wealth, or to put it in some other contexts, about double the world's equity markets or half again as large as the world's bond markets. Japanese land was then valued at about five times that of the United States; the land under the Emperor's Palace, which is about three-quarters of a square mile, was estimated to be worth about the same as all the land in California or in Canada. Real estate assets of Japanese corporations grew by $2.8 trillion from 1986 to 1988, an increase in valuation roughly equal to the size of the Japanese gross national product. An equally dramatic rise in stock prices accompanied the rise in land prices. At its peak in December 1989, the Japanese stock market had a value of about $4 trillion, which was about 44 percent of the world's equity market capitalization. To put that figure in perspective, the value of the equity on all the stock exchanges in the United States in August 1992 was less than $5 trillion. But then, from its peak in December 1989 to August 1992, the Japanese stock market fell by over 60 percent. Various indices of speculative land values fell a similar amount. Meanwhile, other land prices—industrial, commercial, residential, as measured by various indices—fell 15–20 percent. This paper discusses the rise of Japanese stock and land prices in the past four decades and their dramatic decline in the early 1990s. To what extent can

Contested Exchange versus the Governance of Contractual Relations

Abstract: There is much in the paper by Samuel Bowles and Herbert Gintis with which I agree. But there are also real differences—which is to be expected, since they and I examine economic organization through very different lenses. Thus whereas they view economic organization through the lens of power and contested exchange, I believe that economizing and governance is, for most purposes, a more productive perspective. I also have a variety of minor differences with their paper. I begin with our agreements, next consider conceptual differences, and then run through the more minor matters.

Global Warming Policy: A Public Finance Perspective

Abstract: In the last few years, a substantial volume of research has considered the design of taxes to slow greenhouse gas emissions as well as the economic effects of such policies. In this paper, I summarize the insights that have emerged from this work. I begin by explaining that while efficiency considerations create a presumption for using coordinated international policies to alter greenhouse gas emissions, the prospects for such action are bleak. Then I focus on the public finance of carbon taxes at the national level, considering the design of such taxes as well as their incidence across and within nations. Next, I focus on greenhouse gas emission policies that could be enacted in less-developed countries, such as the elimination of fossil fuel subsidies and other policies to slow deforestation. Finally I suggest several promising directions for future study.

Japan's Different Trade Regime: An Analysis with Particular Reference to Keiretsu

Abstract: Many claim that although formal trade barriers have been removed at the border, Japanese markets remain unusually closed because of non-tariff barriers. After describing Japan's development strategy and the debate over the sources of Japanese growth, we consider current trade barriers. Recent research has made some headway investigating the impact of one of the alleged "invisible" barriers. In particular, efforts have been made to test if the behavior of Japanese corporate groups, known as keiretsu, creates a barrier to trade. Finally we consider whether private sector trade restrictions warrant a public response; what, if anything, should be done about keiretsu?

Economics of Development and the Development of Economics

Abstract: The purpose of this paper is to restore some historical perspective by highlighting the many contributions of development economics to the rest of economics. We will point out to the younger generations how some of the glittering ideas they currently play with originally came from that now-neglected field and how in some cases they have rediscovered, with great fanfare, insights that were well-known in the development literature, familiarity with which would have enriched their own work.

Policy Watch Alcohol and Cigarette Taxes

Abstract: Increased excise taxes on cigarettes and alcohol have been suggested as a means to finance (at least partially) the Clinton administration's proposed program of health care reform. We consider the revenue potential of cigarette and alcohol tax hikes and explore the effects on consumption and related outcomes. We present estimates of the social costs and implied optimal tax rates on cigarettes and alcohol. The bulk of the evidence presented here does support higher taxes on cigarettes and alcohol.

Ronald Coase and Methodology

Abstract: Ronald Coase wrote two great theoretical articles that earned him the Nobel Prize: "The Nature of the Firm" in 1937 and "The Problem of Social Cost" in 1960 He also wrote many articles dealing with the methodology of economics, often in the setting of a discussion of a particular economist, such as Adam Smith or Alfred Marshall The methodological articles will be my particular focus here

What Does Japanese Trade Structure Tell Us about Japanese Trade Policy

Abstract: Some argue foreign access to Japanese markets remains tightly controlled and that if Japan is to be a member in good standing of the international economic system, Japan must do more than just adhere to the formal rules of the GATT; Japan must show by the results of its international economic transactions that foreign access to its market is not tightly controlled. As this point of view is increasingly dominating American economic diplomacy with Japan, it is particularly important that its premise be examined. First I examine Japan's growth record and trade record. To the extent that Japan's trade performance is different, I explore whether the difference can legitimately be attributed to Japanese policies. This paper finds that neither the price behavior of Japanese firms nor the pattern and volume of what Japan imports or exports suggests that Japan's trade regime is different. Some of Japan's economic institutions may be distinctive but there is little evidence they produce outcomes which distort the international economic system. What remains to be explained is the conviction of so many that Japan is more a parasite than a pillar of the international economic system. The record of economic research directly and indirectly bearing on this issue does not support such a conclusion at all.