Showing papers in "Journal of Economic Perspectives in 2005"

Cognitive Reflection and Decision Making

Abstract: This paper introduces a three-item "Cognitive Reflection Test" (CRT) as a simple measure of one type of cognitive ability—the ability or disposition to reflect on a question and resist reporting the first response that comes to mind. The author will show that CRT scores are predictive of the types of choices that feature prominently in tests of decision-making theories, like expected utility theory and prospect theory. Indeed, the relation is sometimes so strong that the preferences themselves effectively function as expressions of cognitive ability—an empirical fact begging for a theoretical explanation. The author examines the relation between CRT scores and two important decision-making characteristics: time preference and risk preference. The CRT scores are then compared with other measures of cognitive ability or cognitive "style." The CRT scores exhibit considerable difference between men and women and the article explores how this relates to sex differences in time and risk preferences. The final section addresses the interpretation of correlations between cognitive abilities and decision-making characteristics.

The Impact of Social Structure on Economic Outcomes

Abstract: This chapter begins by reviewing some of the principles. Building on these, the chapter then discusses how social structures and social networks can affect economic outcomes like hiring, price, productivity, and innovation. It focuses on Sociologists have developed core principles about the interactions of social structure, information, ability to punish or reward, and trust that frequently recur in their analyses of political, economic, and other institutions. Thus, network structure can be partially endogenized in labor market analysis. However, there are also a range of alternatives, not commonly included in economic analysis, that work through social groups and create compliance in less intrusive ways. Many studies, comprehensively reviewed in Roger Myersons, show the powerful impact of social structure and networks on the extent and source of innovation and its diffusion. When people trade with others they know, the impact of knowing each other on the price varies with their relationship, the cost of shifting to different partners, and the market situation.

Eight Questions about Corruption

Abstract: This paper will discuss eight frequently asked questions about public corruption: (1) What is corruption? (2) Which countries are the most corrupt? (3) What are the common characteristics of countries with high corruption? (4) What is the magnitude of corruption? (5) Do higher wages for bureaucrats reduce corruption? (6) Can competition reduce corruption? (7) Why have there been so few (recent) successful attempts to fight corruption? (8) Does corruption adversely affect growth?

Identity and the Economics of Organizations

Abstract: On plebes' first day at West Point, called R-Day, they strip down to their underwear. Their hair is cut off. They are put in uniform. They then must address an older cadet, with the proper salute and with the statement: "Sir, New Cadet Doe reports to the cadet in the Red Sash for the first time as ordered." Plebes must stand and salute and repeat, and stand and salute and repeat, until they get it exactly right, all the while being reprimanded for every tiny mistake. In the summary of David Lipsky (2003, pp. 145-154), who spent four years tracking a company of cadets at West Point: "On R-Day you surrender your old self in stages." But R-day is just the beginning of the training and personal re-engineering that is to come, so that West Point graduates emerge four years later as loyal officers in the U.S. Army. Lipsky shows that, despite some failure, this tough program is remarkably successful in creating officers with the will to lead in battle. Economists' current picture of organizations and work incentives has no place for the West Point program and the motivations it seeks to inculcate in recruits. In a standard economic model, an individual's preferences are fixed, and utility depends only on pecuniary variables. The Army's aim at West Point is to change cadets' preferences. They wish to inculcate non-economic motives in the cadets so that they have the same goals as the U.S. Army. Alternatively stated, the goal of West Point is to change the identity of the cadets, so they will think of themselves, above all else, as officers in the U.S. army. They will feel bad about themselves-they will lose utility-if they fall short of the ideals of such an officer. This change in identity

Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions

Abstract: How does one tell when rapid growth in house prices is caused by fundamental factors of supply and demand and when it is an unsustainable bubble? In this paper, we explain how to assess the state of house prices—both whether there is a bubble and what underlying factors support housing demand—in a way that is grounded in economic theory. In doing so, we correct four common fallacies about the costliness of the housing market. For a number of reasons, conventional metrics for assessing pricing in the housing market such as price-to-rent ratios or price-to-income ratios generally fail to reflect accurately the state of housing costs. To the eyes of analysts employing such measures, housing markets can appear "exuberant" even when houses are in fact reasonably priced. We construct a measure for evaluating the cost of home owning that is standard for economists—the imputed annual rental cost of owning a home, a variant of the user cost of housing—and apply it to 25 years of history across a wide variety of housing markets. This calculation enables us to estimate the time pattern of housing costs within a market. As of the end of 2004, our analysis reveals little evidence of a housing bubble.

Child Labor in the Global Economy

Abstract: Few issues in developing countries draw as much popular attention as child labor. This paper begins by quantifying the extent and main characteristics of child labor. It then considers the evidence on a range of issues about child labor. Fundamentally, child labor is a symptom of poverty. Low income and poor institutions are driving forces behind the prevalence of child labor worldwide. This study concludes by assessing the policy options to reduce worldwide child labor.

The American Mortgage in Historical and International Context

Abstract: ome mortgages have loomed continually larger in the Þnancial situationof American households. In 1949, mortgage debt was equal to 20 per-cent of total household income; by 1979, it had risen to 46 percent ofincome; by 2001, 73 percent of income (Bernstein, Boushey and Mishel, 2003).Similarly, mortgage debt was 15 percent of household assets in 1949, but rose to28 percent of household assets by 1979 and 41 percent of household assets by 2001.This enormous growth of American home mortgages, as shown in Figure 1 (as apercentage of GDP), has been accompanied by a transformation in their form suchthat American mortgages are now distinctively different from mortgages in the restof the world. In addition, the growth in mortgage debt outstanding in the UnitedStates has closely tracked the mortgage marketOs increased reliance on securitiza-tion (Cho, 2004).The structure of the modern American mortgage has evolved over time. Webegin by describing this historical evolution. The U.S. mortgage before the 1930swould be nearly unrecognizable today: it featured variable interest rates, high downpayments and short maturities. Before the Great Depression, homeowners typicallyrenegotiated their loans every year.We next compare the form of U.S. home mortgages today with those in othercountries. The U.S. mortgage provides many more options to borrowers than arecommonly provided elsewhere: American homebuyers can choose whether to paya Þxed or soating rate of interest; they can lock in their interest rate in between thetime they apply for the mortgage and the time they purchase their house; they can

Direct Democracy Works

Abstract: The purpose of this essay is to describe the practice and theory of the increasingly important political phenomenon of direct democracy and the main lessons from the scholarly literature. Many questions remain to be answered, but the emerging view is that direct democracy works--allowing the general public to participate in lawmaking often seems to improve the performance of government.

The Role of Oligarchs in Russian Capitalism

Abstract: Using a unique dataset, we describe the degree of ownership concentration in Russian economy and its role in shaping economic and political institutions in Russia. In particular, we find that Russian "oligarchs" do control a substantial part of the economy. While the relative weight of their firms in Russian economy is huge, they do not seem to be excessively large by the standards of the global economy where most of them are operating. The oligarchs seem to run their firms more efficiently than other Russian owners controlling for industry, region and size.

Adam Smith, Behavioral Economist

Abstract: In The Wealth of Nations, published in 1776, Adam Smith famously argued that economic behavior was motivated by self-interest. But 17 years earlier in 1759, Smith had proposed a theory of human behavior that looks anything but self-interested. In his first book, The Theory of Moral Sentiments, Smith argued that behavior was determined by the struggle between what Smith termed the “passions” and the “impartial spectator.” The passions included drives such as hunger and sex, emotions such as fear and anger, and motivational feeling states such as pain. Smith viewed behavior as under the direct control of the passions, but believed that people could override passion-driven behavior by viewing their own behavior from the perspective of an outsider—the impartial spectator—a “moral hector who, looking over the shoulder of the economic man, scrutinizes every move he makes” (Grampp, 1948, p. 317).

The economics of technology sharing: open source and beyond

Abstract: This paper reviews our understanding of the growing open source movement. We highlight how many aspects of open source software appear initially puzzling to an economist. As we have acknowledged, our ability to answer confidently many of the issues raised here questions is likely to increase as the open source movement itself grows and evolves. At the same time, it is heartening to us how much of open source activities can be understood within existing economic frameworks, despite the presence of claims to the contrary. The labor and industrial organization literatures provide lenses through which the structure of open source projects, the role of contributors, and the movement's ongoing evolution can be viewed.

The Vulcanization of the Human Brain: A Neural Perspective on Interactions Between Cognition and Emotion

Abstract: Emotions may explain inconsistencies in human behavior and forms of behavior that some have deemed irrational, though such behavior may seem more sensible after a discussion of the functions that emotions serve—or may have once served in our evolutionary past. People do have the capacity to override emotional responses. This capacity relies in large measure on the most recently evolved parts of our brains that support forms of behavior that are more recognizably rational. Neuroscientists are beginning to make headway in identifying the neural mechanisms involved in both emotional responses and higher cognitive processes. Among the most recent and exciting developments in neuroscience has been the introduction of methods for imaging the function of the intact human brain. This effort offers the promise of a deeper understanding of how and why emotions impact decision making, how this may contribute to behavior that appears to deviate from optimality, and how and when we are able to overcome such emotional responses.

Individual Irrationality and Aggregate Outcomes

Abstract: There is abundant evidence that many individuals violate the rationality assumptionsnroutinely made in economics. However, powerful evidence also indicates that violations ofnindividual rationality do not necessarily refute the aggregate predictions of standard economicnmodels that assume full rationality of all agents. Thus, a key question is how the interactions between rational and irrational people shape the aggregate outcome in markets and other institutions. We discuss evidence indicating that strategic complementarity and strategic substitutability are decisive determinants of aggregate outcomes. Under strategic complementarity, a small amount of individual irrationality may lead to large deviations from the aggregate predictions of rational models, whereas a minority of rational agents may suffice to generate aggregate outcomes consistent with the predictions of rational models under strategic substitutability.

Copying and Copyright

Abstract: Today most newly created textual, photographic, audio and video content is available in digital form. Even older content that was not “born digital” can relatively easily be converted to machine-readable formats. At the same time, the world has become more networked, making it easy to transfer digital content from one person to another. The combination of technological progress in both digitization and computer networking has been a challenge for traditional ways of managing intellectual property. Some observers have even questioned whether current models for intellectual property can or should survive in a digital world. For example, there is widespread concern about piracy of popular music and film, both via the network and via bootleg CDs and DVDs. There is also concern about the economic viability of the current model for scholarly publication or, for that matter, traditional forms of publishing such as newspapers and TV network news. These developments have led to a revival of interest in the economics of copying and copyright. In this brief review, we examine some of the economic issues in this area and describe some of the insights that have emerged from this work. We end with some reflections on alternative business models for provision of creative works. Readers interested in additional discussion of some of the unique challenges associated with digital media might begin with National Academy of Sciences (2000), Maxwell (2004) and Musick (2004).

A Sociological Perspective on Gender and Career Outcomes

Abstract: Both economists and sociologists have documented the association between gender and career outcomes. Men are more likely than women to participate in the labor force, and men average more hours of paid labor per week and more weeks per year. Women and men tend to hold different occupations and to work in different industries, firms and jobs. Furthermore, men outearn women, hold more complex jobs and are more likely to supervise workers of the other sex and to dominate the top positions in their organization. The challenge for both disciplines lies not in showing that gender is linked to employment outcomes, but in explaining the associations. Economists have sought explanations in the characteristics and preferences of individual workers or employers. Some have attributed the associations between workers' sex and their career outcomes to sex differences in training and experience, career commitment or competing demands on time and energy. Others focus on employers' preferences for workers of one sex over the other ("taste discrimination") or on employers' beliefs that workers of one sex or the other are more costly or less profitable to employ ("statistical discrimination"). The sociological approach differs from that of economists in recognizing sex segregation as a causal mechanism that gives rise to other differences between women's and men's careers. This emphasis on segregation reflects sociologists' interest in the ramifications of societal-level systems of differentiation and stratification. It stems also from the discipline's concern with the impact of people's location in social structures on a variety of life outcomes. By concentrating men and women in different jobs, segregation exposes them to more or less similar employment

Law, Endowments and Property Rights

Abstract: While scholars have hypothesized about the sources of variation in property rights for over 2500 years, it is only very recently that researchers have begun to test these theories empirically. This paper reviews both the theory and empirical evidence supporting and refuting the law and endowment views of property rights. The law view holds that historically determined differences in national legal traditions continue to shape cross-country differences in property rights. The endowment view argues that during European colonization, differences in climate, crops, the indigenous population, and the disease environment influenced long-run property rights.

The Degradation of Reported Corporate Profits

Abstract: Recent corporate scandals have highlighted abuses by firms overstating profits to capital markets. In a related but less noticed vein, the reporting of profits to tax authorities has come under increased scrutiny with heightened concerns over the spread of tax avoidance activities. How could firms simultaneously be inflating profits reported to the capital markets and understating profits reported to tax authorities? The practical answer is that American firms keep two sets of financial statements: a financial statement that reports "book profits" to the capital markets and a separate financial statement that reports "tax profits" to the government. These two profit reports can bear little resemblance to each other and follow distinct rules. This paper argues that the latitude afforded managers by the dual nature of corporate profit reporting has contributed to the simultaneous degradation of profit reporting to capital markets and tax authorities. The distinction between book and tax profits allows managers the ability to mischaracterize tax savings to capital markets and to mischaracterize profits to tax authorities. Examination of three high-profile cases of managerial misreporting of profits and tax avoidance—at Enron, Tyco and Xerox—reveals how the drive to improve reported book profits fosters tax avoidance and how the drive to limit taxes gives rise to the manipulation of accounting profits and managerial malfeasance.

Ecologies of Organizations: Diversity and Identity

Abstract: A famous article in bioecology (Hutchinson, 1959) asked, “Why are There So Many Kinds of Animals?” In a 1977 article, John Freeman and I argued that the central goal of organizational sociology should be to answer the parallel question: Why are there so many kinds of organizations? We claimed that the social science literature of the time lacked good answers to this question, and we proposed a research agenda for an “organizational ecology” to answer it by studying interactions within and between populations of organizations. This essay introduces the basic methodology of organizational ecology and sketches some key insights arising from that work. For example, the paper will consider the extent of diversity of organizational forms; whether organizations can easily shift their defining characteristics; what happens to organizations as they age; the extent to which organizations can find niches that protect them against competitive pressures; and questions of how best to define the identity of organizations. I should note that many of my colleagues in sociology regard organizational ecology as heterodox. For one thing, this approach built initially on population bioecology’s evolutionary models of numerical aspects of population interactions (MacArthur, 1972). Reliance on ideas from biology troubles many sociologists even if, as in this case, no reference is made to any biological mechanism. Likewise, organizational ecology has a preoccupation with numerical patterns and tries to link theory, research design and estimation—emphases that run counter to the interpretive zeitgeist of contemporary sociology. However, my sociology colleagues should also note that organizational ecology certainly relies on defining key

Data Watch: The American Time Use Survey

Abstract: We discuss the new American Time Use Survey (ATUS), an on-going household survey of roughly 1,200 Americans per month (1,800 per month in the first year, 2003) that collects time diaries as well as demographic interview information from respondents who had recently been in the Current Population Survey. The characteristics of the data are presented, as are caveats and concerns that one might have about them. A number of novel uses of the ATUS in economic research, including in the areas of macroeconomics, national income accounting, labor economics, and others, are proposed to illustrate the magnitude of this new survey's possible applications.

Autopsy on an empire: understanding mortality in russia and the former soviet union

Abstract: Male life expectancy at birth fell by over six years in Russia between 1989 and 1994. Many other countries of the former Soviet Union saw similar declines, and female life expectancy fell as well. Using cross-country and Russian household survey data, we assess six possible explanations for this upsurge in mortality. Most find little support in the data: the deterioration of the health care system, changes in diet and obesity, and material deprivation fail to explain the increase in mortality rates. The two factors that do appear to be important are alcohol consumption, especially as it relates to external causes of death (homicide, suicide, and accidents) and stress associated with a poor outlook for the future. However, a large residual remains to be explained. JEL codes: I120, J100, P360

Lessons About Markets from the Internet

Abstract: Many of us have grown used to, tired of, and finally downright skeptical of claims of the transformative powers of the Internet. It was to usher in the New Economy, but we seem mostly to have the Old. It would transform retail, but Toys "R" Us has outlasted EToys. Frictionless commerce would be the norm, but plenty of friction still exists. The Internet was also claimed to require a whole new economics with all new laws. While this, too, was very far from the truth--existing theories have mostly done quite well--the Internet has had a substantial effect on economic thought. In this paper, we discuss some ways in which the Internet has affected how economists think about markets.

Structural Reform of Social Security

Abstract: Governments around the world have enacted or are currently considering fundamental structural reforms of their Social Security pension programs. The key feature in these reforms is a shift from a pure pay-as-you-go tax-financed system, in which taxes on current workers are primarily distributed to current retirees, to a mixed system that combines pay-as-you-go benefits with investment-based personal retirement accounts. This paper discusses how such a mixed system could work in practice and how the transition to such a change could be achieved. It then analyzes the economic gains that would result from shifting to a mixed system. I turn next to the three problems that critics raise about any investment-based plan: administrative costs, risk, and income distribution. Finally, I comment on some of the ad hoc proposals for dealing with the financial problem of Social Security without shifting to an investment-based system.

Intellectual Property: The Law and Economics Approach

Abstract: he traditional focus of economic analysis of intellectual property has been on reconciling incentives for producing such property with concerns about restricting access to it by granting exclusive rights in intellectual goods-that is, by "propertizing" them-thus enabling the owner to charge a price for access that exceeds marginal cost. For example, patentability provides an additional incentive to produce inventions, but requiring that the information in patents be published and that patents expire after a certain time limit the ability of the patentee to restrict access to the invention-and so a balance is struck. Is it an optimal balance? This question, and the broader issue of trading off incentive and access considerations, has proved intractable at the level of abstract analysis. With the rise of the law and economics movement, the focus of economic analysis of intellectual property has begun to shift to more concrete and manageable issues concerning the structure and texture of the complicated pattern of common law and statutory doctrines, legal institutions and business practices relating to intellectual property. Among the issues discussed in this paper are the length of protection for intellectual property, the rules that allow considerable copying of intellectual property without permission of the originator, the rules governing derivative works, and alternative methods of providing incentives for the creation of intellectual property. The emphasis is on copyright law, which, perhaps because of its complex legal structure and the relative neglect by economists of the arts and entertainment, has tended to be slighted in the conventional economic analysis of intellectual property, relative to patent law, where economic analysis can draw on an extensive literature concerning the economics of innovation. I also SRichard A. Posner is a Judge of the U.S. Court of Appeals for the Seventh Circuit and a

History Lessons: The End of American Exceptionalism? Mobility in the United States Since 1850

Abstract: New longitudinal data on individuals linked across nineteenth century U.S. censuses document the geographic and occupational mobility of more than 75,000 Americans from the 1850s to the 1920s. Together with longitudinal data for more recent years, these data make possible for the first time systematic comparisons of mobility over the last 150 years of American economic development, as well as cross-national comparisons for the nineteenth century. The U.S. was a substantially more mobile economy than Britain between 1850 and 1880. But both intergenerational occupational mobility and geographic mobility have declined in the U.S. since the beginning of the twentieth century, leaving much less apparent two aspects of the “American Exceptionalism” noted by nineteenth century observers.

Saving Social Security

Abstract: Social Security is one of America's most successful government programs. It has helped millions of Americans avoid poverty in old age. To be sure, the program faces a long-term deficit and is in need of updating. But Social Security's long-term financial health can be restored: the projected deficit is small enough that it can be eliminated through a progressive reform that combines modest benefit reductions and revenue increases.

Retrospectives: Eugenics and Economics in the Progressive Era

Abstract: During the Progressive Era, eugenic approaches to social and economic reform were popular, respectable and widespread. This essay documents the influence of eugenic ideas upon American economic reform, especially in the areas of immigration and labor reform, and tries to illuminate something of its causes and consequences.

Intelligence Failures : An Organizational Economics Perspective

Abstract: Two recent failures of the U.S. intelligence system have led to the creation of high-level investigative commissions. The failure to prevent the terrorist attacks of 9/11 prompted the creation of the National Commission on Terrorist Attacks Upon the United States (2004), or 9/11 Commission.The mistaken belief that Saddam Hussein had retained weapons of mass destruction prompted the creation of the Commission on the Intelligence Capabilities of the United States Regarding Weapons of Mass Destruction (2005), or the WMD Commission. In this paper, we use insights from organizational economics to analyze the principal organizational issues these commissions have raised in the ongoing discussion about how to prevent intelligence failures.

Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?

Abstract: The roles of Fannie Mae and Freddie Mac have become increasingly controversial in the modern world of residential mortgage finance. The authors describe the special features of these two companies and their roles in the mortgage markets and then discuss the controversies that surround the companies and offer recommendations for improvements in public policy. JEL classification: G21, G28. Key words: Fannie Mae, Freddie Mac, government-sponsored enterprises, residential mortgages, securitization, regulation The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation--commonly known as Fannie Mae and Freddie Mac, respectively (1)--have led the way in dramatic changes that have taken place in the structure of the U.S. residential mortgage markets since the 1970s. Fannie Mae and Freddie Mac are quasi-private/quasi-public: for example, they have federal charters that confer unique regulatory provisions; but their shares are publicly traded on the New York Stock Exchange. The biggest advantage of Fannie Mae's and Freddie Mac's anomalous legal status arises because financial markets treat their obligations as if those obligations are backed by the federal government--even though the federal government explicitly does not do so. With the benefit of this special status, Fannie Mae and Freddie Mac have grown into enormous financial institutions, with combined total assets of over $1.8 trillion in 2003. One critic, Richard Carnell (2004), a former Assistant Secretary of the Treasury, has suggested that the two companies' growth is at least partially a consequence of a "double game" that they play: "[They] tell Congress and the news media, 'Don't worry, the government is not on the hook'--and then turn around and tell Wall Street, 'Don't worry, the government really is on the hook.'" The preferential legal status of Fannie Mae and Freddie Mac serves as one of a number of mechanisms by which the federal government encourages the consumption (and, arguably, the over-consumption) of housing in the U.S. economy--this one with an on-budget cost of zero. But economists are congenitally suspicious of programs that seem to offer something for nothing. After all, a federal guarantee of the deposits in savings and loans cost nothing for many decades--until the early 1990s, when it cost taxpayers about $150 billion (U.S. Federal Deposit Insurance Corporation, 1997). Furthermore, Federal Reserve Chairman Alan Greenspan (2004), among others, has suggested that the anomalous situation of Fannie Mae and Freddie Mac may even pose systemic risks to the financial sector. This article will offer a generalist's guide to the functions that Fannie Mae and Freddie Mac perform in the residential mortgage financial markets and the controversies that swirl around them. Along the way we will highlight some important--and perhaps under-appreciated--changes that are occurring in the structure of U.S. residential mortgage markets. Some Background What Do Fannie Mae and Freddie Mac Do? Fannie Mae and Freddie Mac participate in the secondary mortgage market: Mortgage originators come to them with pools (bundles) of mortgages and either swap these assets for securities or sell them outright to one of the two companies. Under Fannie Mae's and Freddie Mac's "swap programs," an originator exchanges a mortgage pool for a mortgage-backed security that is issued and guaranteed by one of the two companies and that represents an interest in the same pool. Fannie Mae and Freddie Mac promise the security holders that the latter will receive timely payment of interest and principal on the underlying mortgages, less an annual "guarantee fee" of about 20 basis points (0.20 percent) on the remaining principal. In essence, Fannie Mae and Freddie Mac are providing insurance to holders of mortgage-backed securities against default risk on the underlying mortgages and are thus bearing that risk themselves. …

Dividend Taxation and Corporate Governance

Abstract: The U.S. government subjects corporate dividends to double taxation: It first taxes corporate income, then taxes the same income again when shareholders receive dividends paid out of corporate income. Until 2003, individuals were taxed on dividend income at the same rates as on other forms of income, resulting in overall taxes on dividends much higher than those in most other countries (PriceWaterhouse-Coopers, 2003a, b). After the passage of the Job Growth and Taxpayer Relief Reconciliation Act of 2003, dividends are still paid out of after-tax corporate income, but the individual tax rate on dividend income was cut to a maximum of 15 percent. We argue that this act, by substantially reducing double taxation of dividends but not eliminating such taxation, strikes a useful balance between competing objectives. Many economists have long opposed the double taxation of dividends because of the high overall tax rates this imposed on corporate income. They argued that double taxation deterred corporate investment and distorted corporate financing decisions, favoring debt over equity financing and earnings retention over dividend payouts. More recently, financial economists stressed how higher dividends (and consequently reduced retained earnings) can improve corporate governance by discouraging empire-building financed by retained earnings.

Affirmative Action and Its Mythology

Abstract: For more than three decades, critics and supporters of affirmative action have fought for the moral high ground through ballot initiatives and lawsuits, in state legislatures, and in varied courts of public opinion. The goal of this paper is to show the clarifying power of economic reasoning to dispel some myths and misconceptions in the racial affirmative action debates. We enumerate seven commonly held (but mistaken) views one often encounters in the folklore about affirmative action (affirmative action may involve goals and timelines, but definitely not quotas, e.g.). Simple economic arguments reveal these seven views to be more myth than fact.