George Akerlof

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pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Airbnb, airport security, Al Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, clean water, conceptual framework, constrained optimization, continuous double auction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, helicopter parent, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, winner-take-all economy

This might explain why Skoll initially took the job at Knight-Ridder rather than committing to Omidyar’s start-up full-time. While there, his misgivings were fed by a speech he gave at a symposium on internet commerce, where he asked whether anyone in the room had ever bought anything online. Only three hands went up out of an audience of several hundred. If even those at the vanguard of tech commerce weren’t shopping online, what hope was there that everyone else ever would? Kicking the Tires George Akerlof never set out to create the intellectual framework that helped nurture the e-commerce explosion or transform the way economists devised their theories. In the 1960s, he was just another young assistant professor trying to get his somewhat unorthodox paper on the economics of the used car market published in an academic journal. When we spoke with him, Akerlof was a resident scholar at the International Monetary Fund in Washington, DC, where he moved with his wife, Janet Yellen, on her confirmation as chair of the Federal Reserve.

Companies like eBay, Amazon, Airbnb, Facebook, and Uber employ PhD economists to more directly translate conceptual insights from Akerlof and his followers into practical guidance on how to better compete in the marketplace or, as we’ll see, reimagine marketplaces altogether. (The paper’s main insight is, in a sense, a warning for all businesses where information is of paramount importance: when the seller knows more about the quality of her wares than the buyer does, the market is prone to collapse.) And all this can be traced back, in some small way, to young George Akerlof choosing to sit in on a topology class his first year at Harvard. Adverse Selection on eBay Despite his early doubts, Jeff Skoll did ultimately end up running eBay, which (along with other e-tailers like Amazon) has succeeded in selling on the internet only because of the enormous resources it devotes to keeping customers from getting screwed.8 As one eBay economist put it to us, in academic parlance, “Our job is to reduce asymmetric information on eBay.”

It’s not for us to say whether any particular eBay merchant is being truthful (but the Tiffany audit we described in the last chapter suggests many aren’t); it’s simply that for any given listing, rip-off artists and honest brokers face the same (negligible) cost of claiming whatever they like. The challenge facing sellers of genuine Tiffany and the buyers in search of them is to prove that they’re not just full of empty words. Around the time George Akerlof had finally gotten someone in the academic community to take “The Market for Lemons” seriously, Michael Spence was at the early stages of his PhD at Harvard’s economics department. By the time he defended his thesis in 1972, he’d provided an answer to the cheap talk problem that also, perhaps inadvertently, helps to explain why Robert Torres ended up with San Fer tattooed across the back of his neck (even though we’re sure Spence, a very proper and vaguely aristocratic Rhodes Scholar, never contemplated the issue of hand and neck tattoos).


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

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algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, Nick Leeson, paper trading, Paul Graham, payday loans, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, six sigma, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel

If Fred Thompson waits several hours before he admits it was wrong to implicate President Clinton in a kickback scheme, that is good strategy. But if he puts off his apology day after day, the delay becomes a problem. It makes good sense to wait until the end of lunch to decide whether to ask someone on a second date. But what if you are still putting off the decision a month later? Where is the line between good delay and bad delay? The economist George Akerlof was spending a year in India after graduate school, and his good friend and fellow economist Joseph Stiglitz visited him there. (This was decades ago, before both men won the Nobel Prize.1) Stiglitz had purchased many souvenirs and clothes during his trip. On his return, when a customs official at check-in told Stiglitz he had too many bags and would have to leave one behind, Stiglitz put the extra ornaments and clothes in a cardboard box and asked Akerlof to ship it back to the United States.

One group observes how common it is, and asks—using the standard classical economics move—how something can be irrational if it is so widespread. Why would human beings engage in procrastination if it weren’t somehow making them better off? Carolyn Fischer, a public finance and natural resources economist, developed a clever mathematical model to show how procrastination can be in our best interests.17 A second strand of economics, the one originated by George Akerlof,18 laid the groundwork for Piers Steel and dozens of other prominent economists and psychologists who see procrastination as closely tied to impatience. Procrastination has become a hot subfield in economics, but if we asked three economists about procrastination, we might get five different opinions. There are also camps of historians with diametrically opposed views. One group points to evidence that procrastination has been around forever and views it as a deeply entrenched phenomenon at the core of human nature, at least since St.

The psychologists Joseph Ferrari, Jane Burka, and Piers Steel help chronic procrastinators who suffer from paralyzing stress and negative self-esteem. The various perspectives from economics and history are enlightening, too, like different views of a cathedral. Yet notwithstanding all of the books, websites, and self-help courses on the topic, there is no grand unified theory of procrastination.22 The closest we have is George Akerlof. In 1991, twenty-five years after his postgraduate year in India, Akerlof was invited to give a lecture at the 103rd meeting of the American Economics Association. By this time, he had developed an economic model to explain why humans procrastinate. He began his lecture, entitled “Procrastination and Obedience,” by telling the crowd about Stiglitz’s box.23 The heart of classical economics is the assumption that human beings are rational and forward-looking.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

Animal Spirits Animal Spirits HOW HUMAN PSYCHOLOGY DRIVES THE ECONOMY, AND WHY IT MATTERS FOR GLOBAL CAPITALISM With a new preface by the authors GEORGE A. AKERLOF AND ROBERT J. SHILLER Princeton University Press • PRINCETON AND OXFORD George Akerlof is the Daniel E. Koshland Sr. Distinguished Professor of Economics at the University of California at Berkeley; co-director of the Program on Social Interactions, Identity and Well-Being of the Canadian Institute for Advanced Research; and a member of the board of directors of the National Bureau of Economic Research. Robert Shiller is the Arthur M. Okun Professor of Economics at the Cowles Foundation for Research in Economics and Professor of Finance at the International Center for Finance, Yale University; research associate at the National Bureau of Economic Research; and co-founder and principal of two U.S. firms that are in the business of issuing securities: MacroMarkets LLC and Macro Financial LLC.

Copyright © 2009 Princeton University Press Requests for permission to reproduce material from this work should be sent to Permissions, Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu All Rights Reserved Ninth printing, and first paperback printing, with a new preface by the authors, 2010 Paperback ISBN: 978-0-691-14592-1 The Library of Congress has cataloged the cloth edition of this book as follows Akerlof, George A., 1940– Animal spirits : how human psychology drives the economy, and why it matters for global capitalism / George A. Akerlof and Robert J. Shiller. p. cm. ISBN 978-0-691-14233-3 (hardcover : alk. paper) 1. Economics—Psychological aspects. 2. Finance—Psychological aspects. 3. Capitalism. 4. Globalization. I. Shiller, Robert J. II. Title. HB74.P8A494 2009 330.12′2019—dc22 2008052649 British Library Cataloging-in-Publication Data is available This book has been composed in Adobe Galliard and Formata by Princeton Editorial Associates, Inc., Scottsdale, Arizona Printed on acid-free paper. ∞ Printed in the United States of America 10 9 Contents * * * Preface to the Paperback Edition Preface Acknowledgments INTRODUCTION Part One: Animal Spirits ONE Confidence and Its Multipliers TWO Fairness THREE Corruption and Bad Faith FOUR Money Illusion FIVE Stories Part Two: Eight Questions and Their Answers SIX Why Do Economies Fall into Depression?

We are grateful for many comments offered by students in Robert Shiller’s Economics 527/Law 20083/Management 565 course, part of the macroeconomics sequence at Yale University, in which, over the course of five consecutive years, succeeding drafts of this book were used as a textbook. Robert’s wife, Virginia Shiller, a clinical psychologist, has been influential in impressing upon her husband the significance for economics of various principles of human psychology and has helped temper his technical impulses to make sure there is always a connection to economic reality. We both have sons who are emerging scholars and who have offered comments on the book. George Akerlof thanks the Canadian Institute for Advanced Research and the National Science Foundation (grant SES 04-17871) for generous financial support. We also thank Edward Koren, whose drawings, wordlessly and succinctly, capture the spirit of this book. Animal Spirits Introduction TO UNDERSTAND HOW economies work and how we can manage them and prosper, we must pay attention to the thought patterns that animate people’s ideas and feelings, their animal spirits.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, full employment, fundamental attribution error, George Akerlof, income inequality, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, Zipcar

But, lacking the subsidy e ectively given by the U.S. government via Fannie Mae and Freddie Mac, mortgage securitization has not been common anywhere else.6 Before the crisis of 2007 nance theorists saw clear innovation in mortgage securitization. Securitized mortgages are, in the abstract, a way of solving an information asymmetry problem—more particularly the problem of “lemons.” This problem, rst given a theoretical explanation by George Akerlof, refers to the aversion many people have to buying anything on the used market, like a used car. They worry that they can’t judge whether the item has defects, and that they will get stuck with a lemon. The seller knows whether a particular item is of good quality or not, but the buyer does not—at least not without expending a good deal of costly e ort to nd out. 7 In a nutshell, Akerlof’s theory holds that if you think that the seller is going to pass o the bad stu on you, you won’t pay more for it than the lowest price.

He believed that real business decisions are emotional, not “the outcome of a weighted average of quantitative bene ts multiplied by quantitative probabilities. … Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;—though fears of loss may have a basis no more reasonable than hopes of profit had before.”8 My colleague George Akerlof and I were so convinced of the importance of these uctuations in animal spirits, and of their importance in the world economic crisis, that we wrote a book about it, entitled Animal Spirits.9 Fluctuations in animal spirits that are shared by large numbers of people are, we argued, social phenomena, the result of epidemic social contagion, which makes these uctuations very hard to comprehend and predict.

They did, nevertheless, reappear again and again for thousands of years, re ecting the persistence of public disgust with the extravagance of the rich. There is an economic theory that would seem to justify something akin to sumptuary laws or taxes. The theory was described by Thorstein Veblen in his 1899 book The Theory of the Leisure Class and the economic part of the theory was expanded by George Akerlof and other economic theorists.10 Many people spend lavishly on consumption that they do not really even enjoy merely to signal to others their status—a practice called positional consumption because its value to the consumer depends on how it establishes his or her position relative to others. As argued convincingly by social psychologist Leon Festinger, with his 1954 “theory of social comparison processes,” people are instinctively constantly comparing themselves with other people, and they delight when they are doing better.11 They tend to compare themselves with others close to them in the social ranking and who are attempting to achieve similar things, and disregard those who are doing very much better or very much worse or who are very di erent in their measures of success.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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Albert Einstein, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, More Guns, Less Crime, mortgage debt, Nash equilibrium, Nate Silver, New Journalism, nudge unit, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Walter Mischel

Eric is a persuasive guy, and as a result of his charm and arm-twisting, the collection of psychologists who showed up at our initial meeting was truly astonishing. We had not just Amos and Danny, but also Walter Mischel, of the Oreo and marshmallow experiment fame, Leon Festinger, who formulated the idea of cognitive dissonance, and Stanley Schachter, one of the pioneers of the study of emotions. Together they were the psychology version of the dream team. Some of the friendly economists who agreed to participate were also an all-star cast: George Akerlof, William Baumol, Tom Schelling, and Richard Zeckhauser. The hard-core group was Colin, George, Bob, and me. Eric also invited Larry Summers to come to the inaugural meeting, but Larry couldn’t come and suggested inviting one of his recent students, Andrei Shleifer. It was at that meeting that I first met the rambunctious Andrei, who would later become my collaborator. Jon Elster, the eclectic Norwegian philosopher who seems to be knowledgeable in nearly every intellectual domain, rounded out the group.

The Russell Sage Foundation’s small size meant that it could not be the primary source of research funding if the field were to grow beyond a few hard-core members, so Eric convinced the board to continue to support the field in a limited and highly unusual way. And unlike the initial effort, it has been a huge success. Here is the plan Eric devised. In 1992, the foundation formed a group of researchers called the Behavioral Economics Roundtable, gave them a modest budget, and tasked them with the goal of fostering growth in the field. The initial members of the Roundtable were George Akerlof, Alan Blinder, Colin Camerer, Jon Elster, Danny Kahneman, George Loewenstein, Tom Schelling, Bob Shiller, Amos Tversky, and me, and within reason, we could spend the money we were given any way we wanted. The Roundtable members decided that the most useful way to spend our limited budget (which began at $100,000 per year) was to foster and encourage the entry of young scholars into the field.

An Austrian by birth, Ernst has become a central figure in the behavioral economics movement in Europe, with a base at the University of Zürich in Switzerland. Like Colin, he has also become a prominent practitioner of neuro-economics. The first paper by Fehr that captured our attention was experimental. He and his coauthors showed that in a laboratory setting, “firms” that elected to pay more than the minimum wage were rewarded with higher effort levels by their “workers.” This result supported the idea, initially proposed by George Akerlof, that employment contracts could be viewed partially as a gift exchange. The theory is that if the employer treats the worker well, in terms of pay and working conditions, that gift will be reciprocated with higher effort levels and lower turnover, thus making the payment of above-market wages economically profitable. In contrast, Matthew Rabin’s first behavioral paper was theoretical, and was at that time the most important theory paper in behavioral economics since “Prospect Theory.”


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

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Andrei Shleifer, asset-backed security, Bernie Madoff, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, moral hazard, new economy, payday loans, Ponzi scheme, profit motive, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, wage slave

Phishing for Phools Akerlof.indb 1 6/19/15 10:24 AM Akerlof.indb 2 6/19/15 10:24 AM Phishing for Phools t h e e co n o m i c s o f ma n i p u l at i o n a n d d e c e p t i o n GEORGE A. AKERLOF AND ROBERT J. SHILLER Princeton University Press • Akerlof.indb 3 PRINCETON AND OXFORD 6/19/15 10:24 AM Copyright © 2015 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu Jacket illustration © Edward Koren. Jacket design by Jason Alejandro. All Rights Reserved ISBN 978-0-691-16831-9 [FULL CIP TO COME] British Library Cataloging-in-Publication Data is available This book has been composed in Adobe Galliard and Formata by Princeton Editorial Associates Inc., Scottsdale, Arizona Printed on acid-free paper. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Akerlof.indb 4 6/19/15 10:24 AM co n t e n ts PREFACE vii INTRODUC TION   PART ONE   Expect to Be Manipulated: Phishing Equilibrium  1 Unpaid Bills and Financial Crash CHAPTER ONE   Temptation Strews Our Path  15 CHAPTER T WO   Reputation Mining and Financial Crisis 23 PART T WO   Phishing in Many Contexts CHAPTER THREE   Advertisers Discover How to Zoom In on Our Weak Spots 45 CHAPTER FOUR   Rip-offs Regarding Cars, Houses, and Credit Cards  60 Phishing in Politics  72 CHAPTER SIX   Phood, Pharma, and Phishing  84 CHAPTER SE VEN   Innovation: The Good, the Bad, and the Ugly  96 CHAPTER EIGHT   Tobacco and Alcohol  103 CHAPTER NINE   Bankruptcy for Profit  117 CHAPTER TEN   Michael Milken Phishes with Junk Bonds as Bait  124 CHAPTER ELE VEN   The Resistance and Its Heroes  136 CHAPTER FIVE   PART THREE   Conclusion and Epilogue CONCLUSON   New Story in America and Its Consequences  149 EPILOGUE   What Is New in Phishing for Phools? 

(New York: Worth Publishers, 2009), pp. 12–13, use this example to explain the nature of equilibrium. Robert H. Frank and Ben Bernanke also refer to this image in Principles of Macroeconomics (New York: McGraw Hill, 2003). 4. See Cinnabon, Inc., “The Cinnabon Story,” accessed October 31, 2014, http://www.cinnabon.com/about-us.aspx. 5. Ibid. 6. “Cinnabon,” Wikipedia, accessed October 22, 2014, http://en.wikipedia. org/wiki/Cinnabon. 7. Email from Stefano DellaVigna to George Akerlof, October 25, 2014. 8. International Health, Racquet, and Sportsclub Association, “Industry Research,” accessed October 22, 2014, http://www.ihrsa.org/industry -research/. 9. Stefano DellaVigna and Ulrike Malmendier, “Paying Not to Go to the Gym,” American Economic Review 96, no. 3 (June 2006): 694–719. See also DellaVigna and Malmendier, “Contract Design and Self-Control: Theory and Evidence,” Quarterly Journal of Economics 119, no. 2 (May 2004): 353–402. 10.

Paul Goldberger, “The Shadow Building: The House That Goldman Built,” New Yorker, May 17, 2010, accessed October 22, 2014, http://www .newyorker.com/magazine/2010/05/17/shadow-building. 21. We are grateful for Zoltan Pozsar for sharing with us his insights regarding the dependence of banking arrangements on firms’ worries regarding large haircuts on conventional deposits at commercial banks if the bank should default. Source: Private conversations with George Akerlof at the International Monetary Fund in 2010–11. 22. Catherine Clifford and Chris Isidore, “The Fall of IndyMac,” Cable News Network, July 13, 2008, accessed December 1, 2014, http://money.cnn .com/2008/07/12/news/companies/indymac_fdic/. NOTES Akerlof.indb 215 215 6/19/15 10:24 AM 23. See Ellis, The Partnership, p. 78. 24. Ibid., p. 5. 25. Cohan, Money and Power, p. 602. 26. See Moody’s, “Moody’s History: A Century of Market Leadership,” accessed November 9, 2014, https://www.moodys.com/Pages/atc001.aspx.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, invisible hand, Isaac Newton, iterative process, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, moral hazard, mortgage debt, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning

Chapter 30 Kunreuther: Reflections and Guiding Principles for Dealing with Societal Risks 1 Howard Kunreuther and Erwann Michel-Kerjan, At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes (Cambridge, MA: MIT Press, 2009). 2 Howard Kunreuther, with R. Ginsberg, L. Miller, P. Sagi, P. Slovic, B. Borkan, and N. Katz, Disaster Insurance Protection: Public Policy Lessons (Wiley Interscience, 1978). ABOUT THE CONTRIBUTORS George A. Akerlof, University of California, Berkeley George Akerlof is the Daniel E. Koshland, Sr., Distinguished Professor of Economics at the University of California, Berkeley. He was educated at Yale and the Massachusetts Institute of Technology. In 2001, Professor Akerlof received the Nobel Prize in Economic Science; he was honored for his theory of asymmetric information and its effect on economic behavior. In 2006, he became president of the American Economic Association, having served earlier as vice president and member of the executive committee.

Fortunately, the story did not stop there. Stimulated by creative conceptual, methodological, and empirical work by the more senior authors in The Irrational Economist and many others, including Amos Tversky, Daniel Kahneman, and Richard Thaler, the trickle of studies challenging traditional economic assumptions of rationality became a torrent. Nobel prizes in economics awarded to Herbert Simon in 1978, to George Akerlof in 2001, and to Daniel Kahneman and Vernon Smith in 2002 for their contributions toward understanding the behavioral dynamics of economic decisions further contributed to what has become a revolution in thinking. Today, young scholars, and even those not so young, have become convinced that the secret to improving economic decision making lies in the careful empirical study of how we actually make decisions.

Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Schelling, Thomas (1996). “Coping Rationally with Lapses from Rationality,” Eastern Economic Journal (Summer): 251-269. Reprinted in Thomas Schelling, Strategies of Commitment and Other Essays (Cambridge, MA: Harvard University Press, 2006.) 2 Berserk Weather Forecasters, Beauty Contests, and Delicious Apples on Wall Street GEORGE A. AKERLOF AND ROBERT J. SHILLER No one has ever made rational sense of the wild gyrations in financial prices, such as stock prices.1 These fluctuations are as old as the financial markets themselves. And yet these prices are essential factors in investment decisions, which are fundamental to the economy. Corporate investment is much more volatile than aggregate GDP, and it appears to be an important driver of economic fluctuations.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

.”: Garrett Hardin, “The Tragedy of the Commons,” Science 162 (1968): 1244. 150 “Game theorists get . . .”: Binmore, Game Theory, 67. 12. HIDDEN INFORMATION AND THE MARKET FOR LEMONS 151 “I belonged to . . .”: From George Akerlof’s Nobel autobiography, available at http://nobelprize.org/nobel_prizes/economics/laureates/2001/akerlof-autobio.html. 152 “a major reason as to why . . .”: George Akerlof, “Writing ‘The Market for Lemons’: A Personal and Interpretive Essay,” available at http://nobelprize.org/nobel_prizes/economics/articles/akerlof/index.html. 153 “[M]ost cars traded . . .”: George Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84 (1970): 489. 154 “was potentially an issue . . .”: Akerlof, “Writing ‘The Market for Lemons.’ ” 155 “marginally attached”: Bureau of Labor Statistics, Issues in Labor Statistics, Summary 90–04 (April 2009): 1. 156 “it is quite possible . . .”: Akerlof, “The Market for ‘Lemons,’ ” 494. 157 2006 health care spending: “National Health Spending in 2006: A Year of Change for Prescription Drugs,” Health Affairs 27, no. 1 (2008): 14. 158 “The most obvious . . .”: Kenneth J.

In Haight-Ashbury, a run-down neighborhood of cheap apartments and vacant buildings just east of Golden Gate State Park, a vibrant subculture was developing around marijuana, LSD, and the psychedelic music of Jefferson Airplane and the Grateful Dead, two local bands; in Candlestick Park, out near the airport, which was then home to the San Francisco Giants football team, the Beatles played what turned out to be their final concert before paying fans; across the water in Oakland, Bobby Seale and Huey P. Newton were founding the Black Panther Party. In nearby Berkeley, George Akerlof, a twenty-six-year-old graduate of MIT’s prestigious Ph.D. program in economics, was starting his teaching career. From early childhood, Akerlof had appeared destined for academia. His father, who emigrated from Sweden to the United States in the 1920s, was a chemistry professor. His mother, who met his father while she was in graduate school, came from a bookish family of German Jews. Akerlof was a bright and studious kid.

But Keynes, as he stressed in his 1937 paper, was primarily concerned not with wage rigidity, which he used mainly as an analytical device, but with how the economy operates in an environment of irreducible uncertainty about the future, populated by individuals who don’t know very much and are, therefore, susceptible to peer pressure and other inchoate factors such as psychology. As every economics major knows, and as George Akerlof and Robert Shiller have recently reminded us, Keynes said that “animal spirits,” or the “spontaneous urge to action rather than inaction,” play an important role in economic behavior. Seizing on these statements, critics of Keynes have suggested that his theories depend on mass irrationality. That is mistaken: they pivot on rational irrationality, rationality that is rational at the individual level but that leads to socially irrational outcomes.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Edward Glaeser, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Washington Consensus, white flight

In the 1970s, economists began to model another aspect of markets: asymmetric information. This is an important feature of real-world markets. Workers have a better sense of their ability than do employers. Creditors know whether they are likely to default or not, while lenders do not. Buyers of used cars do not know whether they’re buying a lemon, but sellers do. Work by Michael Spence, Joseph Stiglitz, and George Akerlof showed that these types of markets could exhibit a variety of distinctive features, including signaling (costly investment in behavior that has no immediate apparent benefit), rationing (refusal to provide a good or service, even at a higher price), and market collapse. This work earned these three economists a joint Nobel Prize in 2001 and spawned a huge literature that hums along to this day.

They are understood today to be an approximation that is valid in a limited context . . . but in this form and in this limited context they have survived for a century and may be expected to survive indefinitely. This is the sort of law of physics that I think corresponds to something as real as anything else we know.” Weinberg, “Sokal’s Hoax,” New York Review of Books 43, no. 13 (August 8, 1996): 11–15. †† In his Nobel address, here’s how George Akerlof described the shift in economic modeling of which he was part: “At the beginning of the 1960s, standard microeconomic theory was overwhelmingly based upon the perfectly competitive general equilibrium model. By the 1990s the study of this model was just one branch of economic theory. Then, standard papers in economic theory were in a very different style from now, where economic models are tailored to specific markets and specific situations.

For a good overview of the differences between economists’ and anthropologists’ perspectives, see Pranab Bardhan and Isha Ray, Methodological Approaches in Economics and Anthropology, Q-Squared Working Paper 17 (Toronto: Centre for International Studies, University of Toronto, 2006). 3. For a sampling of this work, see Samuel Bowles, “Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions,” Journal of Economic Literature 26 (1998): 75–111; George A. Akerlof and Rachel E. Kranton Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being (Princeton, NJ: Princeton University Press, 2010); Alberto Alesina and George-Marios Angeletos, “Fairness and Redistribution,” American Economic Review 95, no. 4 (2005): 960–80; Alberto Alesina, Edward Glaeser, and Bruce Sacerdote, “Why Doesn’t the United States Have a European-Style Welfare State?”


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, investor state dispute settlement, invisible hand, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

In their mind, financial innovation meant designing better products to meet the needs of consumers and firms. That’s the standard neoliberal theory. More modern theories emphasize imperfectly informed and often irrational consumers and firms operating in markets with imperfect and asymmetric information, where profits can typically be enhanced more by exploiting these market imperfections than in any other way. Nobel Prize–winning economists George Akerlof and Rob Shiller document this widespread behavior in their brilliant book Phishing for Phools—using the term for Internet scammers who systematically “fish for fools.”16 With financial products moving ever more easily throughout Europe, the opportunity to take advantage of a whole continent of people who might be duped into buying financial products that were not suitable for them proved irresistible.

A Tract on Monetary Reform (London: Macmillan, 1923), p. 80. 26 For instance, they do not build in, or build in in a fully adequate way, essential market imperfections—for example, the irrationality of financial markets, as emphasized by the research of Nobel Prize–winning economist Rob Shiller (see, for instance, his book Irrational Exuberance [Princeton, NJ: Princeton University Press, 2000]) or the pervasive imperfections of information (as emphasized by Nobel Prize–winning economists Michael Spence, George Akerlof, and myself). For a more extensive discussion of the failures of the standard macroeconomic models, see, for instance, Stiglitz, “Rethinking Macroeconomics: What Failed and How to Repair It,” Journal of the European Economic Association 9, no. 4 (2011): 591–645; and Stiglitz, “Stable Growth in an Era of Crises: Learning from Economic Theory and History,” Ekonomi-tek 2, no. 1 (2013): 1–38 (originally delivered as keynote lecture to the Turkish Economic Association, Izmir, November, 2012).

Stiglitz, “Alternative Theories of Wage Determination and Unemployment in L.D.C.’s: The Labor Turnover Model,” Quarterly Journal of Economics 88, no. 2 (1974): 194–227. I then showed that similar effects arise as a result of imperfect information: lowering wages leads to a lower quality and less motivated labor force. This research was part of the work that provided the basis of the Nobel Prize that was awarded to me. There is now a huge literature on the subject, providing empirical verification as well. See, for instance, George A. Akerlof and Janet L. Yellen, eds., Efficiency Wage Models of the Labor Market (New York: Cambridge University Press, 1986); and Jeremy Bulow and Laurence Summers, “A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination, and Keynesian Unemployment,” Journal of Labor Economics 4, no. 3 (1986): 376–414. 21 The combination of austerity and poorly thought-out structural reforms associated with the IMF/Troika programs simply increased this uncertainty.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, invisible hand, Jean Tirole, joint-stock company, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, payday loans, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, War on Poverty, Washington Consensus, We are the 99%, working poor

Its founder, Kalle Lasn, has asserted, “What we’re trying to do is pioneer a new form of social activism using all the power of the mass media to sell ideas rather than products”; its website proclaims, “The purpose of life is not to find yourself, but to lose yourself.”5 More neoliberal sentiments would be hard to find. The website also has a set of pages devoted to economics; under the rubric “Meet the Mavericks” it profiled Paul Samuelson, George Akerlof, Joseph Stiglitz, and Herman Daly. Kalle Lasn Associates has also published an anti-textbook entitled Meme Wars: The Creative Destruction of Neoclassical Economics which contains contributions by George Akerlof and Joseph Stiglitz. At least the graphics were radical. Similar ideas were promoted in the curiously titled Occupy Handbook, which included chapters by Raghuram Rajan, Tyler Cowen, Martin Wolf, David Graeber, Jeffrey Sachs, and Robert Shiller.6 Besotted by the millenarian idea of starting anew, and lacking any sense of the history of protest and political organization, both neoliberals and neoclassical economists rapidly addled whatever political curiosity and radical inclinations that the well-intentioned protestors might have had.

This, in turn, led to Sissyphyssian task of shoring up whatever was left of the concepts of “agency” and “preference.” For some, identity came from imposition of further variables of “self-confidence” and self-reputation read through the eyes of others—neoliberal prescriptions par excellence (see Benabou and Tirole). Another economist we shall encounter later in our survey of crisis theories, George Akerlof, purported to concoct a neoclassical theory of identity by stuffing the utility function with even more arbitrary variables. This version of the “individual” seeks to reduce anxiety-creating cognitive dissonance induced by the behavior of others whose actions don’t conform to the social categories assigned to them—it smacked of nothing more than teen angst blown up to grand levels of utilitarian generalization, an infantilization of Homo economicus.

The beauty of this narrative is that it mentions some of the major bugaboos of the left, but deftly subordinates them to the time-honored litany that the markets worked as they should, and it was all, in the final analysis, the fault of the government.41 This ingenious commingling of complaints about worsening income distribution and rapacious bankers with what is at bottom a unilateral denial that economists got anything wrong has been so effective that it often has inserted Rajan into critical leftish campaigns where the audience was oblivious to the true character of the analysis.42 I don’t want to especially pick on Chicago in this book; Berkeley’s Christina Romer, Obama’s first head of his Council of Economic Advisors, was just as embarrassing.43 Nevertheless, the sheer density of denial per square economist at Chicago does raise a more interesting issue, given voice by Donald Westbrook and others: “No doubt World War II would have occurred without Martin Heidegger, Carl Schmitt or the other Nazi intellectuals, but it is not so clear that the crisis could have occurred without the Chicago School of neoclassical economics.” Far from being the conventional generic blanket disparagement of “freshwater economics” (such as that spread by Paul Krugman, Brad DeLong, George Akerlof, and others), this points to the fact that Chicago was the prime initial incubator for modern finance theory, which has indeed provided direct intellectual inspiration and justification for most of the so-called innovation in financial derivatives and automated equity trading of the last three decades. There is also the Chicago inspiration for the theory of “public choice” and Stigler’s theory of regulation, so central in the modern development of government (anti)regulation.


pages: 389 words: 98,487

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car by Tim Harford

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Albert Einstein, barriers to entry, Berlin Wall, collective bargaining, congestion charging, Corn Laws, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Fall of the Berlin Wall, George Akerlof, invention of movable type, John Nash: game theory, John von Neumann, market design, Martin Wolf, moral hazard, new economy, price discrimination, Productivity paradox, race to the bottom, random walk, rent-seeking, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, second-price sealed-bid, Shenzhen was a fishing village, special economic zone, spectrum auction, The Market for Lemons, Thomas Malthus, trade liberalization, Vickrey auction

Jerome could rush to buy health insurance if and only if they knew they were ill, who would want to insure them? Inside information This is more than an idle question. Economists have known for a while that if one party to a deal has inside information and the other does not, then markets may not work as well as we would hope. That makes intuitive sense. But it wasn’t until an American economist named George Akerlof published a revolutionary paper in 1970 that the profession realized quite how profound and dramatic the problem might be. Akerlof chose as his example the market for used cars and showed that even if the market is highly competitive, it simply cannot work if sellers know a lot about the quality of their cars and buyers do not. To take a stark example, let’s say that half the used cars on sale are “peaches,” and half are “lemons.”

Health insurance is usually packaged together with a job, which reduces the efficiency of the labor market; workers are hesitant to quit their jobs without lining another job up first for fear of being uninsured. Worse, 15 percent of citizens have no insurance coverage of any kind—which should be a stunning statistic for the world’s richest economy, but probably isn’t because it has been lamented for so many years. Compare it to Germany, where 0.2 percent of the population has no coverage, or to Canada or Britain, where everyone is provided for by the government. Given what we have learned from George Akerlof and his lemons, the troubles of the US health-care system should be no surprise. We should expect a voluntary private insurance system to be patchy. A few people who have more pressing costs than health insurance (for example, the young poor, who have little money and rightly expect that they are unlikely to become seriously ill) will drop out of the system. As a result, health insurance companies, needing to cover their costs, will raise the premiums for the average client, driving out more and more people.

Roth, “Road Pricing in a Free Society,” Economic Affairs, December 1998. The tax bill paid by American drivers from the US Department of Transportation, http://www.fhwa.dot.gov/ohim/2000hfbt.pdf. The effect of London’s congestion charge on traffic levels is described in “Congestion Charging Six Months On,” Transport for London, October 2003. Chapter 5 The classic article on lemons and asymmetric information is George Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics (August 1970). Akerlof ’s book An Economic Theorist’s Book of Tales (Cambridge: Cambridge University Press, 1984) contains many of his most interesting papers up to that date—not only the lemons paper but, for instance, economic theories of the caste system. In conversation, John Kay has made me realize that the explanation of bad restaurants in tourist traps is more subtle than it appears.


pages: 339 words: 95,988

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt, Stephen J. Dubner

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airport security, Broken windows theory, crack epidemic, desegregation, Exxon Valdez, feminist movement, George Akerlof, Joseph Schumpeter, mental accounting, moral hazard, More Guns, Less Crime, oil shale / tar sands, peak oil, pets.com, profit maximization, Richard Thaler, school choice, sensible shoes, Steven Pinker, Ted Kaczynski, The Chicago School, The Market for Lemons, Thorstein Veblen, War on Poverty

BRANDEIS writing that “Sunlight is said to be the best of disinfectants”: See Louis D. Brandeis, Other People’s Money—and How Bankers Use It (New York: Frederick A. Stokes, 1914). THE BRAND-NEW USED-CAR CONUNDRUM: This thesis, and indeed much of what we think today about “asymmetric information,” stems from a paper that George A. Akerlof wrote during his first year as an assistant professor at Berkeley in 1966–67. It was rejected three times—two of the journals told Akerlof that they “did not publish papers on topics of such triviality,” as he later recalled—before being published as George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, August 1970. Some thirty years later, the paper won Akerlof the Nobel Prize in Economics; he is widely considered the nicest man to have ever won the award.

I know, I know, I know: Wikipedia is one of the wonders of the online world. But if anyone ever needs a reason to be deeply skeptical of Wikipedia’s dependability, I urge you to click on the entry for “List of Economists,” which is introduced thusly: “This is an alphabetical list of well-known economists. Economists are scholars conducting research in the field of economics.” It is true that the list includes George Akerlof and Paul Samuelson and Jeffrey Sachs and even Steve Levitt. But if you want to see how truly pathetic Wikipedia can be, check out the sixth “economist” listed under “D”: that’s right, yours truly. Although some of my best friends are economists, I am very much not. (Note: soon after I posted this entry, a reader was helpful/mischievous enough to quickly amend the Wikipedia entry, deleting my name.)

Every honest person that waits in line is delayed 15 minutes or more because of the cheaters. Social scientists sometimes talk about the concept of “identity.” It is the idea that you have a particular vision of the kind of person you are, and you feel awful when you do things that are out of line with that vision. That leads you to take actions that are seemingly not in your short-run best interest. In economics, George Akerlof and Rachel Kranton popularized the idea. I had read their papers, but in general have such a weak sense of identity that I never really understood what they were talking about. The first time I really got what they meant was when I realized that a key part of my identity was that I was not the kind of person who would cut in line to shorten my commute, even though it would be easy to do so, and even though it seemed crazy to wait 15 minutes in this long line.


pages: 432 words: 127,985

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, business climate, cognitive dissonance, corporate governance, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, margin call, market bubble, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, short selling, The Market for Lemons, transaction costs

The key lessons that proponents of the conventional wisdom drew were that “a rule against fraud is not an essential or even necessarily an important ingredient of securities markets” (Easterbrook and Fischel 1991, 285), that private market discipline turned presumed conflicts of interest into positive synergies, and that regulators like the Securities and Exchange Commission (SEC) were more harmful than helpful. In sum, the lessons we learned from the debacle were false. The guidance that law and economics professors provided left us more susceptible to control fraud. This book is often critical of particular economists, but I am not dismissive of economics. Indeed, I write in large part to help build a new economic theory of fraud arising from George Akerlof’s classic theory of lemons markets (1970) and Henry Pontell’s work on “systems capacity” limitations in regulation that may increase the risk of waves of control fraud (Calavita, Pontell, and Tillman 1997, 136). This book explains why private market discipline fails to prevent waves of control frauds. It also studies how S&L control frauds sought to manipulate public sector actors. Charles Keating and his Texas counterparts achieved staggering successes.

I will mention only Jim Cirona, who could have made his job secure had he fired me; Mike Patriarca, who demonstrated every day the ultimate class and integrity as a leader; Chuck Deardorff, who kept supervision from disaster for decades; and my predecessor, Dirk Adams, who recruited the superb staff that made my work such a pleasure. Thanks to Jim Leach, Buddy Roemer, Thomas Carper, and the late Henry Gonzalez. You saved the nation billions of dollars by opposing the efforts of the control frauds, but you also saved me from cynicism about elected officials when I had cause to be cynical. James Pierce gave me the opportunity of a lifetime when he asked me to serve as his deputy and introduced me to George Akerlof. Both of you have been leading influences on my research, and your support has been critical. Kitty Calavita, Gil Geis, Paul Jesilow, and Henry Pontell recruited me to come to UC-Irvine for my doctorate in criminology, taught me criminology, and have supported me throughout. I entered as a student and left as a colleague and friend. Jamie Galbraith was instrumental in my coming to the LBJ School of Public Affairs at the University of Texas at Austin and has, with Bob Auerbach and Elspeth Rostow, been my greatest supporter.

I have been the immense beneficiary of the team assembled by UT Press to edit the book, Kip Keller and Lynne Chapman. Their care and professionalism is top drawer. Our eldest, Kenny, served as my research assistant. My spouse, June Carbone, author of a book on family law, was an inspiration and someone I could bounce ideas off. Travis Hale and Debra Moore gave me editing assistance. Henry Pontell and George Akerlof served as outside reviewers for the book, and their comments, along with those of Ed Kane, were of great use to me in improving the draft. Kirk Hanson helped me complete the book by allowing me to serve as a visiting scholar at the Markkula Center for Applied Ethics. Thank you all. And, yes, the remaining errors are mine alone. 1. THEFT BY DECEPTION: CONTROL FRAUD IN THE S&L INDUSTRY The best way to rob a bank is to own one.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, moral hazard, mortgage tax deduction, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

As the currency collapses, companies default on their debts, and unemployment rises sharply, the reality on the ground becomes nasty. Leading businesspeople—often selected for their personal relationships or political skills rather than their management ability—focus on saving their most prized possessions. Facing shorter time horizons, executives care less about the long-term value of their firms and more about their friends and themselves. As George Akerlof and Paul Romer wrote in their classic paper on “looting,” businesspeople will profit from bankrupting their own firms when “poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.”34 In Russia, as in most emerging market crises, there was a sharp increase in “tunneling”—borderline illegal ways for managers and controlling shareholders to transfer wealth from their businesses to their personal accounts.35 Boris Fyodorov, a former Russian minister of finance who struggled against corruption and the abuse of authority, argued that confusion only helps the powerful;36 when there are complicated government bailout schemes, multiple exchange rates, or high inflation, it becomes difficult to monitor the real market prices of assets and protect the value of firms.37 In the extreme confusion caused by a crisis, insiders can take the money (or other valuables) and run, leaving banks, industrial firms, and other entities to collapse.

* To create a mortgage-backed security (MBS), a large number of mortgages are pooled together; the mortgage-backed securities each have a claim on the payments made on those mortgages. The net effect is that each investor in the MBS owns a tiny piece of each mortgage, distributing each mortgage’s risk of default among a large number of investors. * The mismanagement and outright fraud that led to these failures were one of the inspirations for George Akerlof and Paul Romer’s paper on “looting.” * Bonds are IOUs issued by companies or governments. They are given ratings by credit rating agencies; those ratings are supposed to reflect the probability that the issuer will default on the IOU. “Investment-grade” bonds are those that are highly rated, meaning that there is a small probability of default. “Junk” bonds are any bonds that do not earn investment-grade ratings

See John Odling-Smee, “The IMF and Russia in the 1990s” (IMF working paper WP/04/155, August 2004), available at http://www.imf.org/external/pubs/ft/wp/2004/wp04155.pdf. The general U.S. preference for capital account liberalization is clear in its subsequent free trade agreements with Singapore and with Chile, as well as in its negotiations over China’s accession to the World Trade Organization. 33. Aslund, Russia’s Capitalist Revolution, supra note 31, at chapter 5. 34. George A. Akerlof, Paul M. Romer, Robert E. Hall, and N. Gregory Mankiw, “Looting: The Economic Underworld of Bankruptcy for Profit,” Brookings Papers on Economic Activity 24 (1993): 1–73. 35. The classic techniques involve managers transferring assets (below market price) to, or buying inputs (above market price) from, companies they control. See, for example, the discussion of Gazprom in Vladimir A. Atansov, Bernard S.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

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asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hindsight bias, housing crisis, Hyman Minsky, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, laissez-faire capitalism, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, mortgage debt, mortgage tax deduction, mutually assured destruction, new economy, Nick Leeson, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

It needs a little basic financial knowledge to follow her account, but if you have that, Fool’s Gold reads like a thriller—written by someone who was not just following the story but predicted its outcome. 5 Testimony to the Senate Committee on Agriculture, Nutrition and Forestry, 30 July 1998. CHAPTER THREE: BOOM AND BUST 1 I’m indebted to a piece by Steven Malanga in City Journal: www.city-journal.org/2009/19_2_homeownership.html. 2 There is an excellent discussion of Enron and the impact of frauds in George Akerlof and Robert Shiller’s book Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. CHAPTER FOUR: ENTER THE GENIUSES 1 Again, I’m deeply indebted to Gillian Tett’s account of the CDO industry. 2 Richard A. Posner, A Failure of Capitalism. I don’t agree with all of Posner’s analysis, but it is superbly clear and his book is well worth reading as an account of the financial crisis being based on what one might call rational mistakes. 3 Tett, Fool’s Gold, p. 182. 4 Richard Bitner, Confessions of a Subprime Lender: An Insider’s Tale of Greed, Fraud, and Ignorance, has been a great help to me in understanding the bad lending which underlay the crisis. 5 “Bank Accused of Pushing Mortgage Deals on Blacks,” The New York Times, June 6, 2009. 6 “US Seeks Culprits for Subprime,” Financial Times, August 8, 2007.

*In fact, Keynes seemed to use the term to refer to the basic optimistic will to act which underlies much investment. “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” In their book Animal Spirits, George Akerlof and Robert Shiller appropriated the term to apply to the whole area of emotion and confidence in economics, and it’s in that spirit that I’m using the term here. *This is an oversimplification, because, as the current crisis has shown, central banks can also print money and do so via a number of mechanisms such as the new favorite, “quantitative easing.” This is essentially buying its own debt instruments without issuing anything to back it up; it’s not literally the same thing as printing money but it’s as good as.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

ACKNOWLEDGMENTS I HAVE BEEN WORKING, AS I NOTED, ON THE ORIGINS AND consequences of inequality since my days as a graduate student, and in the almost fifty years since beginning my studies, I have accumulated enormous intellectual debts, too many to enumerate. Robert Solow, one of my thesis advisers, and with whom I wrote an early paper on distribution and macroeconomic behavior, had written his own thesis on inequality. The influence of Paul Samuelson, another of my thesis advisers, will be apparent in the discussion of globalization in chapter 3. My first published papers on the subject were written with my fellow graduate student George Akerlof, with whom I shared the 2001 Nobel Prize. At the time I went to Cambridge University, as a Fulbright scholar in 1965–66, the distribution of income was a major focus of debate, and I owe debts to the late Nicholas Kaldor, David Champernowne, and Michael Farrell, and especially to Sir James Meade and Frank Hahn. It was there that I first began my work with Tony Atkinson, who subsequently has become one of the world’s leading authorities on inequality.

An alternative interpretation, which I discuss briefly in chapter 5, is that of Thomas Frank, in his What’s the Matter with Kansas? How Conservatives Won the Heart of America (New York: Metropolitan Books, 2004). 20. This chapter of my thesis was published as “The Distribution of Income and Wealth Among Individuals,” Econometrica 37, no. 3 (July 1969): 382–97. Other papers growing out of this early work include two with George Akerlof, with whom I shared the 2001 Nobel Prize, “Investment, Income, and Wages” (abstract), Econometrica 34, no. 5, suppl. issue (1966):118, and “Capital, Wages and Structural Unemployment,” Economic Journal 79, no. 314 (June 1969): 269–81; one with my thesis supervisor, Robert Solow, “Output, Employment and Wages in the Short Run,” Quarterly Journal of Economics 82 (November 1968): 537–60; and another chapter from my thesis, “A Two-Sector, Two Class Model of Economic Growth,” Review of Economic Studies 34 (April 1967): 227–38. 21.

See, in particular, the Nobel Prize–winning economist Gary Becker’s The Economics of Discrimination (Chicago: University of Chicago Press, 1957). 45. Of course, for a long time, Jim Crow laws reinforced market processes of discrimination. Inadequate public education ensured that those from certain groups began life with a handicap–and that problem continues today. 46. See, e.g., Dilip Abreu, “On the Theory of Infinitely Repeated Games with Discounting,” Econometrica 56, no. 2 (March 1988): 383–96. See also George A. Akerlof, “Discriminatory, Status-Based Wages among Tradition-Oriented, Stochastically Trading Coconut Producers,” Journal of Political Economy 93, no. 2 (April 1985): 265–76. 47. This is another example of the notion of reflexivity discussed in chapter 5. Psychological phenomena, where individuals’ perceptions are affected by their beliefs, reinforce the result—a phenomenon also discussed further in chapter 5.


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Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, means of production, Mikhail Gorbachev, millennium bug, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Washington Consensus, working poor, éminence grise

But none of these is sufficiently reliable to be useful in making predictions about economic behaviour. Economists do know, however, that human beings possess one predictable instinct: they will always try to maximise their profit. So economics tries to box as much human reaction as possible into this simple and universal theorem. But economics cannot proceed by ignoring the reality that human beings value – indeed, are passionate about – fairness. As economists Robert Shiller and George Akerlof prove,2 unemployment, recessions, swings in confidence and much other economic activity are simply inexplicable using the standard theorems of economics. But if progress is to be made, there has to be a capacity to model what human beings actually think and value reliably – and to get a grip on apparent inconsistencies. Here behavioural psychology has begun to open up incredible insights through a wider range of laboratory tests.3 For instance, we know that people value cooperation, punish cheats, believe that effort should be rewarded, understand the case for salary differentials, value equity and believe that the very poor should have a reasonable standard of living.

commented David Sarnoff Associates in rejecting a proposal for investment in the radio in the 1920s. 24 Thérèse Delpech (2007) Savage Century: Back to Barbarism, Carnegie Endowment for International Peace. 25 National Intelligence Council (2008) Global Trends 2025: A World Transformed, US Government Printing Office. 26 George Orwell (1938; 1962) Homage to Catalonia, Penguin, p. 221. Chapter Two: Why Fair? 1 Literary analysis and history also testify to the importance of balance: see Margaret Atwood (2008) Payback – Debt and the Shadow Side of Wealth, Bloomsbury. 2 George Akerlof and Robert Shiller (2009) Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, Princeton University Press. 3 Some philosophical work is also beginning to take seriously concrete popular conceptions of justice: see David Miller (2001) Principles of Social Justice, Harvard University Press. More generally, for a social-psychological account, see Michael Ross and Dale Miller (eds) (2002) The Justice Motive in Everday Life, Cambridge University Press. 4 Ulpian in the digest of the Roman book of law, Corpus Juris, circa 200 BC. 5 Thomas Hurka, ‘Desert: Individualistic and Holistic’, in Serena Olsaretti (ed.) (2007) Desert and Justice, Oxford University Press. 6 George Sher (1987) Desert, Princeton University Press, p. 53. 7 Marc Hauser (2006) Moral Minds: How Nature Designed Our Universal Sense of Right and Wrong, Ecco Press. 8 Alan Norrie (2001) Crime, Reason and History: A Critical Introduction to Criminal Law, Cambridge University Press. 9 Cited by Jan Narveson, ‘Deserving Profits’, in Robin Cowan and Mario J.

Steinmueller and Juan Mateos-Garcia (2009) ‘Rebooting Britain’, Nesta Policy Briefing. 6 Rohit Talwar and Tim Hancock (2010) ‘The Shape of Jobs to Come: Possible New Careers Emerging from Advances in Science and Technology (2010–2030)’, report, Fast Future. 7 Ian Brinkley (2008) ‘The Knowledge Economy: How Knowledge is Reshaping the Economic Life of Nations’, report, Work Foundation. 8 Robert Nozick (1974) Anarchy, State, and Utopia, Basic Books, p. 169. 9 Liam Murphy and Thomas Nagel (2002) The Myth of Ownership: Taxes and Justice, Harvard University Press. 10 Will Hutton and Philippe Schneider (2008) ‘The Failure of Market Failure: Towards a 21st Century Keynesianism’, Nesta Provocation. 11 George Akerlof (1970) ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics 84 (3): 488–500. 12 Nava Asraf, Colin Camerer and George Loewenstein (2005) ‘Adam Smith,Behavioral Economist’, Journal of Economic Perspectives 19 (3): 131–45. 13 John Coates and Joe Herbert (2008) ‘Endogenous Steroids and Financial Risk Taking on a London Trading Floor’, Proceedings of the National Academy of Sciences 105: 6167–72. 14 Technically, this can be understood as rational behaviour. 15 Studies have sought to limit attention to one potential bias at a time; but several biases might plausibly explain behaviour.


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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, invisible hand, Isaac Newton, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, New Journalism, Nikolai Kondratiev, Paul Lévy, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, volatility smile, Yogi Berra

SAMUELSON DID NOT BELIEVE, THOUGH, that his relentless mathematical reasoning was adequate to the challenge of explaining economic reality. He was, recalled Joseph Stiglitz, a Samuelson favorite who got his Ph.D. from MIT in 1967, “quite good at identifying weaknesses in the perfect competition model and not taking it very seriously.” Just identifying weaknesses wasn’t enough for Stiglitz or his fellow student George Akerlof. “If you’re going to say, ‘This model does not provide a good description,’ you need to provide a model that does provide a good description of what’s going on,” said Stiglitz. “George and I saw our job as graduate students as creating the models [of imperfect competition] that Samuelson was telling us about.” That’s what they did, mostly by following a path blazed a few years before by Kenneth Arrow.

Thaler and Shefrin used a mathematical framework borrowed from agency theory to describe how these conflicting internal priorities interacted, and they described a real-world institution—the “Christmas club” stashes that people set up to deduct a preset amount from their bank accounts every month to save up for end-of-the-year shopping—that seemed to flow from it.19 Thaler began to find others interested in this new approach, which came to be called behavioral economics despite its roots in cognitive—not behavioral—psychology. Shefrin was the first convert and, like Thaler, soon left Rochester for a friendlier environment. In Shefrin’s case it was Santa Clara University in California, where he and colleague Meir Statman began a productive collaboration examining the psychology of investor behavior. Thaler’s Cornell student Werner De Bondt was another important early fellow traveler. Among established economists, George Akerlof was probably the most supportive, teaching a class together with Kahneman at UC–Berkeley for several years in the 1980s. A handful of adventurous young economists at other schools began following the study of less-than-hyperrational decision making in other directions. Thaler’s biggest triumph in those early days, though, was lining up psychologist and foundation executive Eric Wanner to be the intellectual movement’s patron.

The Sage Foundation paid for conferences and workshops, handed out grants to young researchers, and even sponsored a regular behaviorist “summer camp” for graduate students and junior professors. The infrastructure of an intellectual movement was being constructed. There were some questions early on about what kind of intellectual movement it would be. In 1982, Thaler cofounded a group called the Society for the Advancement of Behavioral Economics. George Akerlof and Herbert Simon were members of its first advisory board. It soon became apparent that most of those who signed up wanted to lay waste to the entire mathematical, hard-science apparatus that economists had built after World War II. Thaler didn’t want to do that, and he later left the group—which lives on today as a low-profile organization with almost no impact on the economics mainstream.


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In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

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Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, full employment, George Akerlof, housing crisis, inflation targeting, London Interbank Offered Rate, Long Term Capital Management, market bubble, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail

He called it “the financial accelerator,” and the Great Depression became his leading case study. His research on this subject provided the lens through which he would later view the Great Panic. Beginning with an article published in 1983 in the prestigious American Economic Review and in subsequent research, Bernanke emphasized banks’ role in the economy, employing concepts that later brought Nobel Prizes to Joseph Stiglitz and George Akerlof for their insights into the functioning of markets when one side has more information than the others. Bernanke, among others, contended that banks and other financial intermediaries were “special” because they did more than funnel money from savers to borrowers; they developed expertise in gathering information about industries and borrowers and maintained ongoing relationships with customers.

The Fed agreed to put up $180 billion, giving the TALF a total of $200 billion in loans at very sweet terms to offer hedge funds and other big investors to buy securitized consumer loans. The beauty of it was that the Treasury needed only $20 billion from its $700 billion congressionally authorized TARP to get $200 billion into the economy. “TALF shows us there are two sides to creative finance,” wrote Nobel Prize winner George Akerlof along with Robert Shiller, the Yale economist who had predicted the housing bust. “It may have gotten us into this crisis. But its genius may also get us out of it.” The Fed and the Treasury offered investors an additional carrot to borrow this money to buy auto or credit card loans packaged into securities. If the ultimate consumer didn’t pay back the loans, then the big-money investors wouldn’t have to pay back the Fed.

Monetary Policy Objectives in the Short and Long Run,” Federal Reserve Bank of San Francisco, January 4, 2009. http://www.frbsf.org/news/speeches/2009/0104b.html 253 In September 2008: Fed H.3 release. 254 “credit easing” Ben S. Bernanke, “The Crisis and the Policy Response,” Federal Reserve Board, January 13, 2009. http://www.federalreserve.gov/newsevents/speech/ bernanke20090113a.htm 254 “What justification is there” John B. Taylor, “The Need to Return to a Monetary Framework,” January 2009. http://www.stanford.edu/∼johntayl/NABE%20Business%20Economics%20Article%20-%20Taylor.pdf 255 “TALF shows us” George A. Akerlof and Robert J. Shiller, Animal Spirits (Princeton, N.J.: Princeton University Press, 2009), 92. 256 “Will we face challenges” Charles I. Plosser, “The Economic Outlook and Some Challenges Facing the Federal Reserve,” Federal Reserve Bank of Philadelphia, January 14, 2009. http://www.philadelphiafed.org/publications/ speeches/plosser/2009/01-14-09_university-of- delaware.cfm 257 “In a committee such as the FOMC” Richard W.


pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

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accounting loophole / creative accounting, Albert Einstein, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

Modern economics has a lot to say about the workings of markets. Theorists have opened up the black box of supply and demand and peered inside. Game theory has been brought to bear on the processes of exchange. Examining markets up close, the new economics emphasizes market frictions and how they are kept in check. In 2001, this work received recognition with the award of the Nobel Prize in economics to George Akerlof, Michael Spence, and Joseph Stiglitz for laying the foundation, as the Nobel citation said, “for a general theory of markets with asymmetric information.” Expressed in mathematics and impenetrable jargon, these new ideas reside obscurely in the technical journals. They have, however, a deeply practical content.8 Exchange is “one of the purest and most primitive forms of human socialization,” the sociologist Georg Simmel wrote in 1900; it creates “a society, in place of a mere collection of individuals.”9 A market is a social construction.

In India’s cities, high-quality fresh milk used to be hard to find. To boost their profits, wholesalers and vendors would water it down. Buyers could judge the milk’s freshness by smelling it, but they could not judge its butterfat content. As a result of the low quality, the sales of milk declined; per capita consumption fell 25 percent below what it had been twenty years earlier. The economist George Akerlof created a thought experiment to show the logic of how markets malfunction when buyers cannot observe quality.12 Imagine it costs a seller $1.00 to supply a quart of high-quality milk, and $.60 to supply a quart of watered down milk. A typical buyer would willingly pay up to $1.20 for good milk and $.80 for inferior milk. In either case mutual gains could be obtained from trade. If the buyer could recognize the milk’s quality, both buyer and seller would benefit from a sale at a price somewhere between $.60 and $.80 for the low-quality milk and between $1.00 and $1.20 for the high-quality milk.


pages: 242 words: 68,019

Why Information Grows: The Evolution of Order, From Atoms to Economies by Cesar Hidalgo

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Ada Lovelace, Albert Einstein, Arthur Eddington, Claude Shannon: information theory, David Ricardo: comparative advantage, Douglas Hofstadter, frictionless, frictionless market, George Akerlof, Gödel, Escher, Bach, income inequality, income per capita, invention of the telegraph, invisible hand, Isaac Newton, James Watt: steam engine, Jane Jacobs, job satisfaction, John von Neumann, New Economic Geography, Norbert Wiener, p-value, phenotype, price mechanism, Richard Florida, Ronald Coase, Silicon Valley, Simon Kuznets, Skype, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, working-age population

Friedrich Hayek, an Austrian economist and a contemporary of Shannon, argued famously that prices transmitted information about the supply of and demand for goods. This helped reveal the information needed for Smith’s “invisible hand” to work. As Hayek wrote, “In a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people.”4 The idea of information also helped economists understand some important market failures. George Akerlof became famous by showing that markets could fail to operate when people had asymmetric information about the quality of the goods they wanted to exchange.5 On a parallel front, Herbert Simon, a polymath who contributed to economics, organizational theory, and artificial intelligence, introduced the idea of bounded rationality, which focused on the behavior of economic actors who had limited information about the world.

Two great books describing the interaction between evolution and behavior are Richard Dawkins, The Selfish Gene (Oxford: Oxford University Press, 2006), and Steven Pinker, The Blank Slate: The Modern Denial of Human Nature (New York: Penguin, 2003). 3. Information theory also has a quantum version, known as quantum information theory. The existence of quantum information theory, however, does not invalidate the claim that classical information is a concept that works at a range of scales that is unusual for other theories. 4. Friedrich Hayek, “The Use of Knowledge in Society,” American Economic Review 35, no. 4 (1945): 519–530. 5. George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (1970): 488–500. 6. Claude E. Shannon and Warren Weaver, The Mathematical Theory of Communication (Urbana: University of Illinois Press, 1963), 8. 7. Ibid., 31. 8. The formula for Boltzmann’s entropy (SB) is SB = kB ln(W) where kB is Boltzmann’s constant, which has units of energy over temperature, and W is the number of microstates corresponding to a given macrostate.


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The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

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Affordable Care Act / Obamacare, Airbnb, Al Roth, Black Swan, buy low sell high, Credit Default Swap, cross-subsidies, crowdsourcing, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, Jean Tirole, Lean Startup, Lyft, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, ride hailing / ride sharing, Sand Hill Road, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, The Market for Lemons, too big to fail, trade route, transaction costs, two-sided market, Uber for X, ultimatum game, Y Combinator

As a result, honest sellers (unable to show that they are honest) would have trouble getting a good price for their goods, driving some of them out of the market—a decision that leaves the market overpopulated with dishonest sellers, which further erodes buyers’ trust and prices and so on in a vicious cycle called “adverse selection.”26 The original paper about adverse selection, “The Market for Lemons,” dealt with the case of used cars, but the phenomenon is so pervasive, rearing its head in important markets like those for insurance, that the economist behind the lemons model, George Akerlof, eventually earned a Nobel Prize for this insight.27 The lemons problem explains why middlemen so often appear in markets for used goods: they not only have the expertise to judge quality, but they can vouch for it with their reputation. But it is not only with used goods that we need middlemen to protect us against lemons. It is with any case of hidden information. Part of the reason we need headhunters like Howard Robboy is that workers keep important information about themselves hidden.

See William Alden, “The Business Tycoons of Airbnb,” New York Times Magazine, November 25, 2014. 20.Paul Resnick, Richard Zeckhauser, John Swanson, and Kate Lockwood, “The Value of Reputation on eBay: A Controlled Experiment,” Experimental Economics 9, no. 2 (2006): 79–101. 21.Nira Yacouel and Aliza Fleischer, “The Role of Cybermediaries in Reputation Building and Price Premiums in the Online Hotel Market,” Journal of Travel Research 51, no. 2 (2012): 219–26. 22.Michael Anderson and Jeremy Magruder, “Learning from the Crowd: Regression Discontinuity Estimates of the Effects of an Online Review Database,” The Economic Journal 122, no. 563 (September 2012): 957–89. 23.Michael Luca, “Reviews, Reputation, and Revenue: The Case of Yelp.com,” Harvard Business School Working Paper, No. 12–016. 24.Carl Shapiro, “Premiums for High Quality Products as Returns to Reputation,” The Quarterly Journal of Economics (November 1983): 659–79. 25.Investing in a storefront is one of several ways sellers can elicit trust among buyers. See Patricia M. Doney and Joseph P. Cannon, “An Examination of the Nature of Trust in Buyer-Seller Relationships,” Journal of Marketing 61, no. 2 (April 1997): 35–51. 26.In insurance contexts, the vicious cycle is sometimes called the death spiral. See David M. Cutler and Richard J. Zeckhauser, “Adverse Selection in Health Insurance,” Forum for Health Economics & Policy (1998). 27.George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” The Quarterly Journal of Economics 84, no. 3 (August 1970): 488–500. 28.Joel Grover and Matt Goldberg, “False Claims, Lies Caught on Tape at Farmers Markets,” NBC Los Angeles, September 23, 2010. 29.Shoshana Walter, “Farm Fakes: A History of Fraudulent Food,” Modern Farmer, May 3, 2013. 30.Specifically, the bill created a way for the markets to tax vendors at farmers’ markets to fund these outside inspectors.


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Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional

First, many intellectually curious people are missing a subject that is provocative, powerful, and highly relevant to almost every aspect of our lives. Economics offers insight into policy problems ranging from organ donation to affirmative action. The discipline is intuitive at times and delightfully counterintuitive at others. It is peppered with great thinkers. Some, such as Adam Smith and Milton Friedman, have captured mainstream attention. But others, such as Gary Becker and George Akerlof, have not gotten the recognition outside of academe that they deserve. Too many people who would gladly curl up with a book on the Civil War or a biography of Samuel Johnson have been scared away from a subject that should be accessible and fascinating. Second, many of our brightest citizens are economically illiterate. The media are full of references to the powerful Ben Bernanke, who has played a crucial role in the U.S. government response to the global financial crisis.

Clinton ignored what his advisers almost certainly told him about the Yale experiment: It was quietly canceled after five years, both because repayments fell short of projections and because the administrative costs were prohibitive. What we don’t know can hurt us. Economists study how we acquire information, what we do with it, and how we make decisions when all we get to see is a book’s cover. Indeed, the Swedish Academy of Sciences recognized this point in 2001 by awarding the Nobel Prize in Economics to George Akerlof, Michael Spence, and Joseph Stiglitz for their seminal work on the economics of information. Their work explores the problems that arise when rational people are forced to make decisions based on incomplete information, or when one party to a transaction knows more than another. Their insights are relevant to some of our most pressing social issues, from genetic screening to discrimination in the workplace.

It is about information, which lies at the heart of many discrimination-related problems. Information matters, particularly when we don’t have all that we need. Markets tend to favor the party that knows more. (Have you ever bought a used car?) But if the imbalance, or asymmetry of information, becomes too large, then markets can break down entirely. This was the fundamental insight of 2001 Nobel laureate George Akerlof, an economist at the University of California, Berkeley. His paper entitled “The Market for Lemons” used the used-car market to make its central point. Any individual selling a used car knows more about its quality than someone looking to buy it. This creates an adverse selection problem, just as it did with the Hope Scholarships. Car owners who are happy with their vehicles are less likely to sell them.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, haute couture, illegal immigration, income inequality, invention of the telephone, invention of the wheel, invisible hand, John Nash: game theory, John von Neumann, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Washington Consensus, women in the workforce, yield curve, yield management

He Culture and Prosperity { 207} found a sympathetic listener in the World Bank's president, James Wolfensohn, who had sought to broaden the institution's remit. But Stiglitz's outspoken views went too far for Wall Street. And more particularly, for a U.S. Treasury basking in the warm glow of American triumphalism. It became clear that Wolfensohn's continued support for Stiglitz might be at the cost of his own job, and in 1999 Stiglitz returned to research and teaching at Stanford University. In 2001, Stiglitz, along with George Akerlof and Michael Spence, was awarded the Nobel Prize for work on markets and imperfect information. That award was a formal recognition ofhow far modern economics had moved from the simplified theoretical framework of Arrow-Debreu and the simplified policy prescriptions of the Chicago School. Stiglitz became an increasingly public and controversial figure. I return to this controversy in chapter 28.

The fact is there have been very few empirical testings of this kind ... while assertions of conviction are plentiful, factual findings are rare." 8 Indeed, it is difficult to think of any issue on which a position once held by a substantial, respected group of economists has been vacated as a result of empirical refutation. Perhaps the Phillips curve-an empirical correlation between unemployment and inflation that broke down after the oil shock of the 1970s-falls into this category. But then I turned again to Mankiw's elementary textbook, and discovered an entire chapter devoted to the Phillips curve: and that George Akerlof, receiving the Nobel Prize in 2001, described the Phillips curve as "probably the single most important macroeconomic relationship." 9 No modern chemistry textbook describes the phlogiston theory. No physics laureate commends the theory that the sun rotates the earth. The progress of economics is more accurately described by changing fads and fashions, in which Keynesianism gives way to monetarism, enthusiasm for rational expectations waxes and wanes, game theory attracts attention, disappoints, and is then seized on with renewed enthusiasm.

The state and contribution of econometrics requires another book, however, and I am not the person to write it. The majority of prizes have been given for microeconomic theory-the functioning of individual markets for goods and services, the concerns of this book. Most agree that macroeconomics will develop from a microeconomic base, although that has now been said for many years without major practical consequence. Economic Science: Laureates and Prizes Name Country Year Subject George A. Akerlof USA 2001 Asymmetric information Maurice Allais France 1988 The theory of markets and efficient utilization of resources Kenneth J. Arrow USA 1972 General equilibrium theory { 358} Appendix Name Country Year Subject Gary S. Becker USA 1992 "For having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior."


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A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population, World Values Survey

The current state of affairs in which the predominant majority of Neoclassical economists are of free-market leaning is actually due more to the shift in political ideology since the 1980s than to the absence or the poor quality of theories within Neoclassical economics identifying the limits of the free market. If anything, the arsenal for Neoclassical economists who reject free-market policies has been expanded since the 1980s by the development of information economics, led by Joseph Stiglitz, George Akerlof and Michael Spence. Information economics explains why asymmetric information – the situation in which one party to a market exchange knows something that the other does not – makes markets malfunction or even cease to exist.7 However, since the 1980s, many Neoclassical economists have also developed theories that go so far as to deny the possibility of market failures, such as the ‘rational expectation’ theory in macroeconomics or the ‘efficient market hypothesis’ in financial economics, basically arguing that people know what they are doing and therefore the government should leave them alone – or, in technical terms, economic agents are rational and therefore market outcomes efficient.

* The fact that Walmart, the biggest private sector employer in the US, employs only about 1 per cent of the US labour force (1.4 million people) puts the number in perspective. * The most important regional multilateral banks are the Asian Development Bank (ADB), the African Development Bank (AfDB) and the Inter-American Development Bank (IDB). * There is a huge amount of evidence, well presented in accessible form in books like Peter Ubel’s Free Market Madness, George Akerlof’s and Robert Shiller’s Animal Spirits and the psychologist and 2002 Nobel Economics laureate Daniel Kahnemann’s Thinking, Fast and Slow. * A very rough but useful rule of thumb is that the value-added figure is usually around one-third of sales (turnover) figure of a company. * What really represents a nation’s productivity is how much people have to work in order to produce a given amount of output, rather than what the output is for each person alive.


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The Wisdom of Crowds by James Surowiecki

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AltaVista, Andrei Shleifer, asset allocation, Cass Sunstein, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, moral hazard, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, Yogi Berra

Milgram’s description of how the subway study came about is from the Introduction to that book (xix–xxxiii). An excellent discussion of the relationship between convention and economic behavior is H. Peyton Young, “The Economics of Convention,” Journal of Economic Perspectives 10 (1996): 105–22. Also see Truman F. Bewley, Why Wages Don’t Fall During a Recession (Cambridge: Harvard University Press, 1999); and George Akerlof, “A Theory of Social Custom, of Which Unemployment May Be One Consequence,” Quarterly Journal of Economics 94 (1980): 749–75. The study is Robert E. Hall, “The Response of Prices to Shifts in Demand,” Stanford working paper (2002). A good discussion of movie theaters’ fixed-price strategy can be found in Liran Einav and Barak Orbach, “Uniform Prices for Differentiated Goods: The Case of the Movie-Theater Industry,” Harvard Olin discussion paper no. 337 (2001).

Karim Jamal and Shyam Sunder, “Bayesian Equilibrium in Double Auctions Populated by Biased Heuristic Traders,” Journal of Economic Behavior and Organization 31 (1996): 273–91. See also Richard H. Thaler, “The End of Behavioral Finance,” Financial Analysts’ Journal (November–December 1999): 12–17; and Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgement Under Uncertainty: Heuristics and Biases (New York: Cambridge University Press, 1982), which is the jumping-off point for much of the work in behavioral finance. See George Akerlof’s Nobel lecture, “Behavioral Macroeconomics and Macroeconomic Behavior” (December 8, 2001), for a discussion of people’s problems saving. Fischer Black, “Noise,” Journal of Finance 41 (1986): 533. Robert Shiller, Market Volatility (Cambridge: MIT Press, 1993). The best definition of “market efficiency,” I think, is that the market is efficient if it consistently provides a better forecast of the future discounted free cash flow of companies than any other individual or system provides.


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The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely

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Burning Man, business process, cognitive dissonance, corporate governance, Daniel Kahneman / Amos Tversky, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, George Akerlof, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, loss aversion, Peter Singer: altruism, placebo effect, Richard Thaler, Saturday Night Live, second-price auction, software as a service, The Wealth of Nations by Adam Smith, ultimatum game, Upton Sinclair, young professional

Cohen, “The Neural Basis of Economic Decision-Making in the Ultimatum Game,” Science 300 (2003): 1755–1758. 24. Franklin D. Roosevelt, Oglethorpe University commencement address, May 22, 1932. Bibliography and Additional Readings Below is a list of the papers and books on which the chapters were based, plus suggestions for additional readings on each topic. Introduction: Lessons from Procrastination and Medical Side Effects Additional readings George Akerlof, “Procrastination and Obedience,” The American Economic Review 81, no. 2 (May 1991): 1–19. Dan Ariely and Klaus Wertenbroch, “Procrastination, Deadlines, and Performance: Self-Control by Precommitment,” Psychological Science 13, no. 3 (2002): 219–224. Stephen Hoch and George Loewenstein, “Time-Inconsistent Preferences and Consumer Self-Control,” Journal of Consumer Research 17, no. 4 (1991): 492–507.

Glen Jensen, “Preference for Bar Pressing over ‘Freeloading’ as a Function of Number of Unrewarded Presses,” Journal of Experimental Psychology 65, no. 5 (1963): 451–454. Glen Jensen, Calvin Leung, and David Hess, “ ‘Freeloading’ in the Skinner Box Contrasted with Freeloading in the Runway,” Psychological Reports 27 (1970): 67–73. George Loewenstein, “Because It Is There: The Challenge of Mountaineering . . . for Utility Theory,” Kyklos 52, no. 3 (1999): 315–343. Additional readings George Akerlof and Rachel Kranton, “Economics and Identity,” The Quarterly Journal of Economics 115, no. 3 (2000): 715–753. David Blustein, “The Role of Work in Psychological Health and Well-Being: A Conceptual, Historical, and Public Policy Perspective,” American Psychologist 63, no. 4 (2008): 228–240. Armin Falk and Michael Kosfeld, “The Hidden Costs of Control,” American Economic Review 96, no. 5 (2006): 1611–1630.


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The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

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airport security, availability heuristic, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

The housing bubble had seeped into the culture to the point where two separate TV programs—one named Flip This House and the other named Flip That House—were launched within ten days of each other in 2005. Even home buyers who weren’t counting on a huge return on investment may have been concerned about keeping up with the Joneses. “I can remember twenty years ago, on the road to Sacramento, there were no traffic jams,” I was told by George Akerlof, a frequent colleague of Shiller’s, whose office at the University of California at Berkeley sits at the epicenter of some of the worst declines in housing prices. “Now there tend to be traffic stoppages a good share of the way. That’s what people were thinking—if I don’t buy now then I’m gonna pay the same price in five years for a house that’s ten miles up the road.” Whether homeowners believed that they couldn’t lose on a home or couldn’t choose to defer the purchase, conditions were growing grimmer by the month.

The $85 billion it held in mortgage-backed securities in 2007 was about four times more than the underlying value of its capital, meaning that a 25 percent decline in their value would likely be enough to bankrupt the company.77 Ordinarily, investors would have been extremely reluctant to purchase assets like these—or at least they would have hedged their bets very carefully. “If you’re in a market and someone’s trying to sell you something which you don’t understand,” George Akerlof told me, “you should think that they’re selling you a lemon.” Akerlof wrote a famous paper on this subject called “The Market for Lemons”78—it won him a Nobel Prize. In the paper, he demonstrated that in a market plagued by asymmetries of information, the quality of goods will decrease and the market will come to be dominated by crooked sellers and gullible or desperate buyers. Imagine that a stranger walked up to you on the street and asked if you were interested in buying his used car.

David Miles, Bank of England, “Monetary Policy in Extraordinary Times,” speech given to the Centre for Economic Policy Research and London Business School, February 23, 2011. http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech475.pdf 77. Investopedia staff, “Case Study: The Collapse of Lehman Brothers,” Investopedia; April 2, 2009. http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp#axzz1bZ61K9wz. 78. George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (Aug. 1970). http://sws.bu.edu/ellisrp/EC387/Papers/1970Akerlof_Lemons_QJE.pdf. 79. “Lehman Brothers F1Q07 (Qtr End 2/28/07) Earnings Call Transcript,” Seeking Alpha, Mar. 14, 2007. http://seekingalpha.com/article/29585-lehman-brothers-f1q07-qtr-end-2-28-07-earnings-call-transcript?

Social Capital and Civil Society by Francis Fukuyama

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Berlin Wall, blue-collar work, Fall of the Berlin Wall, feminist movement, Francis Fukuyama: the end of history, George Akerlof, German hyperinflation, Jane Jacobs, Joseph Schumpeter, Kevin Kelly, labor-force participation, low skilled workers, p-value, postindustrial economy, principal–agent problem, RAND corporation, Silicon Valley, The Death and Life of Great American Cities, transaction costs, World Values Survey

Two very important changes occurred sometime during the early postwar period that account for many of the phenomena constituting the Great Disruption. The first involved advances in medical technology (i.e., birth control and abortion) that permitted women for the first time to control their own reproductive cycles. The second was the movement of women into the paid labor force in most industrialized countries and the steady rise in their incomes -hourly, median, or lifetime -relative to men over the next thirty years. 53See George Akerlof, Janet Yellen, and Michael L. Katz, “An Analysis of Out-of-Wedlock Childbearing in the United States,” Quarterly J ou rn al o f E c o nomics 1 1 1 , no. 2 (May 1996): 277–317. 418 The Tanner Lectures on Human Values The significance of birth control was n o t that it lowered fertility, since fertility had been on the decline in many societies prior to the widespread availability of birth control or abortion. 54 Indeed, if the effect of birth control is to reduce the number of unwanted pregnancies, it is hard to explain why its advent should have been accompanied by a rise in the rate of abortions, 55 or why use of birth control is positively correlated with illegitimacy across the OE C D. 56 The main impact of the Pill and the sexual revolution that followed was to dramatically alter calculations about the risks of sex and thereby to change male behavior.


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Information: A Very Short Introduction by Luciano Floridi

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agricultural Revolution, Albert Einstein, bioinformatics, carbon footprint, Claude Shannon: information theory, conceptual framework, double helix, Douglas Engelbart, George Akerlof, Gordon Gekko, industrial robot, Internet of things, invention of writing, John Nash: game theory, John von Neumann, moral hazard, Nash equilibrium, Norbert Wiener, phenotype, prisoner's dilemma, RAND corporation, RFID, Turing machine

The benefits brought about by information need to be understood contextually because the agents exchanging information could be not only human individuals, but also biological agents, social groups, artificial agents (such as software programs or industrial robots), or synthetic agents (such as a corporation or a tank), which comprise agents of all kinds. In Chapter 1, we saw how human society has come to depend, for its proper functioning and growth, on the management and exploitation of information processes. Unsurprisingly, in recent years the scientific study of economic information has bloomed. In 2001, George Akerlof (born 1940), Michael Spence (born 1943), and Joseph E. Stiglitz (born 1943) were awarded what is known as the Nobel Prize in Economics `for their analyses of markets with asymmetric information'. Indeed, information-theoretical approaches to economic topics have become so popular and pervasive that one may be forgiven for mistaking economics for a branch of information science. In the rest of this chapter, we will look at some essential ways in which economic information is used.


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The Social Animal: The Hidden Sources of Love, Character, and Achievement by David Brooks

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Albert Einstein, asset allocation, Atul Gawande, Bernie Madoff, business process, Cass Sunstein, choice architecture, clean water, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, deliberate practice, disintermediation, Donald Trump, Douglas Hofstadter, Emanuel Derman, en.wikipedia.org, fear of failure, financial deregulation, financial independence, Flynn Effect, George Akerlof, Henri Poincaré, hiring and firing, impulse control, invisible hand, Joseph Schumpeter, labor-force participation, loss aversion, medical residency, meta analysis, meta-analysis, Monroe Doctrine, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, school vouchers, six sigma, Steve Jobs, Steven Pinker, the scientific method, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Walter Mischel, young professional

Denis Diderot. 21 This mode, as Guy Claxton Guy Claxton, The Wayward Mind: An Intimate History of the Unconscious (New York: Little, Brown Book Group, 2006). 22 Lionel Trilling diagnosed Lionel Trilling, The Liberal Imagination: Essays on Literature and Society (New York: New York Review of Books, 2008), ix–xx. 23 “deals with introspection” Robert Skidelsky, Keynes: The Return of the Master (New York: PublicAffairs, 2009), 81. 24 Paul Samuelson applied Clive Cookson, Gillian Tett, and Chris Cook, “Organic Mechanics,” Financial Times, November 26, 2009, http://www.ft.com/cms/s/0/d0e6abde-dacb-11de-933d-00144feabdc0.html. 25 George A. Akerlof and Robert Shiller George A. Akerlof and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters (Princeton, NJ: Princeton University Press, 2010), 1. 26 Jim Collins argues Jim Collins, “How the Mighty Fall: A Primer on the Warning Signs,” Businessweek, May 14, 2009, http://www.businessweek.com/magazine/content/09_21/b4132026786379.htm. CHAPTER 15: MÉTIS 1 historian Johan Huizinga John Lukacs, Confessions of an Original Sinner (South Bend, IN: St.

Mitchell Waldrop put it, “Theoretical economists use their mathematical prowess the way great stags of the forest use their antlers: to do battle with one another and to establish dominance. A stag who doesn’t use his antlers is nothing.” Behavioral economists argue that the caricature is not accurate enough to produce reliable predictions about real events. Two psychologists, Daniel Kahneman and Amos Tversky, were the pioneers. Then their insights were picked up by economists proper: including Richard Thaler, Sendhil Mullainathan, Robert Schiller, George Akerlof, and Colin Camerer. These scholars investigate cognition that happens below the level of awareness. Rationality is bounded by emotion. People have a great deal of trouble exercising self-control. They perceive the world in biased ways. They are profoundly influenced by context. They are prone to groupthink. Most of all, people discount the future; we allow present satisfaction to blot out future prosperity.

Paul Samuelson applied the mathematical principles of thermodynamics to economics. On the finance side, Emanuel Derman was a physicist who became a financier and played a central role in developing the models for derivatives. While valuable tools for understanding economic behavior, mathematical models were also like lenses that filtered out certain aspects of human nature. They depended on the notion that people are basically regular and predictable. They assume, as George A. Akerlof and Robert Shiller have written, “that variations in individual feelings, impressions and passions do not matter in the aggregate and that economic events are driven by inscrutable technical factors or erratic government action.” Within a very short time economists were emphasizing monetary motivations to the exclusion of others. Homo Economicus was separated from Homo Sociologus, Homo Psychologicus, Homo Ethicus, and Homo Romanticus.


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Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell

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barriers to entry, Berlin Wall, big-box store, cognitive dissonance, computer age, Daniel Kahneman / Amos Tversky, delayed gratification, deskilling, Donald Trump, Edward Glaeser, fear of failure, Ford paid five dollars a day, Frederick Winslow Taylor, George Akerlof, global supply chain, global village, greed is good, Howard Zinn, income inequality, interchangeable parts, inventory management, invisible hand, James Watt: steam engine, Joseph Schumpeter, Just-in-time delivery, knowledge economy, loss aversion, market design, means of production, mental accounting, Ponzi scheme, price anchoring, price discrimination, race to the bottom, Richard Thaler, Ronald Reagan, side project, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, traveling salesman, ultimatum game, Victor Gruen, washing machines reduced drudgery, working poor, yield management

There are pluses and minuses to each option, of course, but it boils down to this: When we buy a used car from a friend or neighbor, we feel like an insider. When we buy a used car from a dealer we don’t know, we feel like a tourist. In the Age of Cheap we are all tourists, blindly reliant on the seller to wring out the best price from his suppliers and to reliably pass those savings on to us. Retailers, and in particular discount retailers, reliably betray this trust. Nobel Prize winner in economics George Akerlof illustrates the problem with a thought experiment. Imagine that a quart of high-quality milk wholesales for $1.00, and a quart of watered-down milk wholesales for 60 cents. A typical buyer might willingly pay up to 80 cents for the watered-down milk and up to $1.20 for the pure milk. In either case, mutual gains would be made from the transaction: Both the buyer and the seller know what he or she is getting, and both end up with what might be considered a fair deal.

Geertz, an anthropologist, spent decades observing bazaar life in Morocco and Indonesia. 4 sell for more than thirteen times their production price: See Dana Thomas, Deluxe: How Luxury Lost Its Luster (New York: Penguin, 2008) This delicious exposé of the real cost and decline of luxury reveals—among many, many other things, that the average markup of a handbag is ten to twelve times its production cost. A Vuitton bag, however, is marked up as much as thirteen times. 5 in the same terms as he to them: Clifford Geertz, “Bazaar Economy.” 6 illustrates the problem with a thought experiment: George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (1970): 488-500. CHAPTER ONE: DISCOUNT NATION 7 or generate even as much power as a horse: Robert Kanigel, The One Best Way: Frederick Winslow Taylor and the Enigma of Efficiency (New York: Viking, 1997), 95-96. Kanigel shared his thoughts on the importance of mass manufacture on price over a drink at the annual meeting of the American Association for the Advancement of Science in Boston. 8 for firepower in the latter half of the eighteenth century: Merritt Roe Smith, “Eli Whitney and the American System of Manufacturing,” in Carroll W.


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Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, additive manufacturing, Airbnb, algorithmic trading, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, interest rate derivative, interest rate swap, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund

Let me be clear: despite my criticism of our existing model of financial capitalism, this book isn’t anticapitalist. I am not in favor of a planned economy or a turn away from a market system. I simply don’t think that the system we have now is a properly functioning market system. We have a rentier economy in which a small group of vested interests take the cream off the top, to the detriment of overall growth. I agree with economists like Joseph Stiglitz, George Akerlof, Paul Volcker, and others who believe that markets prudently regulated by governments are the best guarantee of peace and prosperity the world has ever known. Until we make more progress toward that goal, we won’t have the kind of recovery we deserve. THE HIGH PRICE OF COMPLEXITY The first step in this process is understanding how the financial sector, which is the pivot point for all of this, came to play such an outsize role.

Locke, Ruchir Sharma, Gautam Mukunda, Saule Omarova, Eileen Appelbaum, and Sherle Schwenninger. Thanks also to the many academics and policy thinkers whose research I relied heavily on, including but not limited to: Greta Krippner, Moritz Schularick, Alan M. Taylor, Robin Greenwood, David Scharfstein, Raghuram G. Rajan, Carmen Reinhart, Ken Rogoff, Thomas Philippon, Robert Atkinson, J. W. Mason, Luigi Zingales, Thomas Piketty, Emmanuel Saez, Gabriel Zucman, Jeff Madrick, George Akerlof, Robert Shiller, John Coates, Karen Ho, Enisse Kharroubi, Claudia Goldin, Lawrence Katz, David Graeber, Charles Calomiris, Stephen H. Haber, Allan H. Meltzer, Robert Reich, Alan Blinder, John Asker, Joan Farre-Mensa, Alexander Ljungqvist, Kimberly Krawiec, Thomas Ferguson, Gerald Epstein, Michael Spence, Sarah Edelman, Monique Morrissey, Mariana Mazzucato, Atif Mian, and Amir Sufi. Finally, the biggest thanks of all to my husband, John Sedgwick, the author of thirteen books himself, who talked me down from the ledge numerous times during the three years it took to complete this project.


pages: 263 words: 75,610

Delete: The Virtue of Forgetting in the Digital Age by Viktor Mayer-Schönberger

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en.wikipedia.org, Erik Brynjolfsson, Firefox, full text search, George Akerlof, information retrieval, information trail, Internet Archive, invention of movable type, invention of the printing press, moveable type in China, Network effects, packet switching, pattern recognition, RFID, slashdot, Steve Jobs, Steven Levy, The Market for Lemons, The Structural Transformation of the Public Sphere, Vannevar Bush

Third, market participants could hide their intention to change their behavior when it is the basis of the transaction (think of a person who begins to drive recklessly after having taken out comprehensive car insurance). These problems, it is argued, can be overcome by more and more symmetrical information, which is what online market makers have tried to achieve utilizing digital memory. 3. Michael Spence, who won the Nobel Prize with George Akerlof, is the author of a theory of signaling he originally developed for the job market, and which—in a much adapted form—eBay’s reputation system is an example of. See Spence, “Signaling in Retrospect and the Informational Structure of Markets,” 434–59. 4. See New York City Department of Health and Hygiene. Restaurant Inspection Information, http://www.nyc.gov/html/doh/html/rii/index.shtml. Also see BBC News, “Dishing the Dirt.”


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, Flash crash, floating exchange rates, forward guidance, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, invisible hand, jitney, Kenneth Rogoff, labor-force participation, labour mobility, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve

The policy debate over forward guidance as an adjunct to market manipulation is a continuation of one of the most long-standing areas of intellectual inquiry in modern economics. This inquiry involves imperfect information or information asymmetry: a situation in which one party has superior information to another that induces suboptimal behavior by both parties. This field took flight with a 1970 paper by George Akerlof, “The Market for ‘Lemons,’” that chose used car sales as an example to make its point. Akerlof was awarded the Nobel Prize in Economics in 2001 in part for this work. The seller of a used car, he states, knows perfectly well whether the car runs smoothly or is of poor quality, a “lemon.” The buyer does not know; hence an information asymmetry arises between buyer and seller. The unequal information then conditions behavior in adverse ways.

WP/13/143, June 2013, http://www.imf.org/external/pubs/cat/longres.aspx?sk=40642.0. This is not certain to happen but is likely . . . : This analysis is based on data and reporting in Buttonwood, “The Real Deal—Low Real Interest Rates Are Usually Bad News for Equity Markets,” Economist, October 20, 2012, http://www.economist.com/news/finance-and-economics/21564845-low-real-interest-rates-are-usually-bad-news-equity-markets. “The Market for ‘Lemons’”: George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (August 1970), pp. 488–500. “Irreversibility, Uncertainty . . .”: Ben S. Bernanke, “Irreversibility, Uncertainty, and Cyclical Investment,” National Bureau of Economic Research, Cambridge, Mass., July 1980, http://www.nber.org/papers/w502. Even with huge pools of unused labor . . . : Jason E.


pages: 162 words: 51,473

The Accidental Theorist: And Other Dispatches From the Dismal Science by Paul Krugman

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Bonfire of the Vanities, Bretton Woods, clean water, collective bargaining, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, knowledge economy, life extension, lump of labour, new economy, Nick Leeson, paradox of thrift, Plutocrats, plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor

And even this may not be the whole story: There is some evidence that a push to zero inflation may lead not just to a temporary sacrifice of output but to a permanently higher rate of unemployment. This is still controversial—the standard view, embodied in the concept of the NAIRU (non-accelerating-inflation rate of unemployment) is that there is no long-run tradeoff between inflation and unemployment—but recent work by George Akerlof, William Dickens, and George Perry makes a compelling case that this no-tradeoff view breaks down at very low inflation rates. The NAIRU hypothesis is based on the reasonable proposition that people can figure out the effects of inflation—that both workers and employers realize that an 11 percent wage increase in the face of 10 percent inflation is the same thing as a 6 percent increase in the face of 5 percent inflation, and therefore that any sustained rate of inflation will simply get built into price and wage decisions.


pages: 147 words: 45,890

Aftershock: The Next Economy and America's Future by Robert B. Reich

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Berlin Wall, declining real wages, delayed gratification, Doha Development Round, endowment effect, full employment, George Akerlof, Home mortgage interest deduction, Hyman Minsky, illegal immigration, income inequality, invisible hand, job automation, labor-force participation, Long Term Capital Management, loss aversion, mortgage debt, new economy, offshore financial centre, Ralph Nader, Ronald Reagan, school vouchers, sovereign wealth fund, Thorstein Veblen, too big to fail, World Values Survey

We will choose reform, I believe, because we are a sensible nation, and reform is the only sensible option we have. ACKNOWLEDGMENTS This book is the result of discussions with people too numerous to name, although some will no doubt recognize their arguments and counterarguments in these pages. Special mention should go to my former colleagues Jack Donahue and Richard Parker and current colleagues George Akerlof, Brad DeLong, Jack Glaser, David Kirp, Jane Mauldon, Harley Shaiken, Eugene Smolensky, and Laura Tyson, all of whom helped me sharpen my arguments but none of whom should bear responsibility for them. Several friends subjected earlier drafts to the sort of criticism only friends can be trusted to provide. Here, Doug Dworkin, John Isaacson, and Erik Tarloff played their customary roles. I am also grateful to diligent students here at the Goldman School of Public Policy, especially to Mia Bird, Teal Brown, Jason Burwen, Jonathan Stein, and Renee Willette, who helped me trace down facts and focus the argument.


pages: 204 words: 54,395

Drive: The Surprising Truth About What Motivates Us by Daniel H. Pink

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affirmative action, call centre, Daniel Kahneman / Amos Tversky, Dean Kamen, deliberate practice, Firefox, Frederick Winslow Taylor, game design, George Akerlof, Isaac Newton, Jean Tirole, job satisfaction, knowledge worker, performance metric, profit maximization, profit motive, Results Only Work Environment, side project, the built environment, Tony Hsieh, transaction costs

It's fair.) Getting the internal and external equity right isn't itself a motivator. But it is a way to avoid putting the issue of money back on the table and making it a de- motivator. 2. PAY MORE THAN AVERAGE I f you have provided adequate baseline rewards and established internal and external fairness, consider borrowing a strategy first surfaced by a Nobel laureate. In the mid-1980s, George Akerlof, who later won the Nobel Prize in economics, and his wife, Janet Yellen, who's also an economist, discovered that some companies seemed to be overpaying their workers. Instead of paying employees the wages that supply and demand would have predicted, they gave their workers a little more. It wasn't because the companies were selfless and it wasn't because they were stupid. It was because they were savvy.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

Laboratory experiments that reproduce the give and take of an employment relationship can help explain the reasons that perceptions of fairness are more important for most labor relationships than market 170 ECONOMISTS AND THE POWERFUL forces. The Swiss economist Ernst Fehr has pioneered the use of the gift exchange game for this purpose. The name of the game refers to an influential theoretical paper by Nobel Memorial Prize winner George Akerlof, called “Labor Contracts as a Partial Gift Exchange.” In the gift exchange model, the effort of workers depends on whether they consider their pay as fair. Therefore many firms pay more than the market clearing wage in order to elicit more effort. One consequence of this policy is that the market does not clear and there is involuntary unemployment (Akerlof 1982). The typical results of such experiments confirm that higher wage offers by firms, on average, induce workers to provide more effort.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop, illegal immigration, income inequality, income per capita, invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey

Henderson (2003 a, b). 15 McKitrick (2007). 16 Nordhaus (2007). 17 Nordhaus (2007). 18 Conference on Global Climate Change, (2007) Robert Mendelsohn, “Climate Policy: Minimizing the Present Value of the Sum of the Abatement Costs and Climate Change Damages for All Time”; Gilbert Metcalf, “Distributional Consequences of Policies to Mitigate Warming Effects by Excise Taxes for Carbon Dioxide Emissions in the United States”; Peter Wilcoxen, “Economic Analysis of Policy Choices for Dealing with Climate Change”; Ross McKitrick, “Response to David Henderson’s ‘Governments and Climate Change Issues: The Flawed Consensus.’” http://www.aier.org/research/conferences/climate-change. 19 McKitrick (2007). 20 Nordhaus (2007), 21. 21 Dasgupta (2006), 8. 22 Stern (2009), 71. 23 See for example Hepburn and Klemperer (2006). 24 Brundtlandt (1987). 25 Dasgupta (2009a), 28. 26 Solow (1992). 27 Collier (2010). 28 See http://www.teebweb.org/; accessed 10 May 2010; and also http://news.bbc.co.uk/1/hi/science_and_environment/10103179.stm; accessed 10 May 2010. 29 Sen (2009a), 251. 30 Dasgupta (2010), Diamond (2005); Homer-Dixon (1999); Collier (2010). 31 Partha Dasgupta (2010), 7. 32 See Hamilton and Clemens (1999), Dasgupta and Mäler (2000), Arrow et al. (2003, 2004), Dasgupta (2009b) for increasingly general treatments. 33 Dasgupta (2009a), 42. 34 Report by the Commission on the Measurement of Economic Performance and Social Progress (Sen et al. [2009], 67). NOTES TO CHAPTER THREE 1 Quoted by Achenbach (2010). 2http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-on-Financial-Rescue-and-Reform-at-Federal-Hall. 3 It is a textbook example of the collapse of a market due to asymmetric information set out in a classic article by George Akerlof (1970). 4 IMF, World Economic Outlook, (April 2009), 203. 5 See also IMF http://www.imf.org/external/np/speeches/2010/032110.htm; accessed 14 April 2010. 6 Gokhale and Smetters (2003); accessed 1 April 2010. 7 United Nations Population Division, “Completing the Fertility Transition,” 2002 conference, http://www.un.org/esa/population/publications/completingfertility/completingfertility.htm, containing the following papers: “The Future of Fertility in Intermediate-Fertility Countries,” http://www.un.org/esa/population/publications/completingfertility/RevisedPEPSPOPDIVpaper.PDF, also “Eamining Changes in the Status of Women and Gender as Predictors of Fertility Change Issues in Intermediate-Fertility Countries.” http://www.un.org/esa/population/publications/completingfertility/RevisedCosio-Zavalapaper.PDF. 8 Sen (1990). 9 OECD (2006b), 42. 10 Willetts (2010), 253. 11 OECD (2006a), EU Projections European Economy: “The 2005 Projections of Age-related Expenditure” (2005). http://ec.europa.eu/economy_finance/publications/publication6502_en.pdf .

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

I eventually decided the simplest thing to do was to refrain from buying anything. Thus the proprietors lost out, my guide lost out and I lost out, returning home empty-­handed. A lack of trust prevented a transaction from taking place. This was a classic example of market failure: all parties wanted a transaction to take place but a lack of trust meant that it was impossible to strike a deal. My experience is not so different from George Akerlof ’s market for lemons. In his seminal paper published in 1970,1 Akerlof investigated an obvious peculiarity associated with the value of second-­ hand cars. Why did the value of a brand new car immediately drop as soon as it was driven off the forecourt? The answer was simple: the 123 4099.indd 123 29/03/13 2:23 PM When the Money Runs Out seller, having owned the car, would know something about its idiosyncratic strengths and weaknesses that the would-­be buyer would, inevitably, be clueless about.


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

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Affordable Care Act / Obamacare, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs

Every honest person that waits in line is delayed fifteen minutes or more because of the cheaters. Social scientists sometimes talk about the concept of “identity.” It is the idea that you have a particular vision of the kind of person you are, and you feel awful when you do things that are out of line with that vision. That leads you to take actions that are seemingly not in your short-run best interest. In economics, George Akerlof and Rachel Kranton popularized the idea. I had read their papers, but in general have such a weak sense of identity that I never really understood what they were talking about. The first time I really got what they meant was when I realized that a key part of my identity was that I was not the kind of person who would cut in line to shorten my commute, even though it would be easy to do so, and seemed crazy to wait for fifteen minutes in this long line.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

As they say on Wall Street, when something looks too good to be true, it probably is. Or as one of the major figures in the development of information asymmetry theory, Joseph Stiglitz, put it, "If it's such a good idea, why are you telling me, instead of investing your own money?" (quoted in Kane 1993). This is a remarkably blunt statement for Stiglitz, whose normal mode is the symbols of pure mathematized theory. Interest in "information asymmetry" is usually traced to George Akerlof s 1969 paper on the "lemons" problem — not the fruit, but bum autos. Would-be buyers of used cars have no way of knowing whether the vehicle they're contemplating is any good. So the price must reflect the possibility that it is a lemon, meaning that the sellers of good cars get an unfairly low price — while the sellers of bad ones still get an unfairly high one. If the lemon discount is deep enough, it may keep the sellers of good cars out of the market, because they can't get the price they think they deserve.

Economic Gangsters: Corruption, Violence, and the Poverty of Nations by Raymond Fisman, Edward Miguel

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, barriers to entry, blood diamonds, clean water, colonial rule, congestion charging, European colonialism, failed state, feminist movement, George Akerlof, income inequality, income per capita, invisible hand, megacity, oil rush, prediction markets, random walk, Scramble for Africa, Silicon Valley, South China Sea, unemployed young men

See the paper by Dani Kaufmann, Aart Kraay, and Massimo Mastruzzi, “Governance Matters V: Governance Indicators for 1996–2005” for further details on this measure. Available on the World Bank website at http://info.worldbank.org/governance/ wgi2007/pdf/govmatters5.pdf (last accessed March 23, 2008). 7. “U.N. Hears of 2 Diplomats’ Treatment,” New York Times, January 10, 1997. 8. This has started to change in recent years, thanks to the pioneering efforts of a renegade band of “behavioral economists” including Matthew Rabin and Nobel Prize winner George Akerlof, both at University of California, Berkeley. Their research shows how people’s feelings—say, about fairness or about identity— can drive economic decision making just as powerfully as the financial incentives that dominate standard economic analysis. 9. There is more discussion of this result in the working paper 222 N O TES version, “Cultures of Corruption: Evidence from Diplomatic Parking Tickets,” NBER Working Paper #12312 (2006). 10.


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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accounting loophole / creative accounting, air freight, Albert Einstein, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

Dan explains why that is so challenging for all of us, and how recognizing your built-in biases can help you avoid common mistakes.” —Charles Schwab, Chairman and CEO of The Charles Schwab Corporation “Predictably Irrational is wildly original. It shows why—much more often than we usually care to admit—humans make foolish, and sometimes disastrous, mistakes. Ariely not only gives us a great read; he also makes us much wiser.” —George Akerlof, Nobel Laureate in Economics, Koshland Professor of Economics, University of California, Berkeley “Dan Ariely’s ingenious experiments explore deeply how our economic behavior is influenced by irrational forces and social norms. In a charmingly informal style that makes it accessible to a wide audience, Predictably Irrational provides a standing criticism to the explanatory power of rational egotistic choice.”

Cohen, “The Neural Basis of Economic Decision-Making in the Ultimatum Game,” Science 300 (2003): 1755–1758. 24. Franklin D. Roosevelt, Oglethorpe University commencement address, May 22, 1932. Bibliography and Additional Readings Below is a list of the papers and books on which the chapters were based, plus suggestions for additional readings on each topic. Introduction: Lessons from Procrastination and Medical Side Effects Additional readings George Akerlof, “Procrastination and Obedience,” The American Economic Review 81, no. 2 (May 1991): 1–19. Dan Ariely and Klaus Wertenbroch, “Procrastination, Deadlines, and Performance: Self-Control by Precommitment,” Psychological Science 13, no. 3 (2002): 219–224. Stephen Hoch and George Loewenstein, “Time-Inconsistent Preferences and Consumer Self-Control,” Journal of Consumer Research 17, no. 4 (1991): 492–507.

Glen Jensen, “Preference for Bar Pressing over ‘Freeloading’ as a Function of Number of Unrewarded Presses,” Journal of Experimental Psychology 65, no. 5 (1963): 451–454. Glen Jensen, Calvin Leung, and David Hess, “ ‘Freeloading’ in the Skinner Box Contrasted with Freeloading in the Runway,” Psychological Reports 27 (1970): 67–73. George Loewenstein, “Because It Is There: The Challenge of Mountaineering . . . for Utility Theory,” Kyklos 52, no. 3 (1999): 315–343. Additional readings George Akerlof and Rachel Kranton, “Economics and Identity,” The Quarterly Journal of Economics 115, no. 3 (2000): 715–753. David Blustein, “The Role of Work in Psychological Health and Well-Being: A Conceptual, Historical, and Public Policy Perspective,” American Psychologist 63, no. 4 (2008): 228–240. Armin Falk and Michael Kosfeld, “The Hidden Costs of Control,” American Economic Review 96, no. 5 (2006): 1611–1630.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

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airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K

Chapter 12 Carol Braun was Jed Block (2004), Betrayal, Goodwill Industries of North Central Wisconsin, Inc. principal–agent problem Kathleen M. Eisenhardt (1989), “Agency Theory: An Assessment and Review,” The Academy of Management Review, 14:57–74. John M. Darley (2010), “Constructive and Destructive Obedience: A Taxonomy of Principal-Agent Relationships,” Journal of Social Issues, 41:124–54. corporate looting George A. Akerlof, Paul M. Romer, Robert E. Hall, and N. Gregory Mankiw (1993), “Looting: The Economic Underworld of Bankruptcy for Profit,” Brookings Papers on Economic Activity, 1993(2): 1–73. Sambo's restaurants Charles Bernstein (1984), Sambo's: Only a Fraction of the Action: The Inside Story of a Restaurant Empire's Rise and Fall, National Literary Guild. moral considerations James A. Waters (1978), “Catch 205: Corporate Morality as an Organizational Phenomenon,” Organizational Dynamics, 6:3–19.

Kelman (1958), “Compliance, Identification, and Internalization: Three Processes of Attitude Change,” Journal of Conflict Resolution, 2:51–60. attribute substitution Daniel Kahneman and Shane Frederick (2002), “Representativeness Revisited: Attribute Substitution in Intuitive Judgment,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman, eds., Heuristics and Biases: The Psychology of Intuitive Judgment, Cambridge University Press, 49–81. a lemons market George Akerlof (1970), “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, 83:488–500. George E. Hoffer and Michael D. Pratt (1987), “Used Vehicles, Lemons Markets, and Used Car Rules: Some Empirical Evidence,” Journal of Consumer Policy, 10:409–14. Steven E. Kaplan, Pamela B. Roush, and Linda Thorne (2007), “Andersen and the Market for Lemons in Audit Reports,” Journal of Business Ethics, 70:363–73.


pages: 411 words: 80,925

What's Mine Is Yours: How Collaborative Consumption Is Changing the Way We Live by Rachel Botsman, Roo Rogers

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Airbnb, barriers to entry, Bernie Madoff, bike sharing scheme, Buckminster Fuller, carbon footprint, Cass Sunstein, collaborative consumption, collaborative economy, Community Supported Agriculture, credit crunch, crowdsourcing, dematerialisation, disintermediation, en.wikipedia.org, experimental economics, George Akerlof, global village, Hugh Fearnley-Whittingstall, information retrieval, iterative process, Kevin Kelly, Kickstarter, late fees, Mark Zuckerberg, market design, Menlo Park, Network effects, new economy, new new economy, out of africa, Parkinson's law, peer-to-peer lending, Ponzi scheme, pre–internet, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Simon Kuznets, Skype, slashdot, smart grid, South of Market, San Francisco, Stewart Brand, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thorstein Veblen, Torches of Freedom, transaction costs, traveling salesman, ultimatum game, Victor Gruen, web of trust, women in the workforce, Zipcar

This is a working article written by Butts while on the Knight-Bagehot fellowship for business journalists at Columbia Journalism School and Columbia Business School, http://www.mickeybutts.com/wj_business.html. 19. Ibid. 20. Joe Nocera, A Piece of the Action: How the Middle Class Joined the Money Class, as quoted in Vanity Fair, “Rethinking the American Dream,” www.vanityfair.com/culture/features/2009/04/american-dream200904. 21. George A. Akerlof and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism (Princeton University Press, 2009), 128. 22. Steve Rhode, founder of myvesta.org, found that 26 percent of his company’s clients say they never look at the statement. Quoted in Mickey Butts, “Why We Charge: What Behavioral Economics Can Tell Us.” 23. Juliet B. Schor, The Overspent American: Why We Want What We Don’t Need (HarperCollins, 1998), 72. 24.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, moral hazard, mortgage debt, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

., 1987, Devotions upon Emergent Occasions (originally published 1624), ed. Raspa, A., New York, Oxford University Press. 34. Tuckett, D., 2011, Minding the Markets, London, Palgrave Macmillan, p. 18. 35. Sinclair, U., 1994, I, Candidate for Governor: And How I Got Licked (originally published 1935), London, University of California Press, p. 109. 3: Intermediation 1. McCardie, J., Armstrong v. Jackson (1917) 2KB 822. 2. George Akerlof employed the used car market as an example to highlight how markets can break down when information asymmetry is present in his classic 1970 article: Akerlof, G.A., 1970, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, 84 (3), pp. 488–500. 3. Shiller, R.J., 1981, ‘Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?’


pages: 510 words: 120,048

Who Owns the Future? by Jaron Lanier

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3D printing, 4chan, Affordable Care Act / Obamacare, Airbnb, augmented reality, automated trading system, barriers to entry, bitcoin, book scanning, Burning Man, call centre, carbon footprint, cloud computing, computer age, crowdsourcing, David Brooks, David Graeber, delayed gratification, digital Maoism, en.wikipedia.org, facts on the ground, Filter Bubble, financial deregulation, Fractional reserve banking, Francis Fukuyama: the end of history, George Akerlof, global supply chain, global village, Haight Ashbury, hive mind, if you build it, they will come, income inequality, informal economy, invisible hand, Jacquard loom, Jaron Lanier, Jeff Bezos, job automation, Kevin Kelly, Khan Academy, Kickstarter, Kodak vs Instagram, life extension, Long Term Capital Management, Mark Zuckerberg, meta analysis, meta-analysis, moral hazard, mutually assured destruction, Network effects, new economy, Norbert Wiener, obamacare, packet switching, Peter Thiel, place-making, Plutocrats, plutocrats, Ponzi scheme, post-oil, pre–internet, race to the bottom, Ray Kurzweil, rent-seeking, reversible computing, Richard Feynman, Richard Feynman, Ronald Reagan, self-driving car, side project, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, smart meter, stem cell, Steve Jobs, Steve Wozniak, Stewart Brand, Ted Nelson, The Market for Lemons, Thomas Malthus, too big to fail, trickle-down economics, Turing test, Vannevar Bush, WikiLeaks

See http://www.newstatesman.com/blogs/internet/2012/10/reddit-blocks-gawker-defence-its-right-be-really-really-creepy, and http://gawker.com/5950981/unmasking-reddits-violentacrez-the-biggest-troll-on-the-web. This is an instance in which a classic problem in pre-digital markets should have been put to rest to a significant degree by digital designs. The supposed transparency of the way we have structured our present information economy turned out to be unusable. The problem in question is known as the “Market for Lemons,” after the title of the famous paper, which helped earn its author, George Akerlof, a Nobel Prize13 in Economics. The lemons in the paper were not from the lemonade stand we encountered earlier, but were instead crummy used cars for sale. The paper detailed how a prevalence of bad used cars distorted markets through the mechanism of information asymmetry. Buyers worried that sellers knew more about a used car’s problems than they were letting on, which put a pervasive burden on the market, stunted it, and made it less efficient.

The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly

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airport security, anti-communist, Asian financial crisis, bank run, banking crisis, Bretton Woods, British Empire, call centre, clean water, colonial exploitation, colonial rule, Edward Glaeser, European colonialism, failed state, farmers can use mobile phones to check market prices, George Akerlof, Hernando de Soto, income inequality, income per capita, Indoor air pollution, invisible hand, Kenneth Rogoff, laissez-faire capitalism, land reform, land tenure, microcredit, moral hazard, Naomi Klein, purchasing power parity, randomized controlled trial, Ronald Reagan, Scramble for Africa, structural adjustment programs, The Fortune at the Bottom of the Pyramid, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, War on Poverty, Xiaogang Anhui farmers

If I adopted costly but safe food handling methods and sold you healthy tacos, but you couldn’t observe my safe handling and still offered the low price, then I would be the one who lost out in the exchange. So I would not bother with safe food handling, selling you the lousy tacos you expected. I could even keep all the best taco ingredients and safest procedures for tacos consumed by my own family, and sell you the tacos made with shoddy ingredients and food safety procedures. So the market does not supply healthy tacos! The economist George Akerlof of Berkeley won the Nobel Prize for this kind of insight, applied to sales of used cars.14 Even slightly used cars sell for far less than new cars because buyers have no information on the cars’ quality (and used car sellers have a tendency to sell lemons). Many other types of cheating exist. For many transactions, payment at the time we get the service is not efficient. Either the service comes first, or the payment comes first.


pages: 297 words: 103,910

Free culture: how big media uses technology and the law to lock down culture and control creativity by Lawrence Lessig

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Brewster Kahle, Cass Sunstein, future of journalism, George Akerlof, Innovator's Dilemma, Internet Archive, invention of the printing press, Kevin Kelly, knowledge economy, Louis Daguerre, new economy, prediction markets, prisoner's dilemma, profit motive, rent-seeking, Richard Florida, Richard Stallman, Ronald Coase, Ronald Reagan, Saturday Night Live, Silicon Valley, software patent, transaction costs

One made the argument I've already described: A brief by Hal Roach Studios argued that unless the law was struck, a whole generation of American film would disappear. The other made the economic argument absolutely clear. This economists' brief was signed by seventeen economists, including five Nobel Prize winners, including Ronald Coase, James Buchanan, Milton Friedman, Kenneth Arrow, and George Akerlof. The economists, as the list of Nobel winners demonstrates, spanned the political spectrum. Their conclusions were powerful: There was no plausible claim that extending the terms of existing copyrights would do anything to increase incentives to create. Such extensions were nothing more than "rent-seeking"—the fancy term economists use to describe special-interest legislation gone wild. The same effort at balance was reflected in the legal team we gathered to write our briefs in the case.


pages: 336 words: 90,749

How to Fix Copyright by William Patry

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A Declaration of the Independence of Cyberspace, barriers to entry, big-box store, borderless world, business intelligence, citizen journalism, cloud computing, crowdsourcing, death of newspapers, en.wikipedia.org, facts on the ground, Frederick Winslow Taylor, George Akerlof, Gordon Gekko, haute cuisine, informal economy, invisible hand, Joseph Schumpeter, Kickstarter, knowledge economy, lone genius, means of production, new economy, road to serfdom, Ronald Coase, Ronald Reagan, semantic web, shareholder value, Silicon Valley, The Chicago School, The Wealth of Nations by Adam Smith, trade route, transaction costs, trickle-down economics, web application, winner-take-all economy

Supreme Court in the Eldred case wrote: “Where building-block materials are copyrighted, new creators must pay to use those materials, and may incur additional costs in locating and negotiating with copyright holders....By reducing the set of building-block materials freely available for new work, the [term extension] raises the cost of producing new works and reduces the number created.” Brief of George Akerlof et al. in Eldred v. Reno, No. 01-618, page 2–3. May 20, 2002. 23. See, e.g., Gowers Review of Intellectual Property, (2006), Centre for Intellectual Property and Information Law (CIPIL)—http://www. hm-treasury.gov.uk/gowers_review.htm; The Recasting of Copyright & Related Rights for the Knowledge Economy (2006), Institute for Information Law (IViR), University of Amsterdam for DG Internal Market; http://www.ivir.nl/publications/other/IViR_Recast_Final_ Report_2006.pdf; Professor David Newbery (FBA, University of Cambridge), letter to Commission; NOTES TO PAGE 197 307 President Barroso (April 10, 2008) (Letter opposing extension from thirty-two economists including Nobel prize-winners and other persons working the field of copyright); Bournemouth Statement, letter and statement to Commission President Barroso (June 16, 2008), academic version “Creativity stifled?”


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

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asset-backed security, bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, Nick Leeson, Northern Rock, offshore financial centre, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve

For Miller, market value was sacrosanct, and he felt that consumers should not be lured into paying over the odds, because that implied a misjudgment about risk. “If you’re buying from a dealer, what makes you think the dealer knows less than you do? It’s like buying second-hand cars. These fancy products—I understand their appeal to buyers, but the fact is, unless they’re mispriced, you’re getting exactly what you paid for.” Miller was making a reference to the so-called lemons problem identified by another Nobel-winning economist, George Akerlof. In the same way that buyers of second-hand cars face a disadvantage against dealers trying to sell them lemons, nonspecialist buyers of derivatives have less information about those hard-to-understand products than the banks that create them. Akerlof’s work highlighted a flaw in the free market: that competition will inevitably tease out all pertinent information about a product and lead to fair pricing.


pages: 353 words: 98,267

The Price of Everything: And the Hidden Logic of Value by Eduardo Porter

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Asian financial crisis, Ayatollah Khomeini, banking crisis, barriers to entry, Berlin Wall, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, clean water, Credit Default Swap, Deng Xiaoping, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, Ford paid five dollars a day, full employment, George Akerlof, Gordon Gekko, guest worker program, happiness index / gross national happiness, housing crisis, illegal immigration, immigration reform, income inequality, income per capita, informal economy, invisible hand, Jean Tirole, John Maynard Keynes: technological unemployment, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, loss aversion, low skilled workers, Martin Wolf, means of production, Menlo Park, Mexican peso crisis / tequila crisis, new economy, New Urbanism, pension reform, Peter Singer: altruism, pets.com, placebo effect, price discrimination, price stability, rent-seeking, Richard Thaler, rising living standards, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, stem cell, Steve Jobs, Stewart Brand, superstar cities, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, transatlantic slave trade, transatlantic slave trade, ultimatum game, unpaid internship, urban planning, women in the workforce, World Values Survey, Yom Kippur War, young professional

The tally of countries that have escaped banking crises is by Carmen Reinhart and Kenneth Rogoff, “Banking Crises: An Equal Opportunity Menace,” NBER Working Paper, December 2008. 236-239 What Rationality?: Eugene Fama’s quote is in Douglas Clement, “Interview with Eugene Fama,” The Region, Federal Reserve Bank of Minnesota, December 2007. Keynes’s quote is in John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt Brace and World, 1965), p. 161. Robert Shiller’s theory is described in George Akerlof and Robert Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Princeton: Princeton University Press, 2010). 240-246 Economics for a New World: Limits to the assumption of human rationality and self-regard are discussed in Herbert Gintis, “Five Principles for the Unification of the Behavioral Sciences,” Working Paper, May 13, 2008.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

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affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, joint-stock company, Kenneth Rogoff, labour market flexibility, labour mobility, land reform, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

But Keynes was a fox with a keen sense of the practical limits of what can be achieved in the real world. That is why he envisaged capital controls as an integral part of any stable system of international finance. Perhaps the most consummate fox among today’s economists is Joe Stiglitz, whose research constitutes a nearly endless catalogue of the ways in which markets can fail. Stiglitz won a Nobel Prize in 2001 (along with George Akerlof and Mike Spence) for theoretical work showing how “asymmetric information” distorts incentives in a wide range of markets. If you know more than I do about the value of what you are selling me—whether it is your used car, your labor, or your debt—then we’re in for a troubled relationship. Prices in such transactions tend to provide the wrong signals. Many trades that should not happen do, while others that should happen don’t.


pages: 370 words: 94,968

The Most Human Human: What Talking With Computers Teaches Us About What It Means to Be Alive by Brian Christian

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4chan, Ada Lovelace, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Bertrand Russell: In Praise of Idleness, carbon footprint, cellular automata, Claude Shannon: information theory, cognitive dissonance, complexity theory, crowdsourcing, Donald Trump, Douglas Hofstadter, George Akerlof, Gödel, Escher, Bach, high net worth, Isaac Newton, Jacques de Vaucanson, Jaron Lanier, job automation, l'esprit de l'escalier, Loebner Prize, Menlo Park, Ray Kurzweil, RFID, Richard Feynman, Richard Feynman, Ronald Reagan, Skype, statistical model, Stephen Hawking, Steve Jobs, Steven Pinker, theory of mind, Turing machine, Turing test, Von Neumann architecture, Watson beat the top human players on Jeopardy!

A glance at the jacket blurbs is enough to produce a resounding no, revealing the light in which we are meant to read these deviations from economic theory. “How we can prevent being fooled,” says Jerome Groopman, Recanati Professor of Medicine at Harvard Medical School. “The weird ways we act,” says business writer James Surowiecki. “Foibles, errors, and bloopers,” says Harvard psychologist Daniel Gilbert. “Foolish, and sometimes disastrous, mistakes,” says Nobel laureate in economics George Akerlof. “Managing your emotions … so challenging for all of us … can help you avoid common mistakes,” says financial icon Charles Schwab.12 Now, some of what passes for “irrationality” in traditional “rational” economics is simply bad science, cautions Daniel Kahneman, Nobel laureate from Princeton. For instance, given a choice between a million dollars and a 50 percent chance of winning four million dollars, the “rational” choice is “obviously” the latter, whose “expected outcome” is two million dollars, double the first offer.


pages: 375 words: 88,306

The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism by Arun Sundararajan

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3D printing, additive manufacturing, Airbnb, Amazon Mechanical Turk, autonomous vehicles, barriers to entry, bitcoin, blockchain, Burning Man, call centre, collaborative consumption, collaborative economy, collective bargaining, corporate social responsibility, cryptocurrency, David Graeber, distributed ledger, employer provided health coverage, Erik Brynjolfsson, ethereum blockchain, Frank Levy and Richard Murnane: The New Division of Labor, future of work, George Akerlof, gig economy, housing crisis, Howard Rheingold, Internet of things, inventory management, invisible hand, job automation, job-hopping, Kickstarter, knowledge worker, Kula ring, Lyft, megacity, minimum wage unemployment, moral hazard, Network effects, new economy, Oculus Rift, pattern recognition, peer-to-peer lending, profit motive, purchasing power parity, race to the bottom, recommendation engine, regulatory arbitrage, rent control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Second Machine Age, self-driving car, sharing economy, Silicon Valley, smart contracts, Snapchat, social software, supply-chain management, TaskRabbit, The Nature of the Firm, total factor productivity, transaction costs, transportation-network company, two-sided market, Uber and Lyft, Uber for X, universal basic income, Zipcar

As I defined and discussed in chapter 6, sharing economy platforms can reduce many forms of information asymmetry. The predictions of economic theory are that such reductions will increase, rather than reduce, wages over time. Let me explain the consequences of information asymmetry, and in particular, the effect of “adverse selection” further by appealing to the example of used car markets that George Akerlof famously used in his Nobel Prize–winning work. In Akerlof’s model, there are two kinds of used cars—those of high quality, and those of low quality (the “lemons”). Suppose that prospective buyers have no way of determining the true quality of a used car prior to purchasing it. The price a buyer would be willing to pay would then be somewhere between the value of a high-quality car and the value of a lemon.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

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Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, low skilled workers, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

For an informed discussion of the client state problem, see Tony Judt’s Post War: A History of Europe since 1945 (William Heinemann, London, 2005). 8. An Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776. As it turned out, this was a remarkably auspicious year for political and economic developments. 9. See, for example, ‘The market for lemons: quality uncertainty and the market mechanism’, the groundbreaking paper by George A. Akerlof, Quarterly Journal of Economics, 84.3 (1970), pp. 488–500. 10. For an interesting modern discussion of the role of ‘good government’, see Timothy Besley’s ‘ ‘Principled Agents?’ The Political Economy of Good Government’, The Lindahl Lectures (Oxford, 2006). The case for government in general is famously well expressed in Thomas Hobbes’s Leviathan, where the ‘state of nature’ gives rise to continuous wars leaving human lives ‘solitary, poor, nasty, brutish and short’.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

When we founded GaveKal, Charles Gave said that many of our best ideas would come from clients and this has been equally true of the ideas in this book, even though most of the clients who unwittingly helped me with their challenges and counter-arguments will doubtless continue to disagree with my conclusions. Further unintended assistance came from an even more distinguished group—the galaxy of renowned economists who gathered at George Soros’s house outside New York to launch the Institute for New Economic Thinking (INET) in September 2009. The discussions that memorable weekend about the subversion of economics by academic politics—and especially the contributions of Joseph Stiglitz, George Akerlof, Axel Leijonhufvud, Roman Frydman, John Kay, and, of course, our convenor George Soros—corroborated at the highest possible level my longstanding belief that academic economics had degenerated into a form of political propaganda and would need to be reinvented along with the capitalist system itself. Then, of course, there were the people who made this book possible in the literal sense: My agent, Andrew Wylie, by expressing enthusiasm for the project when I first presented it to him in May 2009, helped to maintain my confidence through the summer of 2009, when the economic indicators still seemed to be pointing to a very different outcome of the crisis from the one my book proposal described.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

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affirmative action, Albert Einstein, asset allocation, backtesting, Black Swan, Black-Scholes formula, Bonfire of the Vanities, butterfly effect, commodity trading advisor, computer age, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, family office, financial innovation, fixed income, frictionless, frictionless market, George Akerlof, implied volatility, index arbitrage, Jeff Bezos, London Interbank Offered Rate, Long Term Capital Management, loose coupling, margin call, market bubble, market design, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, new economy, Nick Leeson, oil shock, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Shiller, rolodex, Saturday Night Live, shareholder value, short selling, Silicon Valley, statistical arbitrage, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, yield curve, zero-coupon bond

In a variation of Gresham’s law, where bad money drives out good, bad cars will drive out good. Things can get pretty perverse if adverse selection goes too far. Extending this good car/bad car case to where there is a continuum of quality of cars, we might find that not only do the bad cars drive out the good cars, but the really bad cars drive out the moderately bad ones, and so on, until no market exists at all. This basic argument, presented in George Akerlof’s famous paper, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” (Quarterly Journal of Economics, August 1970, pages 488–500), was the basis for his award of the Nobel Prize in 2001. 6. Carol J. Loomis’s Fortune article, “Warren Buffett’s Wild Ride at Salomon” (October 27, 1997), provides an insider’s view of Warren Buffett’s reaction to this scandal. A detailed report of the events is the SEC report, In the Matter of John H.


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The Fissured Workplace by David Weil

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accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, business process, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, corporate governance, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, ultimatum game, union organizing, women in the workforce, Y2K, yield management

This meant that the hiring practice was increasingly at odds with the quality standards desired by the company—although not enough so to tilt the balance back toward its higher-paid permanent workforce. 55. Formally, this requires that the costs of locating the activity inside the firm must be greater than or equal to the cost of activity from outside divided by the relative productivity of outside option relative to inside option. 56. This is famously characterized as the “lemons problem” by George Akerlof, a Nobel Prize–winning economist. In the used car market, the underlying quality of cars is hard for buyers to observe. Because many people sell cars because of problems they have with them, buyers in the market assume the worst (in part because they cannot easily see the quality of any given car). Because of this expectation, the price for used cars is pushed down, so that even the seller of a good car will be forced to receive a lower price than the true value of the vehicle warrants. 57.

Global Financial Crisis by Noah Berlatsky

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accounting loophole / creative accounting, asset-backed security, banking crisis, Bretton Woods, capital controls, Celtic Tiger, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South China Sea, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

The goal of these agreements is to help producers of goods and services, exporters, and importers conduct business. WTO publishes trade statistics, research and analysis, studies, reports, and the journal World Trade Review. Recent publications are available on its Web site. 244 Bibliography of Books Liaquat Ahamed Lords of Finance: The Bankers Who Broke the World. New York: Penguin Press, 2009. George A. Akerlof Animal Spirits: How Human Psycholand Robert J. ogy Drives the Economy, and Why It Shiller Matters for Global Capitalism. Princeton, NJ: Princeton University Press, 2009. Jennifer Amyx Japan’s Financial Crisis: Institutional Rigidity and Reluctant Change. Princeton, NJ: Princeton University Press, 2004. Patrick Bond Against Global Apartheid: South Africa Meets the World Bank, IMF and International Finance.


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The Logic of Life: The Rational Economics of an Irrational World by Tim Harford

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, colonial rule, Daniel Kahneman / Amos Tversky, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, endowment effect, European colonialism, experimental economics, experimental subject, George Akerlof, income per capita, invention of the telephone, Jane Jacobs, John von Neumann, law of one price, Martin Wolf, mutually assured destruction, New Economic Geography, new economy, Plutocrats, plutocrats, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, spinning jenny, Steve Jobs, The Death and Life of Great American Cities, the market place, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, women in the workforce

On another occasion: Uri Gneezy and John List, “Putting Behavioral Economics to Work: Testing for Gift Exchange in Labor Markets Using Field Experiments,” Econometrica 74, no. 5(September 2006): 1365–84, rady.ucsd.edu/faculty/directory/gneezy/docs/behavioral-economics.pdf. (I am oversimplifying here): For an economic model in which it is rational to pay an excess wage, see C. Shapiro and J. Stiglitz, “Equilibrium Unemployment as a Worker Discipline Device,” American Economic Review (June 1984). The theory that high wages and high effort are a sort of gift exchange rather than a response to economic incentives originates with George A. Akerlof, “Labor Contracts as Partial Gift Exchange,” Quarterly Journal of Economics 97 (1982): 543–69. Kagel and Battalio put each rat: Telephone interview with John Kagel, January 24, 2005. Battalio, Kagel, and Kogut showed: Raymond Battalio, John Kagel, and Carl Kogut, “Experimental Confirmation of the Existence of a Giffen Good,” American Economic Review 81, no. 4(September 1991). A Giffen good is: The first written discussion of Giffen goods is in Alfred Marshall’s definitive 1895 textbook, Principles of Economics.


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Our Kids: The American Dream in Crisis by Robert D. Putnam

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correlation does not imply causation, deindustrialization, demographic transition, desegregation, ending welfare as we know it, epigenetics, full employment, George Akerlof, helicopter parent, impulse control, income inequality, index card, low skilled workers, manufacturing employment, meta analysis, meta-analysis, mortgage tax deduction, new economy, Occupy movement, Ralph Waldo Emerson, randomized controlled trial, school choice, Socratic dialogue, The Bell Curve by Richard Herrnstein and Charles Murray, the built environment, upwardly mobile, Walter Mischel, white flight, working poor

Leaving orphans aside, the fraction of 16-year-olds living with two biological parents declined from 85 percent in the 1960s to 59 percent in the 1990s. David T. Ellwood and Christopher Jencks, “The Spread of Single-Parent Families in the United States Since 1960,” in The Future of the Family, eds. Daniel Patrick Moynihan, Timothy M. Smeeding, and Lee Rainwater (New York: Russell Sage Foundation, 2004), 25–65. 13. George A. Akerlof, Janet L. Yellen, and Michael L. Katz, “An Analysis of Out-of-Wedlock Births in the United States,” Quarterly Journal of Economics 11 (1996): 277–317. 14. Cherlin, The Marriage-Go-Round; David Popenoe, War over the Family (New Brunswick, NJ: Transaction, 2005); Paul R. Amato, “Institutional, Companionate, and Individualistic Marriages: Change over Time and Implications for Marital Quality,” in Marriage at the Crossroads: Law, Policy, and the Brave New World of Twenty-first-Century Families, eds.


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Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Blinder, Economic Policy and the Great Stagflation (New York: Academic Press, 1979), p. 103. 59 THERE HAS BEEN SO MUCH CORROBORATING RESEARCH: Alan S. Blinder and Jeremy B. Rudd, “The Supply Shock Explanation of the Great Stagflation Revisited,” Center for Economic Studies Working Paper, No. 176, Princeton, November 2008, p. 49. 60 MANY ECONOMISTS HAILED: Ben S. Bernanke, “The Great Moderation,” Speech, February 2004, http://www.bis.org/review/r040301f.pdf. 61 THERE HAD BEEN DISSENTERS: George A. Akerlof, William T. Dickens, and George L. Perry, “Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment,” Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31 (2000–2001), pp. 1–60. 62 “NOBODY KNOWS THE COST”: On Blanchard’s inflation targeting, see Chris Giles, “IMF Experts Spell Out Policy Flaws,” Financial Times, February 12, 2010, p. 3; Akerlof, Dickens, and Perry, “Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment,” p. 1. 63 RATHER, HIS SOCIAL POLICY WAS DRIVEN: Friedman, Capitalism and Freedom, p. 169. 64 “THE GREAT ADVANCES OF CIVILIZATION”: Ibid., p. 5. 65 “THE GREAT ACHIEVEMENT OF CAPITALISM”: Ibid., p. 169. 66 “I HAVE ALWAYS BEEN IMPRESSED”: Friedman and Friedman, Two Lucky People, pp. 217–18.

How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

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Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, business process, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, discounted cash flows, disintermediation, diversification, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, full employment, George Akerlof, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, John von Neumann, linear programming, Loma Prieta earthquake, Long Term Capital Management, margin call, market friction, market microstructure, martingale, merger arbitrage, Nick Leeson, P = NP, pattern recognition, pensions crisis, performance metric, prediction markets, profit maximization, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Richard Feynman, Richard Feynman, Richard Stallman, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional


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Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond


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The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (The Princeton Economic History of the Western World) by Robert J. Gordon

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3D printing, Affordable Care Act / Obamacare, airline deregulation, airport security, Apple II, barriers to entry, big-box store, blue-collar work, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, deindustrialization, Detroit bankruptcy, discovery of penicillin, Donner party, Downton Abbey, Edward Glaeser, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, feminist movement, financial innovation, full employment, George Akerlof, germ theory of disease, glass ceiling, high net worth, housing crisis, immigration reform, impulse control, income inequality, income per capita, indoor plumbing, industrial robot, inflight wifi, interchangeable parts, invention of agriculture, invention of air conditioning, invention of the telegraph, invention of the telephone, inventory management, James Watt: steam engine, Jeff Bezos, jitney, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, labor-force participation, Loma Prieta earthquake, Louis Daguerre, Louis Pasteur, low skilled workers, manufacturing employment, Mark Zuckerberg, market fragmentation, Mason jar, McMansion, Menlo Park, minimum wage unemployment, mortgage debt, mortgage tax deduction, new economy, Norbert Wiener, obamacare, occupational segregation, oil shale / tar sands, oil shock, payday loans, Peter Thiel, pink-collar, Productivity paradox, Ralph Nader, Ralph Waldo Emerson, refrigerator car, rent control, Robert X Cringely, Ronald Coase, school choice, Second Machine Age, secular stagnation, Skype, stem cell, Steve Jobs, Steve Wozniak, Steven Pinker, The Market for Lemons, Thomas Malthus, total factor productivity, transaction costs, transcontinental railway, traveling salesman, Triangle Shirtwaist Factory, Unsafe at Any Speed, Upton Sinclair, upwardly mobile, urban decay, urban planning, urban sprawl, washing machines reduced drudgery, Washington Consensus, Watson beat the top human players on Jeopardy!, We wanted flying cars, instead we got 140 characters, working poor, working-age population, Works Progress Administration, yield management