Kenneth Arrow

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pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

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Albert Einstein, Bayesian statistics, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, naked short selling, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Once one recognizes that Jacob Marschak was a common denominator between the great minds of previous volumes that include Leonard Jimmie Savage and Milton Friedman, Kenneth Arrow and Harry Markowitz, and even Franco Modigliani, the root of his influence on their work is compelling. When we discover that Marschak made discoveries that were subtle and humble but were so timely and related to the essence of the work of William Sharpe, Fischer Black, and Myron Scholes, we must conclude that he was more than a mentor of other great minds – he was a great mind himself. We will begin with his story. This page intentionally left blank 3 The Early Years Jacob Marschak was not at all unusual among the cadre of great minds that formed the discipline of finance in the first half of the twentieth century. Like the families of Milton Friedman, Franco Modigliani, Leonard Jimmie Savage, Kenneth Arrow, John von Neumann, and Harry Markowitz, Marschak’s family tree was originally rooted in the Jewish culture and derived from the intellectually stimulating region of Eastern, Central and Southern Europe at the beginning of the twentieth century.

Ibid., p. 320. 8. Ibid. 9. Jacob Marschak, “Rational Behavior, Uncertain Prospects, and Measurable Utility,” Econometrica, 18(2) (1950), 111–41. 10. Ibid., p. 120. 11. Jacob Marschak, “Probability in the Social Sciences,” Cowles Commission Paper, 82 (1954), referring to a lecture given on December 6, 1950. 12. Ibid., p. 179. 13. Kenneth Arrow and Frank Hahn, General Competitive Analysis. San Francisco: Holden-Day, 1971, pp. 361 and 369. 6 Applications 1. Kenneth Arrow, “The Theory of Risk Aversion,” in Aspects of the Theory of Risk Bearing. Helsinki: Yrjo Jahnssonin Saatio, 1965. Reprinted in Essays in the Theory of Risk Bearing. Chicago: Markham, 1971, pp. 90–109. 182 Notes 183 2. J.W. Pratt, “Risk Aversion in the Small and in the Large,” Econometrica, 32(1/2) (1964), 122–36. 3. S.A. Ross, “Some Stronger Measures of Risk Aversion in the Small and in the Large with Applications,” Econometrica, 49(3) (1981), 621–39. 4.

Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability waiting to be summed.1 The finance literature further clarified that there are calculable risks and that there are uncertainties that cannot be quantified. In the 1930s, John von Neumann set about producing a model of expected utility that permitted the inclusion of risk. Then, Leonard Jimmie Savage described how our individual perceptions affect the probability of uncertainty, and Kenneth Arrow was able to include these probabilities of uncertainty in a model that established the existence of equilibrium in a market for financial securities. With the existence of equilibrium and a better understanding of the meaning and significance of probability at hand, Harry Markowitz then packaged up these intuitions into a tidy set of insights we now call Modern Portfolio Theory. In doing so, he demonstrated that an efficient portfolio minimizes and diversifies market risk through the choice of securities that take best advantage of the ways in which their returns are correlated with each other.


Gaming the Vote: Why Elections Aren't Fair (And What We Can Do About It) by William Poundstone

affirmative action, Albert Einstein, Debian, desegregation, Donald Trump, en.wikipedia.org, Everything should be made as simple as possible, global village, guest worker program, hiring and firing, illegal immigration, invisible hand, jimmy wales, John Nash: game theory, John von Neumann, Kenneth Arrow, manufacturing employment, Nash equilibrium, Paul Samuelson, Pierre-Simon Laplace, prisoner's dilemma, Ralph Nader, RAND corporation, Ronald Reagan, Silicon Valley, slashdot, the map is not the territory, Thomas Bayes, transcontinental railway, Unsafe at Any Speed, Y2K

Despite the smiling faces, presidenti,,1 comenders Teddy Roosevelt, Woodrow lNilson, and William Howard Taft well kne'F that electionl can be lmfair when there are three Or more candidates. (U.S. Senate Collection. Center for Legislative Archives) To Scott Contents Prologue: The Wizard and the Lizard 3 THE PROBLEM 25 I. Game Theory Kurt Code! • Adolf Hitler· Albert Einstein· Oskar Morgenstern· Bambi· the u.s. Constitution· Joseph Goebbels • God· Kaiser Wilhelm II • John von Neumann" Kenneth Arrow" J\'larxism • Alfred Tarski • intransitivity· Harold Hotelling· ice cream· John Hicks· "Scissors, Paper. Stone" • Duncan Black· the "forty-seven-year-old wife of a machinist liVing in Dayton. Ohio" • the RAND Corporation· Condoleezzrl Rice· Olaf Helmer· Harry Truman· Joseph Stalin· Abram Bergson 2. The Big Bang Michelle Kwan • the Great Flip.Flop • 45 Repuhlicans • Democrats • Communists· Sidney Morgenbesser • irrelevant alternatives" /\.'

The consequences are weakened mandates, loss of faith in the democratic process, squandered dollars, and sometimes squandered lives. This book asks a simple question: Is it possible to devise a fair way of voting, one immune to vote splitting? Until recently, any wellinformed person would have told you the answer was a most definite no. They would have cited the work of Nobel-laureate economist Kenneth Arrow and his famous impossibility theorem. In 1948 Arrow devised a logical proof saying (very roughly) that no voting system is perfect. Arrow was not talking about hanging chads, confusing ballot designs, hacked electronic machines, or any type of outright fraud. Such problems, though serious, can be fixed. He was talking about a problem 20 Prologue: The Wizard and the lizard that can't be fixed.

Were these new campaign techniques a genetically engineered tomato, they might command more attention than they have. They have gone largely unnoticed by the public, the media, and nearly everyone except the campaign strategists and their clients. The story of vote splitting is one of political hardball. It is equally a tale of attempts to improve the world through logic (and how rarely that works out). In both cases, the story properly begins with Kenneth Arrow's lauded, feared, and long-misunderstood impossibility theorem. 22 THE PROBLEM ONE Game Theory Kurt Giidel, the most brilliant logician of the twentieth century, had no interest in politics. He showed no apparent alarm when Hitler became chancellor of Germany. (Codel closed a 1936 letter with a cordial "Heil Hitler:') He was equally unconcerned when Hitler annexed Austria in 1938. Then, in August 1939, war began.


pages: 461 words: 128,421

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

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, 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, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, 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 Bork, 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, Vilfredo Pareto, volatility smile, Yogi Berra

In the no-arbitrage version pioneered by Merton, the right combination of securities could eliminate risk entirely. Enough such securities could also bring about something akin to economic perfection. To provide for economic equilibrium in the face of economic uncertainty, Kenneth Arrow had proposed in the 1950s that there needed to be securities for sale representing every possible state of the future. That seemed a purely theoretical ideal at the time, of course. By the mid-1970s, though, one of Arrow’s students, Steve Ross, was proclaiming that—thanks to option-pricing theory—the financial world was moving in that direction. Ross had majored in physics as an undergraduate at Caltech, and then studied economics at Harvard with Kenneth Arrow. He landed a teaching job at the University of Pennsylvania, and discovered options theory when Fischer Black gave a seminar on campus. Ross took to the topic with enthusiasm, and was soon explicitly tying it to his mentor’s theoretical work on economic equilibrium.

His firm, Barra, provided sophisticated risk assessments to money managers battered by the decade’s bear market. In the 1980s he went over to managing money himself. Stephen Ross Student of Kenneth Arrow, co-originator of the binomial option pricing model. Argued that options and other derivatives were bringing the world closer to economic perfection. Founded a money management firm with Richard Roll. Mark Rubinstein Coauthor with Stephen Ross of the binomial option pricing model. Cofounder with Hayne Leland and John O’Brien of the portfolio insurance firm LOR. Paul Samuelson Greatest American economist of the second half of the twentieth century (although some might favor Kenneth Arrow or Milton Friedman). Finance was just a side interest for him, but he devised the first mathematical proof of the efficient market hypothesis and came close to solving the option-pricing puzzle.

Herbert Simon Economist at Carnegie-Mellon University who theorized in the 1950s that humans didn’t optimize, as most of his colleagues assumed, but “satisficed”—that is, came up with simple but not always entirely rational solutions to his problems. Winner of the 1978 economics Nobel. Joseph Stiglitz Student of Paul Samuelson and Franco Modigliani who, influenced by the work of Kenneth Arrow, showed how the efficient market hypothesis could not be—in theory at least—entirely true. Co-winner of the 2001 economics Nobel. Lawrence Summers Nephew of Paul Samuelson and Kenneth Arrow. Author of sharp critiques of efficient market finance in the 1980s and early 1990s who went on to be Secretary of Treasury in the Clinton administration and top economic adviser to President Barack Obama. Richard Thaler University of Rochester product who became Daniel Kahneman and Amos Tversky’s first student among economists.


pages: 415 words: 125,089

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

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Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, Big bang: deregulation of the City of London, Bretton Woods, buttonwood tree, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial innovation, full employment, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Paul Samuelson, Philip Mirowski, probability theory / Blaise Pascal / Pierre de Fermat, random walk, Richard Thaler, Robert Shiller, Robert Shiller, spectrum auction, statistical model, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

Leora Klapper served as an ideal research assistant: indefatigable, enthusiastic, thorough, and prompt. Molly Baker, Peter Brodsky, Robert Ferguson, Richard Geist, and William Lee were good enough to read segments of early versions of the manuscript. They gave me the running start I needed in order to transform rough drafts into a finished material. The following people also made significant contributions to my work and warrant my deepest appreciation: Kenneth Arrow, Gilbert Bassett, William Baumol, Zalmon Bernstein, Doris Bullard, Paul Davidson, Donald Dewey, David Durand, Barbara Fotinatos, James Fraser, Greg Hayt, Roger Hertog, Victor Howe, Bertrand Jacquillat, Daniel Kahneman, Mary Kentouris, Mario Laserna, Dean LeBaron, Michelle Lee, Harry Markowitz, Morton Meyers, James Norris, Todd Petzel, Paul Samuelson, Robert Shiller, Charles Smithson, Robert Solow, Meir Statman, Marta Steele, Richard Thaler, James Tinsley, Frank Trainer, Amos Tversky,* and Marina von N.

The late Fischer Black, a pioneering theoretician of modern finance who moved from M.I.T. to Wall Street, said, "Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles."2 Over time, the controversy between quantification based on observations of the past and subjective degrees of belief has taken on a deeper significance. The mathematically driven apparatus of modern risk management contains the seeds of a dehumanizing and self-destructive technology. Nobel laureate Kenneth Arrow has warned, "[O]ur knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness. Vast ills have followed a belief in certainty."3 In the process of breaking free from the past we may have become slaves of a new religion, a creed that is just as implacable, confining, and arbitrary as the old. Our lives teem with numbers, but we sometimes forget that numbers are only tools.

One might expect, as a result, that the history of utility theory and decision-making would be dominated by Bernoullians, especially since Daniel Bernoulli was such a well-known scientist. Yet such is not the case: most later developments in utility theory were new discoveries rather than extensions of Bernoulli's original formulations. Was the fact that Bernoulli wrote in Latin a problem? Kenneth Arrow has pointed out that Bernoulli's paper on a new theory of measuring risk was not translated into German until 1896, and that the first English translation appeared in an American scholarly journal as late as 1954. Yet Latin was still in common usage in mathematics well into the nineteenth century; and the use of Latin by Gauss was surely no barrier to the attention that his ideas commanded. Still, Bernoulli's choice of Latin may help explain why his accomplishments have received greater notice from mathematicians than from economists and students of human behavior.


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, corporate raider, 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, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, wealth creators, zero-sum game

Rather than confining myself to expounding the arguments of Friedrich Hayek, Milton Friedman, and their fellow members of the “Chicago School,” I have also included an account of the formal theory of the free market, which economists refer to as general equilibrium theory. Friedman’s brand of utopian economics is much better known, but it is the mathematical exposition, associated with names like Léon Walras, Vilfredo Pareto, and Kenneth Arrow, that explains the respect, nay, awe with which many professional economists view the free market. Even today, many books about economics give the impression that general equilibrium theory provides “scientific” support for the idea of the economy as a stable and self-correcting mechanism. In fact, the theory does nothing of the kind. I refer to the idea that a free market economy is sturdy and well grounded as the illusion of stability.

Many of the scholars associated with the Cowles Commission were mathematicians and natural scientists who had turned to economics mainly because it provided interesting technical problems to study. In 1948, Tjalling Koopmans, a Dutchman and naturalized American who had started out in theoretical physics, became the research director at Cowles, and he gathered around him an assortment of brilliant young minds. One belonged to Kenneth Arrow, who was born in New York City in 1921 to a family of European Jewish immigrants. During the Great Depression, Arrow’s parents lost almost everything. Arrow graduated from City College in 1940 and enrolled in the graduate program in statistics at Columbia. After taking a class in economics with Harold Hotelling, a noted mathematical economist, he switched subjects and did his Ph.D. in economics.

From Walras onward, general equilibrium theorists had sought to start out with individual consumers and firms, each of them following a simple set of rules, and to build up a theory of how the economy as a whole behaves. Sonnenschein, Mantel, and Debreu essentially said this wasn’t possible: the whole could not be derived from the parts. “In the aggregate, the hypothesis of rational behavior has in general no implications,” Kenneth Arrow wrote in a 1986 article reviewing general equilibrium theory. The authors of a high-level textbook for Ph.D. students made the same point in a more lighthearted manner, entitling their section that deals with this body of research “Anything Goes: The Sonnenschein-Mantel-Debreu Theorem.” Some researchers are still trying to rescue the general equilibrium approach, but they face at least two formidable issues.


pages: 483 words: 134,377

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

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air freight, Andrei Shleifer, battle of ideas, Bretton Woods, British Empire, business process, business process outsourcing, Carmen Reinhart, clean water, colonial rule, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, Deng Xiaoping, desegregation, discovery of the americas, Edward Glaeser, en.wikipedia.org, European colonialism, Francisco Pizarro, fundamental attribution error, germ theory of disease, greed is good, Gunnar Myrdal, income per capita, invisible hand, James Watt: steam engine, Jane Jacobs, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, M-Pesa, microcredit, Monroe Doctrine, oil shock, place-making, Ponzi scheme, risk/return, road to serfdom, Silicon Valley, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas L Friedman, urban planning, urban renewal, Washington Consensus, World Values Survey, young professional

Hayek’s spontaneous order was related to an idea that was already a mainstream concept in economics—general equilibrium—which held that a system of uncontrolled markets in every possible consumer or producer product would be a self-regulating system that reconciled supply and demand in every market, with nobody in charge.45 Kenneth Arrow summed it all up in a sentence that sounds a lot like Hayek: “The notion that through the workings of an entire system effects may be very different from, and even opposed to, intentions is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes.”46 Lawrence Summers, a Harvard economist who was treasury secretary under Bill Clinton (and coincidentally Kenneth Arrow’s nephew), wrote about Hayek: “What’s the single most important thing to learn from an economics course today? What I tried to leave my students with is the view that the invisible hand is more powerful than the [un]hidden hand.

The general minority problem would later become well known with examples like the Tutsis, Bosnian Muslims, Kurds, Tibetans, Darfuris, and many others. But there was more to the risk that nationalism posed for freedom than just its threat to ethnic minorities. What exactly did the goal of “national development” mean? It could not make sense as just a unified aspiration of all individuals, when individuals have so many different goals of their own. Indeed, another Nobel laureate, Kenneth Arrow, was to demonstrate a famous “impossibility theorem” in 1950, showing that no method can exist to rank the choices of a collection of individuals in a way that satisfies the most elementary common-sense rules for consistency and coherence. Hayek was blunt that a “national goal” just covered up the fact that some goals for some groups were attained at the expense of other goals for other groups.

Tacit knowledge is the kind of trained and mostly unconscious knowledge needed, for example, to ride a bicycle—it does not work to follow a recipe on how to balance and turn the pedals. Economics examples include on-the-job learning, which is the main reason workers’ earnings rise with experience. Even purely technical solutions often require experience with that technology, in particular times and places, to fix the bugs. Tacit knowledge can only be gained through what Kenneth Arrow later called “learning by doing.” Tacit knowledge can certainly not be accessed by centralized problem-solvers. For Hayek, the advantages of a spontaneous order of free individuals is that it creates the incentives for individuals to utilize their own localized or tacit knowledge, without any need for anyone else to access it. For private goods, the prices and markets coordinate all the decisions of individuals based on their idiosyncratic knowledge in a way that top-down plans could never do.


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, Alvin Roth, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, corporate raider, 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, information asymmetry, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, Kenneth Arrow, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, ought to be enough for anybody, 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

The cost of shopping around—even if it is tiny by comparison with the value of the purchase—can prevent competitive forces from breaking out. Each seller is a little monopolist. Because of the buyers’ cost of searching, the merchants make a large profit. Big effects can come from small transaction costs. Today’s economics has the problem of information at its core. The “biggest new concept in economics in the last thirty years,” Kenneth Arrow said in 2000, “is the development of the importance of information, along with the dispersion of information.”4 Two kinds of market frictions arise from the uneven supply of information. There are search costs: the time, effort, and money spent learning what is available where for how much. And there are evaluation costs, arising from the difficulties buyers have in assessing quality. A successful market has mechanisms that hold down the costs of transacting that come from the dispersion of information.

According to the survey, less than a fifth of serious disputes with suppliers were ending up in court. As a purchasing manager said, if an issue comes up, you telephone your counterpart “and deal with the problem. You don’t read legalistic clauses at each other if you ever want to do business again.”13 “The freedom and extent of human commerce depend entirely on a fidelity with regard to promises,” said David Hume in 1739. Two and a half centuries later, Kenneth Arrow said, “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time.” As a result, “much of the economic backwardness in the world can be explained by a lack of mutual confidence.”14 A well-designed market has a range of mechanisms to build mutual confidence. Contracting rests not only on the courts but also on informal devices based on reputation.

Léon Walras took the first big step toward answering this question in the late nineteenth century, formulating a mathematical model of an economy in which, for each good or service in the economy, there was an equation representing the balance of supply and demand. Walras left unanswered the key question of whether it was possible for supply to equal demand simultaneously in every market. This stayed unresolved until 1954, when Kenneth Arrow and Gerard Debreu, in a densely mathematical article that was to earn them Nobel Prizes, “confirmed the internal logical consistency of Smith’s and Walras’s model of the market economy” (to quote the Nobel committee).11 One of the supreme achievements of economics, the Arrow-Debreu theory identifies certain precise conditions under which individuals’ separate decisions add up to a consistent overall outcome.


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

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affirmative action, banking crisis, Berlin Wall, Bretton Woods, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, labour market flexibility, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Ponzi scheme, price stability, rent control, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

Columbia and Chicago were perhaps the two leading American academic centers in economics in the mid-1930s. Columbia was home of the retired John Bates Clark—the most esteemed economist America had produced—Wesley Mitchell, Hotelling, and John Maurice Clark, son of John B. Clark. Like Mitchell, John Maurice Clark had studied and taught at Chicago. Friedman says that Hotelling “undoubtedly influenced me most”14 in the year at Columbia. Hotelling, primarily a mathematician, has been described by Kenneth Arrow, a student and future Nobel laureate, as a “creative thinker in both mathematical statistics and economics.”15Friedman remembers Hotelling as “concise, rigorous, and lucid.... [H]e also had an extraordinary instinct for picking problems and making contributions of the greatest practical importance.”16 Friedman describes the active leaders in economics at Columbia in this way: “Hotelling did for mathematical statistics what Jacob Viner had done for economic theory: revealed it to be an integrated logical whole, not a set of cook-book recipes....Wesley C.

According to Lester Telser, now the senior continuous member of the faculty in the Department of Economics, who came to Chicago as a research assistant on the Cowles Commission in 1952: “While Cowles was here, the economics of Chicago was unparalleled in the world. I would say it was the leading center in economics. No one else even came close.”3 The only comparable gathering of scholars, according to Telser, was the Niels Bohr Institute of Physics in Copenhagen. According to Nobel laureate Kenneth Arrow, who was also at Chicago with the Cowles Commission, a “truly exceptional group of people was assembled in Chicago during the late 1940s. I doubt that such a group could ever be put together again in economics.”4 Here Arrow is not referring to the economists of Friedman’s perspective. Friedman wrote that he, as well as the rest of the economics department, significantly benefited from the location of Cowles at Chicago.

Christ, “The Cowles Commission’s Contributions to Econometrics at Chicago, 1939–1955,” Journal of Economic Literature (March 1994), for the perspective of a participant. Daniel Bell and Irving Kristol (eds.), The Crisis in Economic Theory (New York: Basic Books, 1981), is an excellent snapshot of where the economics profession was at that time. Contributors include, in addition to the editors, Kenneth Arrow, Peter Drucker, and Allan Meltzer. Friedman, though he does not contribute an essay, is the most discussed contemporaneous economist. James Dean notes in his essay that behind Friedman’s idea of a fixed rule for monetary growth is a “fundamental premise of pre-Keynesian laissez faire economics, namely that the private sector is self-stabilizing. Real-world instability results primarily from the fiscal, monetary, and regulatory actions of government.


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, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, Chuck Templeton: OpenTable, clean water, conceptual framework, constrained optimization, continuous double auction, creative destruction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, 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, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, winner-take-all economy

As with Samuelson, they focused on questions that were central to the development of economics as a science, but not necessarily for the reasons you might think—not just because they intended to advance the field of economics but because they were looking for challenging problems to solve, and to solve them first. It turned out that some of the fundamental building blocks of the discipline provided exactly the tough nuts they were after. One of the foremost among this postwar group was Kenneth Arrow, a brilliant mathematical mind in search of hard economics problems to solve. And he helped solve some of the hardest, all of which related in one way or another to Radford’s experiences in Stalag VII-A. But there is a difference between Radford’s observation of a particular market and what Arrow and his colleagues accomplished: the mathematical modeling of the general idea of a market. Arrow was born in New York City on August 23, 1921—another child of the Great Depression.

At the Toulouse School of Economics, where he has worked since 1996, graduate students joked that there must be a dozen little Jean Tiroles hidden in his basement writing the manuscripts, given the rate at which they appeared. Tirole wrote the book, quite literally, on industrial organization, the field within economics that aims to understand why markets are organized as they actually appear—why some industries consist of two dominant players (like Coke and Pepsi), while others more closely resemble Kenneth Arrow’s perfectly competitive ideal. You can only confront these questions if you consider the strategic choices companies like Microsoft or Coke might make to try to ensure they’re the only game in town, and the regulatory decisions an enlightened government might choose to make sure they aren’t. Tirole’s Theory of Industrial Organization remains the standard reference on the topic, despite being published nearly three decades ago.

We’d also like to thank Benjamin Adams, our editor, and his colleagues at PublicAffairs, including Melissa Veronesi, our project manager, Kate Mueller, our copyeditor (who saved us from more than one embarrassing mistake), and Tony Forde, our publicist. We’d also like to thank Iain Campbell, our publisher in the United Kingdom, and his team at John Murray. We’d like to thank the following people who read the manuscript, or parts of it, or who graciously agreed to talk with us about ideas in the book: George Akerlof, Kenneth Arrow, Pierre Azoulay, Seth Dicthick, Frank Dobbin, Ben Edelman, Teppo Felin, Ronald Findlay, Todd Fitch, Margo Beth Fleming, Walter Frick, Joshua Gans, Ed Glaeser, Andrei Hagiu, Matthew Kahn, Judd Kessler, Barbara Kiviat, Scott Kominers, Ilyana Kuziemko, Kevin Li, Roger Martin, Eric Maskin, Dan McGinn, Ben Olken, Joel Podolny, Jeff Pontiff, Canice Prendergast, Paul Romer, Marc Rysman, Peng Shi, Paolo Siconolfi, Paulo Soumaini, Michael Spence, Kendall Sullivan, Morgan Sword, Steve Tadelis, Jonas Vlachos, Ania Wieckowski, and Feng Zhu.


pages: 998 words: 211,235

A Beautiful Mind by Sylvia Nasar

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Al Roth, Albert Einstein, Andrew Wiles, Brownian motion, cognitive dissonance, Columbine, experimental economics, fear of failure, Gunnar Myrdal, Henri Poincaré, invisible hand, Isaac Newton, John Conway, John Nash: game theory, John von Neumann, Kenneth Arrow, Kenneth Rogoff, linear programming, lone genius, market design, medical residency, Nash equilibrium, Norbert Wiener, Paul Erdős, Paul Samuelson, prisoner's dilemma, RAND corporation, Ronald Coase, second-price auction, Silicon Valley, Simon Singh, spectrum auction, The Wealth of Nations by Adam Smith, Thorstein Veblen, upwardly mobile, zero-sum game

” — Paul Trachtman, Smithsonian Magazine “Presented with grace and skill.” — Brian Hayes, The Sciences “A must-read with something for everyone.” — Keith Devlin, New Scientist “Fascinating, complicated, and studious.” — Mark H. Fleisher, JAMA “A deeply moving love story, an account of the centrality of human relationships.” — Richard Wyatt and Kay Jamison, The New England Journal of Medicine “A gripping narrative.” — Kenneth Arrow, Nobel Laureate, The Times Higher Education Supplement Simon & Schuster Paperbacks A Division of Simon & Schuster, Inc. 1230 Avenue of the Americas New York, NY 10020 www.SimonandSchuster.com Copyright © 1998 by Sylvia Nasar All rights reserved, including the right of reproduction in whole or in part in any form. Cover Art © 2001 by Universal Studios Publishing Rights, a Division of Universal Studios Licensing, Inc.

At that point, the military was the only government sponsor of pure research in the social sciences — a role later taken over by the National Science Foundation — and it bankrolled a great many ideas that turned out to have little true relevance for the military but a great deal for other endeavors. RAND attracted a younger generation of mathematically sophisticated economists who embraced the new methods and tools, including the computer, and attempted to turn economics from a branch of political philosophy into a precise, predictive science. Take Kenneth Arrow, one of the early Nobel Laureates in economics. When Arrow came to RAND in 1948, he was an unknown youngster.17 His famous thesis, written in the as-yet-unfamiliar language of symbolic logic, was a product of a RAND assignment. The assignment was to demonstrate that it was okay to apply game theory, which is formulated in terms of individuals, to aggregations of many individuals, namely nations.

Williams convinced the Air Force to let RAND create two new divisions, economics and social science. By the time Nash arrived, a “trust” of game theory research had grown up at RAND including such game theorists as Lloyd S. Shapley, J. C. McKinsey, N. Dalkey, F. B. Thompson, and H. F. Bohnenblust, such pure mathematicians as John Milnor, statisticians David Blackwell, Sam Karlin, and Abraham Girschick, and economists Paul Samuelson, Kenneth Arrow, and Herbert Simon.13 Most of the RAND military applications of game theory concerned tactics. Air battles between fighters and bombers were modeled as duels.14 The strategic problem in a duel is one of timing. For each opponent, having the first shot maximizes the chance of a miss. But having the better shot also maximizes the chance for being hit. The question is when to fire. There’s a tradeoff.


pages: 500 words: 145,005

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

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3Com Palm IPO, Albert Einstein, Alvin Roth, 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, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, Paul Samuelson, 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, Vilfredo Pareto, Walter Mischel, zero-sum game

As if One of the most prominent of the putdowns had only two words: “as if.” Briefly stated, the argument is that even if people are not capable of actually solving the complex problems that economists assume they can handle, they behave “as if” they can. To understand the “as if” critique, it is helpful to look back a bit into the history of economics. The discipline underwent something of a revolution after World War II. Economists led by Kenneth Arrow, John Hicks, and Paul Samuelson accelerated an ongoing trend of making economic theory more mathematically formal. The two central concepts of economics remained the same—namely, that agents optimize and markets reach a stable equilibrium—but economists became more sophisticated in their ability to characterize the optimal solutions to problems as well as to determine the conditions under which a market will reach an equilibrium.

In October 1985, two University of Chicago Graduate School of Business professors—Robin Hogarth, a psychologist, and Mel Reder, an economist—organized a conference at the University of Chicago, home of many ardent defenders of the traditional way of doing economics. Rationalists and behavioralists were to come together and try to sort out whether there was really any reason to take psychology and behavioral economics seriously. If anyone had been laying odds on who would win this debate, the home team would have been considered the strong favorite. The behavioral team was led by Herb Simon, Amos, and Danny, and was buttressed by Kenneth Arrow, an economic theorist who, like Paul Samuelson, deserved to win several Nobel Prizes in economics, though he had to settle for just one. The younger behavioral crowd, which included Bob Shiller, Richard Zeckhauser, and me, were given speaking roles as discussants. The rationalists’ team was formidable, with Chicago locals serving as team captains: Robert Lucas and Merton Miller. Eugene Fama and my thesis advisor, Sherwin Rosen, were given the roles of panel moderators, but were clearly part of the Chicago-based rationalists’ side.

The economists thought that fairness was a silly concept mostly used by children who don’t get their way, and the skeptics just brushed aside our survey data. The Ultimatum Game experiments were a bit more troubling, since actual money was at stake, but of course it wasn’t all that much money, and all the usual excuses could be raised. The talk that gave me the most to think about, and the one I have gone back to read again most often, was by Kenneth Arrow. Arrow’s mind goes at light speed, and his talks tend to be highly layered fugues, with digressions inserted into digressions, sometimes accompanied by verbal footnotes to obscure scholars from previous centuries, followed by a sudden jump up two or three levels in the outline that he has in his head. While you work to digest a profound nugget disguised as a throwaway line, he has leapt back to the main argument and you are left scrambling to catch up.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

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Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, stochastic process, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

The investor’s sensitivity to changing wealth and risk is known as the utility function, and the elements that determine the shape of the utility function are obscure. As Roy put it, “A man who seeks advice about his actions will not be grateful for the suggestion that he maximize his expected utility.”19 The complexity of the subject has attracted the attention of some of the best thinkers of our time, including Kenneth Arrow, a Nobel Prize-winner, and Oskar Morgenstern and John von Neumann, famous for having invented game theory. But this is not the only feature of the Markowitz paradigm with controversial implications. The calculation of the Efficient Frontier is a task that would defy the abilities and capabilities of many investors, and even the capacities of many computers. so it is fair to ask whether the relationship between risk and return is as neat as Markowitz postulates.

As he himself has described it: “The mathematics of the continuous-time model contains some of the most beautiful applications of probability and optimization theory. But, of course, not all that is beautiful in science need also be practical. And surely, not all that is practical in science is beautiful. Here we have both.”19 Although it bears an unmistakable resemblance to the Capital Asset Pricing Model, Merton’s theory has philosophical roots in the work of Kenneth Arrow and Gerard Debreu, both Nobel Prize winners. Arrow and Debreu describe a world in which everything is tradable, from the value of an education to the housewife’s ironing of the family sheets, and under an infinite variety of conditions, or “states of nature.” The continuous-time model provides a framework for converting such “pure” securities into a form that will permit them to be traded. Merton also pays his respects to Bachelier’s “magnificent dissertation on the theory of speculation.”20 On the more practical side, Merton incorporates into his theoretical structure the institutional functions and risk-taking activities of financial intermediaries such as banks and mutual funds.

This fascination with diversity is evident in Rosenberg’s investigations of the interaction of diverse investors and diverse securities within various groupings. He graduated from Berkeley in the class of 1963 with a degree in economics. While still a senior, he was fortunate enough to take Gerard Debreu’s graduate course sequences in statistics, economics, and mathematical economics. Debreu was already a distinguished scholar who would subsequently be awarded the Nobel Prize in economic sciences for his work with Kenneth Arrow in these areas. Rosenberg went on to earn a master’s degree in mathematical economics and econometrics at the London School of Economics. He continued to pursue those studies while working for his doctorate at Harvard. Econometrics in particular caught his fancy; this was the field of study that Alfred Cowles had helped to launch and that brings sophisticated statistical techniques to the measurement of economic variables.


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, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, working-age population, World Values Survey

This is only a theoretical solution, though. In reality, the market will not necessarily find this equilibrium because there is always trading going on at the wrong prices. This trading at offequilibrium prices can take the economy away from the equilibrium and there is no guarantee that equilibrium will be reached or that it will be optimal in some sense (Screpanti and Zamagni 1993). Nobel Memorial Prize winners Kenneth Arrow and Gerard Debreu later were able to prove that under certain conditions a unique equilibrium did exist (Arrow and Debreu 1954), with these conditions later taking the unwieldy moniker of the “Sonnenschein–Mantel–Debreu theorem” better known to postgraduate students as the “SMD conditions.” However, this proof of equilibrium should rather have been recorded as proof of its non-existence because the conditions are extremely demanding and hardly ever fulfilled in reality.

In 1951, it received almost a third of its funds from RAND and another quarter from the Office of Naval Research. According to Mirowski (2002), it was RAND who pushed the Commission to abandon (unsuccessful) efforts to find empirical evidence for neoclassical theory in favor of an THE ECONOMICS OF THE POWERFUL 23 abstract axiomatic approach pursued by RAND scholar and later Nobel Memorial Prize laureate Kenneth Arrow, against substantial resistance from its members. In 1953, Oskar Morgenstern proposed in a letter that it should be a requirement for membership in the Econometric Society (Econometrics is the statistical study of economic behavior) that a researcher had come “in one way or another in actual contact with data.” This proposal was defeated by procedural maneuvers despite its widespread support in the Society (Mirowski 2002).

The other major influence of RAND on economic doctrine was through its support of the rational choice movement from the very beginning, which laid the foundation for the strictly individualistic approach of the modern economic mainstream. Several of the canonical works of the rational choice approach to economics and politics were devised either at RAND or in close association with its researchers. The most notable one is Kenneth Arrow’s Social Choice and Individual Values (1951), containing his famous impossibility theorem. It is one of the most often cited modern texts in economics. Other examples are An Economic Theory of Democracy (1957) by Arrow’s student Anthony Downs and Mancur Olson’s The Logic of Collective Action (1965). The link to RAND is somewhat more tenuous but still existent for Nobel Memorial Prize laureate James Buchanan and his Calculus of Consent (1962), written together with Gordon Tullock (Amadae 2003).


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, endogenous growth, 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 - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), 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, zero-sum game

The adjustments made in these early estimates fall short of the ideal—improvements in human capital due to improved health are left out, as are losses of fish stocks—but it is certainly the avenue to pursue. Kirk Hamilton and Michael Clemens (1999) and the World Bank (2006) estimated comprehensive investment in the period 1970–2000 in over 120 countries. Their analysis is inevitably preliminary. Still, it is a start. Kenneth Arrow and his coauthors (2007) also used estimates of comprehensive wealth and concluded that economic development had gone backward in a large number of developing countries in the years 1970–2000. China was one exception; other countries, including India and Pakistan, had seen total comprehensive wealth rise, but not in per capita terms because of their high rates of population growth. In developing countries, the aim is not to demand less consumption by people who are very poor, but to seek better policies and economic institutions so that their use of resources is more productive.

James Buchanan, one of the originators of public choice theory, put it this way: he noted that the focus in economics tends to be on choices by individuals, whereas seeing the economy through the lens of contracts between people is equally illuminating.8 Another conclusion is therefore that the “market versus government” opposition is not a fruitful way to think about what institutional framework for the economy is best, and we should also consider households, firms, and perhaps other organizational types such as co-ops or residents’ associations. Kenneth Arrow said: “Truly among man’s innovations, the use of organization to accomplish his ends is among both his greatest and his earliest.”9 The literature of institutional economics is rich with examples of how collective arrangements of many kinds evolve in different contexts. Two key aspects of the context are the regulatory framework and the availability of information and in particular asymmetries of information—things that some people do know and others can’t know.

Indeed, there seems to be a pattern of swings from periods of inequality and social tension, coinciding with innovation and a dynamic economy (the 1870s, 1920s, 1960s) to periods of sobriety and cohesion (1890s, 1930s, 1970s). If there is a “trilemma,” which means only two of the three elements of social welfare are attainable at the same time, this chimes with a wider “impossibility theorem” in social welfare theory. Famously, in 1951 economist Kenneth Arrow asked whether individual tastes and preferences could be aggregated in a way that was logically consistent, obeying a set of seemingly innocuous conditions—and concluded that the answer was “no.” Among the assumptions were that citizens had free choice and a range of credible alternatives before them. Each individual in the society (or equivalently, each “decision criterion”) is assumed to assign a particular order of preferences to the set of possible outcomes.


pages: 309 words: 78,361

Plenitude: The New Economics of True Wealth by Juliet B. Schor

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Asian financial crisis, big-box store, business climate, carbon footprint, cleantech, Community Supported Agriculture, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, decarbonisation, dematerialisation, demographic transition, deskilling, Edward Glaeser, en.wikipedia.org, Gini coefficient, global village, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Joseph Schumpeter, Kenneth Arrow, knowledge economy, life extension, McMansion, new economy, peak oil, pink-collar, post-industrial society, prediction markets, purchasing power parity, ride hailing / ride sharing, Robert Shiller, Robert Shiller, sharing economy, Simon Kuznets, single-payer health, smart grid, The Chicago School, Thomas L Friedman, Thomas Malthus, too big to fail, transaction costs, Zipcar

That’s where nature is truly of infinite value, and therefore infinitely costly to degrade, an observation that is starting to appear in the economics literature. If we continue to compromise atmosphere, climate, water, and other species, we jeopardize life itself. In 2004 what many had hoped would be a breakthrough paper was published by The Journal of Economic Perspectives. A collaboration of some of the world’s most distinguished environmental economists and ecologists, such as Kenneth Arrow, Partha Dasgupta, Lawrence Goulder, Paul Ehrlich, Stephen Schneider, and Gretchen Daily, asked a question that had been off the table since the debate about limits: “Are we consuming too much?” This type of collaboration itself was rare (perhaps a first). The paper stayed within the standard economic framework that takes human well-being as the ultimate goal, and asked if we are consuming too much either to reproduce today’s levels of well-being into the future or to maximize well-being.

.: Process Publishers. Crawford, Matthew B. 2009. The case for working with your hands. The New York Times Magazine, May 21. Available from http://www.nytimes.com/2009/05/24/magazine/24labor-t.html (accessed September 7, 2009). Daily, Gretchen C. 1997. Nature’s services: Societal dependence on natural ecosystems. Washington, D.C.: Island Press. Daily, Gretchen C., Tore Soderqvist, Sara Aniyar, Kenneth Arrow, Partha Dasgupta, Paul R. Ehrlich, Carl Folke, et al. 2000. The value of nature and the nature of value. Science 289 (5478) (July 21): 395-96. Daly, Herman E. 2005. Economics in a full world. Scientific American 293 (3) (September): 100-107. ———. 1996. Beyond growth: The economics of sustainable development. Boston: Beacon Press. ———. 1977. Steady-state economics: The economics of biophysical equilibrium and moral growth.


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

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activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

Such a study would do the following: • Train students to think about theory not as an absolute model but as multiple, often competing perspectives on how economic relations can be understood. • Give explicit consideration to human desires, how they affect our behavior, and how this in turn affects economic decisions. • Focus on an understanding of institutions, the checks and balances that regulate economic relations. A market of buyers and sellers needs some degree of trust if it is to thrive. The economist and Nobel laureate Kenneth Arrow pointed out that “ethical elements enter in some measure into every contract; without them no market could function.” He also noted that “trust and similar values, loyalty or truth telling, are … not commodities for which trade on the open market is technically possible or even meaningful.”44 In finance, we would do well to note this. We are all aware of fundamental human needs where economics doesn’t help.

Citation can be found at www.theinvisiblegorilla.com/biographies.html. 40. The video can be accessed at www.youtube.com/watch?v=IGQ mdoK_ZfY. 41. As leading participants in the corporate governance movement that encouraged some of these actions, the authors themselves must accept some of the blame for encouraging this form of contracting. 42. Smith, Wealth of Nations, bk. 5, chap 1. 43. Alfred Marshall, Principles of Economics (Macmillan, 1946), 303. 44. Kenneth Arrow, Information and Economic Behaviour (Federation of Swedish Industries, 1973), 24. For discussion, see O. Williamson, The Economic Institutions of Capitalism (Free Press, 1985), 405. 45. John R. Hicks, “ ‘Revolutions’ in Economics,” in Spiro J. Latsis, ed., Method and Appraisal in Economics (Cambridge University Press, 1976), 207–18. Quoted in Williamson, 386. 46. In his words, “Organisations, markets and economies are not just like evolutionary systems, they truly, literally are evolutionary systems.”


pages: 678 words: 216,204

The Wealth of Networks: How Social Production Transforms Markets and Freedom by Yochai Benkler

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affirmative action, barriers to entry, bioinformatics, Brownian motion, call centre, Cass Sunstein, centre right, clean water, commoditize, dark matter, desegregation, East Village, fear of failure, Firefox, game design, George Gilder, hiring and firing, Howard Rheingold, informal economy, invention of radio, Isaac Newton, iterative process, Jean Tirole, jimmy wales, John Markoff, Kenneth Arrow, market bubble, market clearing, Marshall McLuhan, New Journalism, optical character recognition, pattern recognition, peer-to-peer, pre–internet, price discrimination, profit maximization, profit motive, random walk, recommendation engine, regulatory arbitrage, rent-seeking, RFID, Richard Stallman, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, shareholder value, Silicon Valley, Skype, slashdot, social software, software patent, spectrum auction, technoutopianism, The Fortune at the Bottom of the Pyramid, The Nature of the Firm, transaction costs, Vilfredo Pareto

Because no competitors are permitted into the market for copies of War and Peace, the publishers can price the contents of the book or journal at above their actual marginal cost of zero. They can then turn some of that excess revenue over to Tolstoy. Even if these laws are therefore necessary to create the incentives for publication, the market that develops based on them will, from the technical economic perspective, systematically be inefficient. As Kenneth Arrow put it in 1962, "precisely to the extent that [property] is effective, there is underutilization of the information." 7 Because welfare economics defines a market as producing a good efficiently only when it is pricing the good at its marginal cost, a good like information (and culture and knowledge are, for purposes of economics, forms of information), which can never be sold both at a positive (greater than zero) price and at its marginal cost, is fundamentally a candidate for substantial nonmarket production. 80 This widely held explanation of the economics of information production has led to an understanding that markets based on patents or copyrights involve a trade-off between static and dynamic efficiency.

The full statement was: "[A]ny information obtained, say a new method of production, should, from the welfare point of view, be available free of charge (apart from the costs of transmitting information). This insures optimal utilization of the information but of course provides no incentive for investment in research. In a free enterprise economy, inventive activity is supported by using the invention to create property rights; precisely to the extent that it is successful, there is an underutilization of information." Kenneth Arrow, "Economic Welfare and the Allocation of Resources for Invention," in Rate and Direction of Inventive Activity: Economic and Social Factors, ed. Richard R. Nelson (Princeton, NJ: Princeton University Press, 1962), 616-617. 8. Suzanne Scotchmer, "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives 5 (1991): 29-41. 9. Eldred v. Ashcroft, 537 U.S. 186 (2003). 10.

Titmuss also attacked the U.S. system as inequitable, arguing that the rich exploited the poor and desperate by buying their blood. He concluded that an altruistic blood procurement system is both more ethical and more efficient than a market system, and recommended that the market be kept out of blood donation to protect the "right to give." 31 Titmuss's argument came under immediate attack from economists. Most relevant for our purposes here, Kenneth Arrow agreed that the differences in blood quality indicated that the U.S. blood system was flawed, but rejected Titmuss's central theoretical claim that markets reduce donative activity. Arrow reported the alternative hypothesis held by "economists typically," that if some people respond to exhortation/moral incentives (donors), while others respond to prices and market incentives (sellers), these two groups likely behave independently--neither responds to the other's incentives.


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, information asymmetry, invention of movable type, John Nash: game theory, John von Neumann, Kenneth Arrow, market design, Martin Wolf, moral hazard, new economy, Pearl River Delta, 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

Few people foresaw the later collapse of government-run economies, whether vast like the Soviet Union and China, or small like Tanzania or North Korea. But even if they had believed that private markets were more efficient, this was neither here nor there in the 1940s: the postwar Labour government in Britain would have been content to live with some inefficiency if it meant a fairer society. But the old dilemma between efficiency and fairness was about to be shattered by a young New Yorker called Kenneth Arrow, who knew all about unfairness after watching helplessly as a teen-ager while his father lost his successful business and all his savings in the Great Depression. The desire for social justice stayed with Arrow, but intellectually he couldn’t just ignore the question of efficiency. The young economist set his logical mind to wrestling with the tension between the unerring efficiency of the free market and the imperative that some kind of fairness should prevail.

Perhaps taxing Chamberlain’s income heavily would make the situation fairer, but Nozick warns that if Chamberlain did not really enjoy playing basketball and he was loaded down with heavy taxes, he might stop playing altogether. So although this situation might seem more “fair,” there would be neither the tax revenue, nor the basketball game: the problem of the cappuccino sales tax all over again. So how is it reasonable to call a distribution of income “fair” when everybody concerned, both fans and player, would prefer the “unfair” outcome? Thanks to Kenneth Arrow, we now know that, when faced with a modern-day sports star like Tiger Woods, the solution is • 75 • T H E U N D E R C O V E R E C O N O M I S T to levy a one-time lump-sum tax of several million dollars on him. He would still have the incentive to earn money by playing golf, since he could not avoid the tax by playing less, as he would have to do in order to avoid a heavy income tax. He would no doubt earn enough to pay off the tax bill and still retain enough to buy a family car and a nice house somewhere unassuming.


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Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

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3D printing, additive manufacturing, Affordable Care Act / Obamacare, AI winter, algorithmic trading, Amazon Mechanical Turk, artificial general intelligence, assortative mating, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Bernie Madoff, Bill Joy: nanobots, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chris Urmson, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, computer age, creative destruction, debt deflation, deskilling, diversified portfolio, Erik Brynjolfsson, factory automation, financial innovation, Flash crash, Fractional reserve banking, Freestyle chess, full employment, Goldman Sachs: Vampire Squid, Gunnar Myrdal, High speed trading, income inequality, indoor plumbing, industrial robot, informal economy, iterative process, Jaron Lanier, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kenneth Arrow, Khan Academy, knowledge worker, labor-force participation, labour mobility, liquidity trap, low skilled workers, low-wage service sector, Lyft, manufacturing employment, Marc Andreessen, McJob, moral hazard, Narrative Science, Network effects, new economy, Nicholas Carr, Norbert Wiener, obamacare, optical character recognition, passive income, Paul Samuelson, performance metric, Peter Thiel, Plutocrats, plutocrats, post scarcity, precision agriculture, price mechanism, Ray Kurzweil, rent control, rent-seeking, reshoring, RFID, Richard Feynman, Richard Feynman, Rodney Brooks, secular stagnation, self-driving car, Silicon Valley, Silicon Valley startup, single-payer health, software is eating the world, sovereign wealth fund, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Steven Pinker, strong AI, Stuxnet, technological singularity, telepresence, telepresence robot, The Bell Curve by Richard Herrnstein and Charles Murray, The Coming Technological Singularity, The Future of Employment, Thomas L Friedman, too big to fail, Tyler Cowen: Great Stagnation, union organizing, Vernor Vinge, very high income, Watson beat the top human players on Jeopardy!, women in the workforce

Many people would like to believe that health care is a normal consumer market: if only we could get insurance companies, and especially the government, out of the way and instead push decisions and costs onto the consumer (or patient), then we’d get innovations and outcomes similar to what we’ve seen in other industries (Steve Jobs might be mentioned again here). The reality, however, is that health care is simply not comparable to other markets for consumer products and services, and this has been well understood for over half a century. In 1963, the Nobel laureate economist Kenneth Arrow wrote a paper detailing the ways in which medical care stands apart from other goods and services. Among other things, Arrow’s paper highlighted the fact that medical costs are extremely unpredictable and often very high, so that consumers can neither pay for them out of ongoing income nor effectively plan ahead as they might for other major purchases. Medical care can’t be tested before you buy it; it’s not like visiting the wireless store and trying out all the smart phones.

In either scenario, moving aggressively toward an accountable care model might be a vital part of the solution. Both of these approaches, in various combinations, are used successfully by other advanced countries. The bottom line is that a pure “free market” approach in which we cut government out of the loop and expect patients to operate like consumers shopping for groceries or smart phones is never going to work. As Kenneth Arrow pointed out over fifty years ago, health care is simply different. This is not to say that there are no significant dangers associated with either approach. Both strategies rely on regulators to either control premiums or set the prices paid to providers. There is an obvious risk of regulatory capture; powerful companies or industries may exert influence that bends government policy in their favor.


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, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, 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%, wealth creators, women in the workforce, zero-sum game

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. At the time, it was still thought that there were major trade-offs between inequality and growth, and Jim Mirrlees was just then beginning his work on how one could design optimal redistributive taxes (work for which he would later receive the Nobel Prize). Another of my teachers at MIT (and then a fellow visitor at Cambridge in 1969–70) was Kenneth Arrow, whose work on information greatly influenced my thinking. Later, his work, paralleling my own, would focus on the impact of discrimination; how information, say about relative abilities, affects inequality; and the role of education in the whole process. A key issue that I touch upon in this volume is the measurement of inequality. This turns out to raise theoretical issues that are closely akin to the measurement of risk, and my early work, four decades ago, was done jointly with Michael Rothschild.

Craig Romaine, “Preserving Monopoly: Economic Analysis, Legal Standards, and Microsoft,” George Mason Law Review 4, no. 7 (1999): 617–1055. 38. See Microsoft’s annual report. 39. As the late Oxford professor and Nobel Prize winner John Hicks said, “The best of all monopoly profits is a quiet life.” J. R. Hicks, “Annual Survey of Economic Theory: The Theory of Monopoly,” Econometrica 1, no. 8 (1935). Kenneth Arrow pointed out that because monopolists restrict production, the saving they get from reducing costs is diminished. See Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton: Princeton University Press, 1962), pp. 609–26. Monopolies, of course, don’t last forever: new technologies and the open-source movement are already beginning to challenge Microsoft’s dominance. 40.

In fact, there is little evidence that there would be serious “moral hazard consequences” even of a generous program to help homeowners. Shaun Donovan, secretary of the Department of Housing and Urban Development, argues that “only about 10 or 15 percent of Americans who can still pay their mortgages try to walk away from their debt.” Ibid. The general theory of moral hazard was developed in the midsixties and seventies by Arrow, Mirrlees, Ross, and Stiglitz. See, e.g., Kenneth Arrow, Aspects of the Theory of Risk Bearing (Helsinki, Finland: Yrjö Jahnssonin Säätiö, 1965); James Mirrlees, “The Theory of Moral Hazard and Unobservable Behaviour I,” Review of Economic Studies 66, no. 1 (1999): 3–21; S. Ross, “The Economic Theory of Agency: The Principal’s Problem,” American Economic Review 63, no. 2 (1973): 134–39; and J. E. Stig-litz, “Incentives and Risk Sharing in Sharecropping,” Review of Economic Studies 41, no. 2 (1974): 219–55.


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The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Albert Einstein, barriers to entry, Bayesian statistics, Bernie Madoff, Bob Noyce, Bonfire of the Vanities, business process, butterfly effect, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate raider, corporate social responsibility, creative destruction, deskilling, discounted cash flows, disintermediation, Donald Trump, family office, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, Gordon Gekko, hiring and firing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Whale, Long Term Capital Management, market fundamentalism, Menlo Park, new economy, obamacare, oil shock, pattern recognition, performance metric, Peter Thiel, Plutocrats, plutocrats, profit maximization, profit motive, pushing on a string, Ralph Nader, Ralph Waldo Emerson, RAND corporation, random walk, rent-seeking, Ronald Coase, Ronald Reagan, Sand Hill Road, Saturday Night Live, shareholder value, Silicon Valley, Skype, Steve Jobs, survivorship bias, The Nature of the Firm, the scientific method, Thorstein Veblen, union organizing, urban renewal, Vilfredo Pareto, War on Poverty, William Shockley: the traitorous eight, women in the workforce, Y Combinator

When describing the case method, the faculty also loves to trot out another chestnut, the so-called bias for action that the case method is supposed to imbue in its practitioners. “[More] often than not,” wrote Nohria in the same article as above, “managers are thrown into situations in which they must act quickly and without certainty. To quote economist Kenneth Arrow, in many situations, ‘we must simply act, fully knowing our ignorance of possible consequences.’” Likewise if the forecast calls for a 50 percent chance of rain, we must simply choose to take an umbrella or not, fully knowing our ignorance of possible weather. What Nohria is arguing is that the case method gives one the ability to choose how to proceed in a given situation. With all respect to Kenneth Arrow, most of us don’t need an economist to tell us that we don’t always know what’s going to happen next, and that we sometimes have to make a decision before we’d like to. That’s called life, and it hardly merits bragging about.

On the other hand, there was this feeling of bewilderment that the lives of so many men should add up to no more than two simple columns.”28 The late Robert Bellah, an influential sociologist and moral philosopher, points to flaws in rational choice theory, which originated at the RAND Corporation, found support from the Ford Foundation, and an enthusiastic practitioner in Robert McNamara, as the sources of McNamara’s failure. The theory, which assumes that social life can be explained as the outcome of rational choices by individual actors, found an early foothold in economics with Kenneth Arrow’s 1951 book, Social Choice and Individual Values, and it remains the dominant economic idea at the University of Chicago. But the theory didn’t come from economics departments. It originated at the RAND Corporation in response to the desire of policy makers to mathematically model the decisions the Soviet Union might make during the Cold War. But even in that context, argued Bellah, it had a fatal flaw.


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Against Intellectual Monopoly by Michele Boldrin, David K. Levine

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accounting loophole / creative accounting, agricultural Revolution, barriers to entry, cognitive bias, creative destruction, David Ricardo: comparative advantage, Dean Kamen, Donald Trump, double entry bookkeeping, en.wikipedia.org, endogenous growth, Ernest Rutherford, experimental economics, financial innovation, informal economy, interchangeable parts, invention of radio, invention of the printing press, invisible hand, James Watt: steam engine, Jean Tirole, John Harrison: Longitude, Joseph Schumpeter, Kenneth Arrow, linear programming, market bubble, market design, mutually assured destruction, Nash equilibrium, new economy, open economy, peer-to-peer, pirate software, placebo effect, price discrimination, profit maximization, rent-seeking, Richard Stallman, Silicon Valley, Skype, slashdot, software patent, the market place, total factor productivity, trade liberalization, transaction costs, Y2K

The idea that monopoly is necessary for innovation forms the foundation for a wide variety of economic models, ranging from general equilibrium models of monopolistic competition to micromodels of patents and patent races. The original theoretical argument was sketched by Allyn Young before the Second World War and developed in greater detail by Joseph Schumpeter during the war. The first formal treatment of the idea that competitive markets are intrinsically incapable of handling innovations can be found in writings by Kenneth Arrow and subsequently Karl Shell, published in the early and middle 1960s. In the second half of the 1980s, Robert Lucas, Paul Romer, and many followers used new analytical instruments to apply this P1: KNP head margin: 1/2 gutter margin: 7/8 CUUS245-07 cuus245 978 0 521 87928 6 May 21, 2008 16:55 Defenses of Intellectual Monopoly 159 point of view to the problem of economic development, creating a theory now known as the new growth theory.

A number of authors are references in the brief overview of the history of economic research on innovation. The conventional notion that ideas are a nonrivalrous public good is a major theme of Romer’s work (1986, 1990a, 1990b), and is reflected also in Lucas (1988). Variations on this theme in the setting of monopolistic competition can be found in the work of Grossman and Helpman (1991). These ideas build on the earlier ideas of Allyn Young (1928), and especially the work of Kenneth Arrow (1962), further developed by Karl Shell (1966, 1967). To give credit where it belongs, we should point out that Arrow’s original argument was meant to lead to the conclusion that R&D, because it produced a public good (nonrivalrous knowledge), ought to be financed by public expenditure. There is nothing in Arrow’s seminal paper, nor in his subsequent writings on the topic, that suggests he had in mind intellectual monopoly as a solution to the allocational inefficiency that he – in our view, incorrectly – detected in the production of knowledge.


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Finance and the Good Society by Robert J. Shiller

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Alvin Roth, 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, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, income inequality, information asymmetry, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, 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, zero-sum game, Zipcar

Then there was perhaps only one mathematician / option trader in the entire world; with no competition, he could make a fantastic pro t. But now such practitioners are so numerous—look at all the graduate programs in mathematical nance, or attend one of the Institute for Quantitative Research in Finance (Q Group) conferences—that they compete heavily against one another, thus bringing options prices closer to their fundamental values. Justifications for Derivatives Markets In a classic 1964 article, economic theorist Kenneth Arrow argued that a major source of economic ine ciency is the absence of markets for risks. 4 Financial theorist Stephen Ross made Arrow’s theory the raison d’être for options markets. In his 1976 article “Options and E ciency,” he argued that nancial options have a central place because an immense variety of useful complex contracts can be “ ‘built up’ as portfolios of simple options.”5 But in fact only a small fraction of our risks are traded in any derivatives markets.

The fallacy in the Joe Salesman argument is readily apparent to anyone trained in nance. Legal and nancial advisers who are committed to serving their customers’ interests will easily see through such a sales pitch, and will in fact warn their clients away from it. If we move to a world in which people have access to better nancial advice, then the options market could move closer to the ideal market initially envisioned by theorists like Kenneth Arrow and Stephen Ross. The market might even expand further in its usefulness, by aligning itself more squarely with the real interests of real people. Options could be created that represent genuine, personally signi cant risks to individuals, like the risks of a decline in home prices or a decline in career incomes. This would make derivatives such as options, even more clearly than they are today, instances of finance in the service of the good society.


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Bourgeois Dignity: Why Economics Can't Explain the Modern World by Deirdre N. McCloskey

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Admiral Zheng, agricultural Revolution, Albert Einstein, BRICs, British Empire, butterfly effect, Carmen Reinhart, clockwork universe, computer age, Corn Laws, creative destruction, dark matter, David Ricardo: comparative advantage, Donald Trump, Edward Lorenz: Chaos theory, endogenous growth, European colonialism, experimental economics, financial innovation, Fractional reserve banking, full employment, George Akerlof, germ theory of disease, Gini coefficient, greed is good, Howard Zinn, income per capita, interchangeable parts, invention of agriculture, invention of air conditioning, invention of writing, invisible hand, Isaac Newton, James Watt: steam engine, John Maynard Keynes: technological unemployment, John Snow's cholera map, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, long peace, means of production, Naomi Klein, New Economic Geography, New Urbanism, Paul Samuelson, purchasing power parity, rent-seeking, road to serfdom, Robert Gordon, Ronald Coase, Ronald Reagan, sceptred isle, Scientific racism, Scramble for Africa, Shenzhen was a fishing village, Simon Kuznets, Slavoj Žižek, spinning jenny, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, tulip mania, union organizing, Upton Sinclair, urban renewal, V2 rocket, very high income, working poor, World Values Survey, Yogi Berra

In the field of history the fullest telling the story of objectivism is Peter Novick's brilliant That Nobel Dream (1988). My own Rhetoric of Economics (1985a; 1998) tells a similar tale about economics. 2. Bailyn 2005, especially Chapter 1, "Politics and the Creative Imagination." 3. Mill 1843, p. 464. 4. "Samuelsonian" is an adjective for modern, American-style economics, which was originated by Paul A. Samuelson (b. 1915) and by his brother-in-law Kenneth Arrow (b. 1921), and announced in Samuelson's modestly entitled Ph.D. dissertation of 1947, The Foundations of Economic Analysis. It insists that every economic issue must be treated as a problem of constrained maximization by utility-seeking individuals. Samuelsonian economics is commonly called "neoclassical." But the term perpetuates an anachronism, since neoclassical economics names the much earlier new economics of the 1870s (Menger, Walras, Jevons), which was wider than Samuelsonian in method. 5.

The difference between the two writers can be explained by the periods that Mitch and Easterlin are studying. Lately human capital has become indubitably important. But around 1840 it’s hard to make the case that it was important for coal miners or cotton mill workers. Easterlin points out that the spread of technology is personal, in just the sense that the chemist and philosopher Michael Polanyi used the word in his book Personal Knowledge (1958), and quotes the economist Kenneth Arrow: “it seems to be personal contact that is most relevant in leading to. . . adoption” of a technique. 74 Technical knowledge is largely tacit, non-write-downable, and requires people quick on the uptake. Quickness of uptake-most relevant to recent years in which the technology to be taken up is so ample-can be encouraged by literacy. But it can also be discouraged by literacy, leading to a rote-learning bureaucracy hostile to innovation.

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, Gunnar Myrdal, haute couture, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, light touch regulation, 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, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, 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, Right to Buy, 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 new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, yield curve, yield management

Nader supporters could not get what they wanted, but they might have been able to get what they would have preferred. But to vote strategically, you must guess not just at the preferences of others, but at their own strategic behavior. Voting mechanisms have their own problems of incentive compatibility. Condorcet demonstrated two hundred years ago that majorities can easily be assembled for inconsistent proposals. Kenneth Arrow-coauthor of the Arrow-Debreu results-generalized this to an "impossibility theorem": no voting mechanism can derive consistent social preferences from conflicting views about how society should be organized. Arrow, who lives in California, must have recognized the practical force of his impossibility theorem as the lights flickered and faded. The Culture and Prosperity { 101} electricity blackouts in California in 2000 and 2001 15 occurred because no voting system could prevent the California electorate from simultaneously demanding low electricity prices and no new generating plants while using ever increasing amounts of electricity. 16 This doesn't mean that politics is impossible.

As Mankiw himself observes, quoting Paul Samuelson, the most successful of all writers of economics textbooks: "I don't care who writes a nation's laws, or crafts its advanced treaties, if I can write its economics textbooks." 23 (This is before Mankiw took a position in the Bush administration.) Current Policy Controversies ••••••••••••••••••••••••••••••••••••• But a majority of working economists-including the leaders of the neoclassical tradition, such as Kenneth Arrow and Paul Samuelsonwere, like most social scientists, predominantly liberal. Many economists found a means of reconciling their neoclassical economics with liberal sentiments in redistributive market liberalism, a doctrine described in a previous chapter and, as I noted there, popular with economists but with few other people. The focus of resulting tensions was the World Bank and the IMP. These international agencies, which employ many capable economists, were charged with implementing conservative policies in poor countries.


The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, distributed ledger, diversification, double entry bookkeeping, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, labour market flexibility, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

DSGE based models have been dominant tools in macroeconomic modelling, economic forecasting and policy construction since the early 1980’s and continues to play this role today - For example, in 2009 the Reserve Bank of New Zealand developed and adopted the KITT (Kiwi Inflation Targeting Technology) DSGE model as their main forecasting and scenario tool (Beneš et al., 2009). Hence, to fully understand why we need to consider the use of complexity based models, in the context of the Blockchain, it is essential for us to first review equilibrium economic models. Some of the early trailblazers who combined the study of complexity theory with economics include, Kenneth Arrow (economist), Philip Anderson (physicist), Larry Summers (economist), John Holland (physicist), Tom Sargent (economist), Stuart Kauffman (physicist), David Pines (physicist), José Scheinkman (economist), William Brock (economist) and of course, W. B. Arthur (economist), who coined the term complexity economics and has been largely responsible for its initial growth and exposure to mainstream academia. 12 Knightian uncertainty is an economic term that refers to risk.

These models were build on top of the existing framework of RBC models but their construction was also influenced by a new theory that had begun to gain increasing traction in the field of economics at that time - contract theory. This theory might be familiar to most readers, as two of the three16 economists who developed the theory received the Nobel Memorial Prize in Economic Sciences in October 2016. Contract theory was first developed in the late 1960’s by Kenneth Arrow (winner of the 1972 Nobel prize in economics), Oliver Hart and Bengt R. Holmström. The latter two shared the Nobel prize in economics in 2016. 16 169 Chapter 4 ■ Complexity Economics: A New Way to Witness Capitalism Contract theory introduced the concepts of price and wage rigidities (See Sidebar 4-2 and ‘Theories of Wage Rigidity’, Stiglitz, 1984) in NK models. The older RBC models were thus enhanced with some Keynesian assumptions, namely competition on goods, labour and rigidities.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

For over two hundred years, economists tried to formalise Smith’s proposition and discover under exactly what conditions a competitive market economy would allocate resources efficiently. In the nineteenth century, important contributions came from Frenchman Léon Walras, who taught in Lausanne, and Englishman Alfred Marshall, who taught in Cambridge. Then, in the early 1950s, two economists, Kenneth Arrow and Gerard Debreu, both working in America, finally produced a rigorous explanation of the invisible hand (for which they were subsequently awarded the Nobel Prize).47 They imagined a hypothetical grand auction held at the beginning of time in which bids are made for every possible good and service that people might want to buy or sell at all possible future dates. The process continues until every market has cleared (that is, demand equals supply) with prices, demands and supplies of all goods and services determined in the auction.

This idea was contrary to the apparently common-sense view that if every market equates supply and demand for its product, then adding up across all markets means that aggregate demand equals aggregate supply in the economy as a whole. How could one explain this apparent paradox? Keynes was less than clear on this point, and it was his misfortune to write The General Theory some twenty years before economic theorists provided a rigorous framework within which it was possible to understand his intuition. As explained in Chapter 2, Kenneth Arrow and Gerard Debreu described how a grand auction could indeed equate supply and demand overall if, and only if, all of the markets for future goods and services were incorporated into the auction process. Self-evidently, that world is fictional – radical uncertainty means that many of the markets for future goods and services are simply missing. The concept of the grand auction is of value, however, precisely because it shows why Keynes’s intuition was correct.


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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, computerized trading, corporate raider, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, Kenneth Arrow, knowledge economy, life extension, lump of labour, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

Earth in the Balance Sheet: Economists Go for the Green Like most people who think at all about how much burden their way of life places on Spaceship Earth, I feel a bit guilty. But on Earth Day in 1997 my conscience was clearer than usual—and so were those of 2,500 other economists. A few months earlier, an organization called Redefining Progress enlisted five economists—the Nobel laureates Robert Solow and Kenneth Arrow, together with Harvard’s Dale Jorgenson, Yale’s William Nordhaus, and myself—to circulate an “Economists’ Statement on Climate Change,” calling for serious measures to limit the emission of greenhouse gases. To be honest, I agreed to be one of the original signatories mainly as a gesture of goodwill, and never expected to hear any more about it; but the statement ended up being signed by, yes, more than 2,500 economists.


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, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, 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, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, Washington Consensus, white flight

Holding a pencil in his hand, Friedman marveled at the feat accomplished by free markets: it took thousands of people all over the world to make this pencil, he pointed out—to mine the graphite, cut the wood, assemble the components, and market the final product. Yet it was the price system, not any central authority, that managed to coordinate their actions so that the pencil would end up in the hands of the consumer.3 Compared to Adam Smith’s and Milton Friedman’s explications, the First Fundamental Theorem itself entails a logic that is highly abstract and almost impenetrably dense. It was first formulated fully in the early 1950s by Kenneth Arrow and Gerard Debreu, using mathematics that was then unfamiliar to most economists.4 The first sentence of Debreu’s 1951 article gives a sense of the nature of the exercise: “The activity of the economic system we study can be viewed as the transformation by n production units and the consumption by m consumption units of l commodities (the quantities of which may or may not be perfectly divisible).”† Even though the Arrow and Debreu articles are foundational, having earned each economist a Nobel Prize, they are rarely read.


pages: 187 words: 62,861

The Penguin and the Leviathan: How Cooperation Triumphs Over Self-Interest by Yochai Benkler

business process, California gold rush, citizen journalism, Daniel Kahneman / Amos Tversky, East Village, Everything should be made as simple as possible, experimental economics, experimental subject, framing effect, informal economy, invisible hand, jimmy wales, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge economy, laissez-faire capitalism, loss aversion, Murray Gell-Mann, Nicholas Carr, peer-to-peer, prediction markets, Richard Stallman, Scientific racism, Silicon Valley, Steven Pinker, telemarketer, Toyota Production System, ultimatum game, Washington Consensus, zero-sum game, Zipcar

In comparing the two systems, the sociologist Richard Titmuss found that the British system had higher-quality blood (as measured by the likelihood of recipients contracting hepatitis from transfusions); less blood waste; and fewer blood shortages at hospitals (Titmuss also argued that the U.S. system was less equitable, because the rich exploited the poor and those who are desperate by buying their blood). Ethics aside, he concluded that a voluntary system was safer and more efficient than a market-based one. Predictably, Titmuss’s argument came under immediate attack from economists. Most famously, Nobel laureate Kenneth Arrow agreed that the U.S. blood system was flawed but refused to concede that it was because payments reduced the voluntary donations. Arrow admitted that some donors might be responding to moral or intrinsic incentives (giving blood because it’s the right thing to do), but a completely different group of people was responding to prices and market incentives (giving blood to make money). Because these groups were separate and independent, he said, the incentives for one group had no impact on the incentives for the other.


pages: 297 words: 77,362

The Nature of Technology by W. Brian Arthur

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Andrew Wiles, business process, cognitive dissonance, computer age, creative destruction, double helix, endogenous growth, Geoffrey West, Santa Fe Institute, haute cuisine, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, knowledge economy, locking in a profit, Mars Rover, means of production, Myron Scholes, railway mania, Silicon Valley, Simon Singh, sorting algorithm, speech recognition, technological singularity, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions

My sons Ronan Arthur and Sean Arthur provided much needed writing criticism. Brid Arthur helped me plan the flow of the book, and Niamh Arthur helped edit the final draft. One of the joys of the project has been the company of friends and colleagues who have provided intellectual stimulation and moral support over the years. I thank in particular Cormac McCarthy and my SFI co-conspirator David Lane; also Kenneth Arrow, Jim Baker, John Seely Brown, Stuart Kauffman, Bill Miller, Michael Mauboussin, Richard Palmer, Wolfgang Polak, Nathan Rosenberg, Paul Saffo, Martin Shubik, Jan Vasbinder, and Jitendra Singh. Not least, I am deeply grateful to my partner, Runa Bouius, for her patience and support during the time this book was being written. INDEX accounting, 85, 153, 197 agriculture, 10, 25, 154, 196 air inlet system, 40, 41 Airbus, 91 aircraft, 7, 10, 22, 182 design of, 72–73, 77, 91, 92–94, 108, 111–12, 120, 133, 136–37 detection of, 22, 39, 49, 73–74, 132 navigation and control of, 25, 30, 72–73, 93–94, 96, 108, 111–12, 132, 206 people and cargo processed by, 30, 32, 92–94 piston-and-propeller, 108, 111, 113, 120, 140–41 propulsion of, 108, 111–12, 120 radar surveillance, 41 stealth, 39–42 see also jet engines; specific aircraft aircraft carriers, 39–42 air traffic control, 132 algorithms, 6, 24, 25, 50, 53, 55, 80, 167, 178, 180–81, 206 digital compression, 28 sorting, 17, 30–31, 98 speech recognition, 28 text-processing, 153 altruism, 142 amplifiers, 69, 83, 167–68 analog systems, 71 anatomy, 13, 14, 32, 43 animals, 9, 53 bones and organs of, 13, 45, 187 genus of, 13 natural selection among, 16 see also vertebrates; specific animals archaeology, 45–46, 88 archaeomagnetic dating, 45 Architectural Digest, 175 architecture, 10, 32, 35, 41–42, 71, 73, 79, 81, 84, 98, 101, 116, 212–13 arithmetic, 81, 108, 125, 182 Armstrong oscillator, 102, 130 Arpanet, 156 artificial intelligence, 12, 215 arts, 15, 72, 77, 79 see also music; painting; poetry Astronomical Society, 74 astronomy, 47–50, 74 Atanasoff-Berry machine, 87 Atomic Energy Commission, U.S., 104 atomic power, 10, 24, 80, 103–5, 114–15, 160, 200 automobiles, 2, 10, 176, 180 autopoiesis, 2–3, 21, 24, 59, 167–70, 188 Babbage, Charles, 74, 75, 126 bacteria, 10, 119, 148, 207 banking, 149, 153–55, 192, 201, 209 bar-codes, 48 barges, 81–83 barometers, 47 batteries, 58, 59, 63 Bauhaus architecture, 212 beekeeping, 25 Bernoulli effect, 52 Bessemer process, 14, 75, 152, 153 biochemistry, 61, 119–20, 123–24, 147 biology, 10, 13, 16, 17, 18, 53, 54, 147–48, 187–88 evolution and, 13, 16, 107, 127–28, 188, 204 molecular, 147, 161, 188 technology and, 28, 61, 206–8 BIOS chip, 13 Black, Fischer, 154 black-bellied plover (pluvialis squatarola), 31 black box concept, 14, 18, 178 blacksmithing, 180 Boeing 737, 96 Boeing 747, 92–94, 109 Boeing 787, 32 bones, 13, 45, 187–88 Boot, Henry, 113 bows, 171 Boyer, Herbert, 148 brain: imaging of, 10 implanting electrodes in, 9 mental processes of, 9, 23, 56, 97, 112, 121–22, 193 parts of, 9, 10, 56, 208 bridges, 29, 109, 150 cable-stayed, 31, 70, 91 concrete, 99–100 bridging technologies, 83–84 bronze, 185 Brown, John Seely, 210 buildings, 47 design and construction of, 10, 71, 72 business, 54, 148, 149, 192, 205 practices of, 80–81, 83, 153, 157, 158–59, 209 Butler, Paul, 47–48, 49–50 Butler, Samuel, 16, 17 cables, 31, 70, 91 fiber optic, 69, 83 calculating devices, 74 canals, 81–83, 85, 150, 192 canoes, 16, 171 capacitors, 59, 69, 169 carbon-14, 45 carrier: air wing, 40, 42 battlegroup, 40–41 Cathcart, Brian, 160 cathedrals, 10 cathode-ray tubes, 57, 59 Cavendish Laboratory, 160 cavity magnetron, 113 Chain, Ernst, 120 Chargaff, Erwin, 77 chemistry, 25, 57, 66, 69, 159, 202, 205 industrial, 75, 162, 171 polymer, 162 Chicago Board of Trade, 156 “chunking,” 36–37, 50 clocks, 33, 36, 38, 49, 158, 198 atomic, 24, 206 cloning, 70 cloud chamber, 61 coal, 82, 83 Cockburn, Lord, 149 Cohen, Stanley, 148 combustion systems, 17, 19, 34, 50, 52, 53, 120 common sense, 65 communication, 66, 78 see also language; telecommunications compressors, 18–19, 34, 51–52, 65, 136–37, 168 computers, 10, 28, 33, 64, 71–73, 75, 80–81, 82, 85, 96, 153–55, 181–83, 203 evolution of, 87, 108–9, 125–26, 146, 150–51, 159, 168–69, 171 intrinsic capabilities of, 88–89 operating systems of, 12–13, 34–35, 36, 72–73, 79–80, 88, 108–9, 150, 156 programming of, 34–35, 53, 71, 88–89 see also algorithms; Internet computer science, 38, 98 concrete, 10, 73, 99–100 contracts, 54, 55, 153–54, 193, 201 derivatives, 154–55, 209 cooling systems, 103–4, 134–35 Copernicus, Nicolaus, 61 copper, 9, 58 cotton, 139, 196 Crick, Francis, 58, 61 Crooke’s tube, 57 Cuvier, Georges, 13 cyclotron, 115, 131 Darwin, Charles, 16, 17–18, 89, 102–3, 107, 127–28, 129, 132, 138, 142, 188, 203–4 “Darwin Among the Machines” (Butler), 16 Darwin’s mechanism, 18, 89, 138 data, 50, 146, 153 processing of, 70, 80–81, 83, 151 dating technologies, 45–46 David, Paul, 157–58 Dawkins, Richard, 102 deep craft, 159–60, 162, 164 de Forest, Lee, 167–68 Deligne, Pierre, 129 dendrochronology, 45 Descartes, René, 208, 211 diabetes, 175 Dickens, Charles, 197 digital technologies, 25, 28, 66, 71, 72, 79–80, 80–81, 82, 84, 117–18, 145, 154, 156, 206 “Digitization and the Economy” (Arthur), 4 DNA, 24, 77, 85, 169, 208 amplification of, 37, 70, 123–24 complementary base pairing in, 57–58, 61, 123–24 extraction and purification of, 61, 70 microarrays, 85 recombinant, 10, 148 replication of, 147 sequencing of, 6, 37, 70, 123–24 domaining, 71–76 definition of, 71–72 redomaining and, 72–74, 85, 151–56 domains, 69–85, 103, 108, 145–65, 171 choice of, 71–73, 101 deep knowledge of, 78–79 definitions of, 70, 80, 84, 145 discipline-based, 146 economy and, 149, 151–56, 163 effectiveness of, 75–76, 150 evolution and development of, 72, 84, 85, 88, 145–65 languages and grammar of, 69, 76–80, 147 mature, 149–50, 165 morphing of, 150–51 novel, 74–75, 152–53 styles defined by, 74–76 subdomains and sub-subdomains of, 71, 151, 165 worlds of, 80–85 Doppler effect, 48, 122 dynamo, 14 Eckert, J.


pages: 283 words: 73,093

Social Democratic America by Lane Kenworthy

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affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, Celtic Tiger, centre right, clean water, collective bargaining, corporate governance, David Brooks, desegregation, Edward Glaeser, endogenous growth, full employment, Gini coefficient, hiring and firing, Home mortgage interest deduction, illegal immigration, income inequality, invisible hand, Kenneth Arrow, labor-force participation, manufacturing employment, market bubble, minimum wage unemployment, new economy, postindustrial economy, purchasing power parity, race to the bottom, rent-seeking, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, school choice, shareholder value, sharing economy, Skype, Steve Jobs, too big to fail, Tyler Cowen: Great Stagnation, union organizing, universal basic income, War on Poverty, working poor, zero day

“The New Industrial Culture: Journeys Toward Collaboration.” The American Prospect, Winter: 54–61. Haskins, Ron and Isabel V. Sawhill. 2009. Creating an Opportunity Society. Washington, DC: Brookings Institution Press. Hauser, Robert M., John Robert Warren, Min-Hsiung Huang, and Wendy Y. Carter. 2000. “Occupational Status, Education, and Social Mobility in the Meritocracy.” Pp. 179–229 in Meritocracy and Economic Inequality. Edited by Kenneth Arrow, Samuel Bowles, and Steven Durlauf. Princeton, NJ: Princeton University Press. Hays, Sharon. 2003. Flat Broke with Children. New York: Oxford University Press. Heckman, James J. 2008. “Schools, Skills, and Synapses.” Working Paper 14064. Cambridge, MA: National Bureau of Economic Research. Heckman, James J. and Paul A. LaFontaine. 2007. “The American High School Graduation Rate: Trends and Levels.”


pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

Leon Walras (1834-1910) from France, Vilfredo Pareto (1848-1923) from Italy, and Francis Edgeworth (1845-1926) from Ireland introduced sophisticated mathematical methods and attempted to validate Adam Smith's invisible hand doctrine in mathematical form. The invisible hand idea, that laissez-faire leads to the common good, has become known as the first fundamental theorem of welfare economics (as noted in chapter 1). Welfare economics deals with the issues of efficiency, justice, economic waste, and the political process in the economy. Since the late 1930s, when welfare economics was popularized by John Hicks, Kenneth Arrow, Paul Samuelson, and Ronald Coase (all of whom became Nobel Prize winners), the technique of welfare economics has been extended to issues of monopoly and government policies. In most cases, the welfare economists have demonstrated that government-imposed monopoly and subsidies lead to inefficiency and waste. Walras, Pareto, and Edgeworth were the first economists to use advanced mathematical formulas and graphic devices to prove certain hypotheses in welfare economics.


pages: 288 words: 76,343

The Plundered Planet: Why We Must--And How We Can--Manage Nature for Global Prosperity by Paul Collier

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agricultural Revolution, Berlin Wall, business climate, Doha Development Round, energy security, food miles, information asymmetry, Kenneth Arrow, megacity, new economy, offshore financial centre, oil shock, profit maximization, rent-seeking, Ronald Coase, Scramble for Africa, sovereign wealth fund, stem cell, Stewart Brand

But that is precisely what the Nigerian national accounts are doing. There is a way of correcting national accounts for this error. It is known as “Green Accounting.” In essence, the depletion of natural assets is subtracted from apparent income unless offset by the accumulation of other assets. To date, the most convincing attempt at Green Accounting for the countries of the bottom billion has been done by a team led by Nobel laureate Kenneth Arrow. They have built a more comprehensive measure of wealth for the period 1970–2000, one that included natural assets alongside all the man-made assets. I rely on their estimates, as recently adapted by Professor Sir Partha Dasgupta, a distinguished Indian economist at Cambridge University. What happens when Africa’s national accounts are redone on this basis? Results reveal that over these three decades, comprehensive wealth per person declined by 2.8 percent per year.


pages: 240 words: 73,209

The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment by Guy Spier

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Albert Einstein, Atul Gawande, Benoit Mandelbrot, big-box store, Black Swan, Checklist Manifesto, Clayton Christensen, Daniel Kahneman / Amos Tversky, Exxon Valdez, Gordon Gekko, housing crisis, information asymmetry, Isaac Newton, Kenneth Arrow, Long Term Capital Management, Mahatma Gandhi, mandelbrot fractal, NetJets, pattern recognition, pre–internet, random walk, Ronald Reagan, South Sea Bubble, Steve Jobs, winner-take-all economy, young professional, zero-sum game

An Amazing Way to Deal with Change in Your Work and in Your Life by Spencer Johnson Working Together: Why Great Partnerships Succeed by Michael Eisner with Aaron Cohen Economics Modern International Economics by Shelagh Heffernan and Peter Sinclair Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely The Economy as an Evolving Complex System by Philip Anderson, Kenneth Arrow, and David Pines The Rational Optimist: How Prosperity Evolves by Matt Ridley Games 500 Master Games of Chess by S. Tartakower and J. du Mont Homo Ludens: A Study of the Play Element in Culture by Johan Huizinga Reality Is Broken: Why Games Make Us Better and How They Can Change the World by Jane McGonigal Winning Chess Tactics for Juniors by Lou Hays Wise Choices: Decisions, Games, and Negotiations by Richard Zeckhauser, Ralph Keeney, and James Sebenius Investing A Zebra in Lion Country by Ralph Wanger with Everett Mattlin Active Value Investing: Making Money in Range-Bound Markets by Vitaliy Katsenelson Beating the Street by Peter Lynch Common Stocks and Uncommon Profits by Philip Fisher Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb Fooling Some of the People All of the Time: A Long Short Story by David Einhorn and Joel Greenblatt Fortune’s Formula: The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street by William Poundstone Investing: The Last Liberal Art by Robert Hagstrom Investment Biker: Around the World with Jim Rogers by Jim Rogers More Mortgage Meltdown: 6 Ways to Profit in These Bad Times by Whitney Tilson and Glenn Tongue More Than You Know: Finding Financial Wisdom in Unconventional Places by Michael Mauboussin Of Permanent Value: The Story of Warren Buffett by Andrew Kilpatrick Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment by David Swensen Security Analysis by Benjamin Graham and David Dodd Seeking Wisdom: From Darwin to Munger by Peter Bevelin Short Stories from the Stock Market: Uncovering Common Themes behind Falling Stocks to Find Uncommon Ideas by Amit Kumar The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai The Manual of Ideas: The Proven Framework for Finding the Best Value Investments by John Mihaljevic The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot and Richard Hudson The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks The Warren Buffett Way by Robert Hagstrom Value Investing: From Graham to Buffett and Beyond by Bruce Greenwald, Judd Kahn, Paul Sonkin, and Michael van Biema Where Are the Customers’ Yachts?

The Armchair Economist: Economics and Everyday Life by Steven E. Landsburg

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Albert Einstein, Arthur Eddington, diversified portfolio, first-price auction, German hyperinflation, Golden Gate Park, information asymmetry, invisible hand, Kenneth Arrow, means of production, price discrimination, profit maximization, Ralph Nader, random walk, Ronald Coase, sealed-bid auction, second-price auction, second-price sealed-bid, statistical model, the scientific method, Unsafe at Any Speed

This rules out the round-robin, where a candidate with the bad luck to be scheduled in an early round has more chances to be disqualified than opponents who enter later in the game. Third, a third-party candidate with no chance of winning should not be able to affect the outcome of a two-way race. This rules out the simple "plurality wins" rule. With plurality rule, a candidate's prospects can improve when a third-party candidate draws votes from his opponent. In the early 1950s, the economist Kenneth Arrow (subsequently a Nobel prize winner) wrote down a list of reasonable requirements for a democratic voting procedure. They all have the flavor of the three I've just listed. Then Arrow set out to find all of those voting procedures that meet the requirements. It turns out that there aren't many. Arrow was able to prove-^ with the inexorable force of pure mathematics—that the only way to satisfy all of the requirements is to select one voter and give him all the votes.


pages: 270 words: 79,180

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, Chuck Templeton: OpenTable, Credit Default Swap, cross-subsidies, crowdsourcing, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, information asymmetry, Jean Tirole, Kenneth Arrow, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, Metcalfe’s law, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, ride hailing / ride sharing, Robert Metcalfe, 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

See David Karp, “New California Law Aims to Rid Farmers Markets of Cheaters,” Los Angeles Times, September 29, 2014. 31.David Karp, “Produce Inspectors Keep Farmers Markets Honest,” Los Angeles Times, December 26, 2013. 32.Interview with Carol Shamon, April 2, 2014. 33.Michael Neff, “Poise, Tenacity, and Clancy: An Interview with Deborah Grosvenor,” Algonkian Writer Conferences, retrieved from http://webdelsol.com/Algonkian/interview-dgrosvenor.htm. 34.Michael Neff, “A View from the Top: An Interview with Robert Gottlieb, Chairman of Trident Media Group,” Algonkian Writer Conferences, retrieved from http://webdelsol.com/Algonkian/interview-rgottlieb.htm. 35.Richard Whately, quoted in Richard S. Howey, The Rise of the Marginal Utility School, 1870–1889 (New York: Columbia University Press, 1989), 4. 36.Richard Whately, Introductory Lectures on Political Economy (London: B. Fellowes, 1831), 253. 3 THE ENFORCER: KEEPING EVERYONE HONEST 1.This term comes from the economist Kenneth Arrow. Hidden information can lead to the problem of adverse selection (the lemons problem), while hidden action can lead to moral hazard. For a discussion of hidden information (also called hidden characteristics) and hidden action, see Mark Bergen, Shantanu Dutta, and Orville C. Walker Jr., “Agency Relationships in Marketing: A Review of the Implications and Applications of Agency,” Journal of Marketing 56, no. 3 (July 1992): 1–24. 2.Avinash Dixit, “Governance Institutions and Economic Activity (AEA Presidential Address),” American Economic Review 99, no. 1 (March 2009): 5–24. 3.One cattle breeder in Palermo told Gambetta, “When the butcher comes to me to buy an animal, he knows that I want to cheat him.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

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3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

It superseded monetarism as the new orthodoxy, though it incorporated, rather than rejected, the quantity theory. The idea that Keynesian macroeconomics lacked suitable microeconomic foundations was now generally accepted in academia. Meanwhile the reputation of the Walrasian general equilibrium had been reestablished by the new tools of mathematics which had been developed in the postwar period. Students in the 1960s and 1970s had absorbed the works of Kenneth Arrow and Gerard Debreu, who had given a rigorous foundation to the Walrasian general equilibrium theory. They saw the world as the “Arrow-Debreu economy.” There were multiple markets for commodities which all came into equilibrium at the same time for the present and for all instances in the future. There was no need for macroeconomics unless it could be reconciled with the new general equilibrium theory.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman

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Albert Einstein, Atul Gawande, availability heuristic, Bayesian statistics, Black Swan, Cass Sunstein, Checklist Manifesto, choice architecture, cognitive bias, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hindsight bias, index card, information asymmetry, job satisfaction, John von Neumann, Kenneth Arrow, libertarian paternalism, loss aversion, medical residency, mental accounting, meta analysis, meta-analysis, nudge unit, pattern recognition, Paul Samuelson, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Robert Metcalfe, Ronald Reagan, The Chicago School, The Wisdom of Crowds, Thomas Bayes, transaction costs, union organizing, Walter Mischel, Yom Kippur War

Thirty years later, when Amos introduced me to their work, he presented it as an object of awe. He also introduced me Bima a me Bimto a famous challenge to that theory. Allais’s Paradox In 1952, a few years after the publication of von Neumann and Morgenstern’s theory, a meeting was convened in Paris to discuss the economics of risk. Many of the most renowned economists of the time were in attendance. The American guests included the future Nobel laureates Paul Samuelson, Kenneth Arrow, and Milton Friedman, as well as the leading statistician Jimmie Savage. One of the organizers of the Paris meeting was Maurice Allais, who would also receive a Nobel Prize some years later. Allais had something up his sleeve, a couple of questions on choice that he presented to his distinguished audience. In the terms of this chapter, Allais intended to show that his guests were susceptible to a certainty effect and therefore violated expected utility theory and the axioms of rational choice on which that theory rests.

asymmetrical effects on individual well-being: Zamir, “Law and Psychology.” 29: The Fourfold Pattern and other disasters: Including exposure to a “Dutch book,” which is a set of gambles that your incorrect preferences commit you to accept an { to> puzzle that Allais constructed: Readers who are familiar with the Allais paradoxes will recognize that this version is new. It is both much simpler and actually a stronger violation than the original paradox. The left-hand option is preferred in the first problem. The second problem is obtained by adding a more valuable prospect to the left than to the right, but the right-hand option is now preferred. sorely disappointed: As the distinguished economist Kenneth Arrow recently described the event, the participants in the meeting paid little attention to what he called “Allais’s little experiment.” Personal conversation, March 16, 2011. estimates for gains: The table shows decision weights for gains. Estimates for losses were very similar. estimated from choices: Ming Hsu, Ian Krajbich, Chen Zhao, and Colin F. Camerer, “Neural Response to Reward Anticipation under Risk Is Nonlinear in Probabilities,” Journal of Neuroscience 29 (2009): 2231–37.


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

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Alvin Roth, 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, creative destruction, 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, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, 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, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

The constant bewailing of the size of government is a win-win situation for neoliberals: they complain about recent growth of government, which they have themselves fostered, use the outrage they fan to “privatize” more functions, which leads only to more spending and a more intrusive infrastructure of government operations. The same dynamic is now at play in the further privatization and “rationalization” of European state health care systems. 86 Hayek, “The Moral Element in Free Enterprise.” 87 In this regard, the nominally left-liberal tradition of “social-choice theory” (Kenneth Arrow, Amartya Sen, John Rawls) by this criterion is virtually as neoliberal as the right-wing tradition of the “public-choice theory” of Buchanan and Tullock and the Virginia School. See Amadae, Rationalizing Capitalist Democracy; Arnsperger, Critical Political Economy. 88 Plant, The Neoliberal State. 89 Foucault, The Birth of Biopolitics, p. 226. 90 Davis, The Theory of the Individual in Economics and Individuals and Identity in Economics. 91 Milton Friedman in Friedman and Samuelson, Discuss the Responsibility of Government, p. 5. 92 “Neoliberalism figures interest as both a psychology that drives rational choices, and as the good achieved by those choices.

There’s a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance” (Krugman, “How Did Economics”). 49 Lo, “Reconciling Efficient Markets with Behavioral Finance”; Caplin and Schotter, The Foundations of Positive and Normative Economics; Harrison, “The Behavioral Counter-revolution.” 50 Ernst Fehr interview in Rosser et al., European Economics at a Crossroads, pp. 72–73. 51 Rabin, “A Perspective on Psychology and Economics,” p. 659. Yet even this divergence went too far for the Old Guard of the orthodoxy, such as Kenneth Arrow. The dividing line between the postwar generation of neoclassical economists and the post-1980 cohort is that the former believed they could abjure all dependence on academic psychology, whereas the latter believed they could pick and choose among psychological doctrines to elevate those that seemingly reinforced the neoclassical orthodoxy. 52 Foer, “Nudge-ocracy.” 53 Gennaioli, Shleifer, and Vishny, “Neglected Risks, Financial Innovation and Financial Fragility.”


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Trust: The Social Virtue and the Creation of Prosperity by Francis Fukuyama

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barriers to entry, Berlin Wall, blue-collar work, business climate, capital controls, collective bargaining, corporate governance, corporate raider, creative destruction, deindustrialization, Deng Xiaoping, deskilling, double entry bookkeeping, equal pay for equal work, European colonialism, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, global village, Gunnar Myrdal, hiring and firing, industrial robot, Jane Jacobs, job satisfaction, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, labour market flexibility, labour mobility, land reform, liberal capitalism, liberation theology, low skilled workers, manufacturing employment, mittelstand, price mechanism, profit maximization, RAND corporation, rent-seeking, Ronald Coase, Silicon Valley, Steve Jobs, Steve Wozniak, The Death and Life of Great American Cities, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, transfer pricing, traveling salesman, union organizing

But if we presume that such legal institutions exist, the presence of a high degree of trust as an additional condition of economic relations can increase economic efficiency by reducing what economists call transaction costs, incurred by activities like finding the appropriate buyer or seller, negotiating a contract, complying with government regulations, and enforcing that contract in the event of dispute or fraud.2 Each of these transactions is made easier if the parties believe in each other’s basic honesty: there is less need to spell things out in lengthy contracts; less need to hedge against unexpected contingencies; fewer disputes, and less need to litigate if disputes arise. Indeed, in some high-trust relationships, parties do not even have to worry about maximizing profits in the short run, because they know that a deficit in one period will be made good by the other party later. In fact, it is very difficult to conceive of modern economic life in the absence of a minimum level of informal trust. In the words of the economist and Nobel laureate Kenneth Arrow, Now trust has a very important pragmatic value, if nothing else. Trust is an important lubricant of a social system. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people’s word. Unfortunately this is not a commodity which can be bought very easily. If you have to buy it, you already have some doubts about what you’ve bought. Trust and similar values, loyalty or truth-telling, are examples of what the economist would call “externalities.”

Sen further argues that users of the revealed-preference concept make use of a hidden assumption that preferences are self-interested, whereas people in reality also have a social side and typically act out of mixed motives. See “Behaviour and the Concept of Preference,” Economics 40 (1973): 214-259. 17F. Y. Edgeworth, as quoted by Amartya Sen in “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,” Philosophy and Public Affairs 6 (1977): 317-344. 18See Kenneth Arrow’s critique of the assumption of many economists that consumers are rational in their choices. Arrow, “Risk Perception in Psychology and Economics,” Economic Inquiry 20 (1982): 1-9. 19Hence, for example, we decide to buy a brand name like Kellogg’s Corn Flakes rather than the store brand because we assume, in the absence of detailed research, that it is of higher quality. 20See Becker (1976), p. 11. 21Mark Granovetter, “Economic Action and Social Structure: The Problem of Embeddedness” American Journal of Sociology 91 (1985): 481-510. 22See World Bank, The East Asian Miracle (Oxford: Oxford University Press, 1993), pp. 304-316.


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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, creative destruction, future of journalism, George Akerlof, Innovator's Dilemma, Internet Archive, invention of the printing press, Kenneth Arrow, 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

But two briefs captured the policy argument best. 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.


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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, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Pareto efficiency, Paul Samuelson, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, source of truth, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

He is also on the North American Council of the Econometric Association. Professor Akerlof’s research interests include sociology and economics, theory of unemployment, assymetric information, staggered contract theory, money demand, labor market flows, theory of business cycles, economics of social customs, measurement of unemployment, and economics of discrimination. Kenneth J. Arrow, Stanford University Kenneth Arrow is the Joan Kenney Professor of Operations Research (Emeritus) at Stanford University. His work has been primarily in economic theory and operations, focusing on such areas as social choice theory, risk bearing, medical economics, general equilibrium analysis, inventory theory, and the economics of information and innovation. He was one of the first economists to note the existence of a learning curve, and he also showed that under certain conditions an economy reaches a general equilibrium.


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Social Life of Information by John Seely Brown, Paul Duguid

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AltaVista, business process, Claude Shannon: information theory, computer age, cross-subsidies, disintermediation, double entry bookkeeping, Frank Gehry, frictionless, frictionless market, future of work, George Gilder, George Santayana, global village, Howard Rheingold, informal economy, information retrieval, invisible hand, Isaac Newton, John Markoff, Just-in-time delivery, Kenneth Arrow, Kevin Kelly, knowledge economy, knowledge worker, loose coupling, Marshall McLuhan, medical malpractice, moral hazard, Network effects, new economy, Productivity paradox, Robert Metcalfe, rolodex, Ronald Coase, shareholder value, Shoshana Zuboff, Silicon Valley, Steve Jobs, Superbowl ad, Ted Nelson, telepresence, the medium is the message, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, Turing test, Vannevar Bush, Y2K

The word blob in the title stands for Arendt's use of social. 31. The first thing to remember, of course, is that Crusoe is a fictional character. 32. Marx, 1947, p. 48. 33. Sartre, 1957, quoted in Warnock, 1960, pp. 127 28. 34. See Feenburg (1995) for an insightful discussion of the social character of illness. 35. These examples are from Dorothy Leonard-Barton and Silvia Sensiper (1998) and Kenneth Arrow (1984), respectively. 36. See van Maanen and Barley (1984) for "occupational communities"; Strauss (1978) and the following chapter for "social world." 37. Listservs are e-mail lists that forward messages sent to a single address to everyone who subscribes to that list. Members of large lists rarely know who the other members are. Some lists are edited so that only messages approved by the editor are forwarded. 38.


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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, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, the new new thing, 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, Vilfredo Pareto, wage slave

Collier, 1909; originally published 1776), p. 19. Emphasis added. 17. For a version of Pareto’s original writings, see Vilfredo Pareto, Man­ ual of Political Economy: A Critical and Variorum Edition, ed. Aldo Montesano et al. (Oxford: Oxford University Press, 2014). This edition derives from Manuale di Economia, published in Italy in 1906, and also a later edition in French. NOTES Akerlof.indb 209 209 6/19/15 10:24 AM 18. In 1954, Kenneth Arrow and Gerard Debreu published a joint article that proved the existence of such an equilibrium under rather general conditions. In due course both of them would receive the Nobel Prize: Arrow in 1972, and Debreu in 1982, both of them especially cited for this contribution. The existence of the general equilibrium, even with the generality of their assumptions, does not appear to us to be of tremendous interest (especially since it occurs for what to us is the obvious mathematical reason).


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Postcapitalism: A Guide to Our Future by Paul Mason

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Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, women in the workforce

There is no need for a solution to good externalities, but they often show up as reduction in cost and activity. But in an information economy, the externalities become the major issue. In the old world, economists categorized information as a ‘public good’: the costs of science, for example, were borne by society – so everybody benefited. But in the 1960s economists began to understand information as a commodity. In 1962, Kenneth Arrow, the guru of mainstream economics, said that in a free-market economy, the purpose of inventing things is to create intellectual property rights. ‘Precisely to the extent that it is successful there is an under-utilisation of information.’37 If you think about it this way, the purpose of patenting the advanced HIV drug Darunavir can only be to keep its price at $1095 a year, which is, as Médecins sans Frontières put it, ‘prohibitively expensive’.


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Superforecasting: The Art and Science of Prediction by Philip Tetlock, Dan Gardner

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Affordable Care Act / Obamacare, Any sufficiently advanced technology is indistinguishable from magic, availability heuristic, Black Swan, butterfly effect, cloud computing, cuban missile crisis, Daniel Kahneman / Amos Tversky, desegregation, drone strike, Edward Lorenz: Chaos theory, forward guidance, Freestyle chess, fundamental attribution error, germ theory of disease, hindsight bias, index fund, Jane Jacobs, Jeff Bezos, Kenneth Arrow, Mikhail Gorbachev, Mohammed Bouazizi, Nash equilibrium, Nate Silver, obamacare, pattern recognition, performance metric, Pierre-Simon Laplace, place-making, placebo effect, prediction markets, quantitative easing, random walk, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Silicon Valley, Skype, statistical model, stem cell, Steve Ballmer, Steve Jobs, Steven Pinker, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Watson beat the top human players on Jeopardy!

In June 1982 an estimated seven hundred thousand people marched in New York City in one of the biggest demonstrations in American history. In 1984, with grants from the Carnegie and MacArthur foundations, the National Research Council—the research arm of the United States National Academy of Sciences—convened a distinguished panel charged with nothing less than “preventing nuclear war.” The panelists included three Nobel laureates—the physicist Charles Townes, the economist Kenneth Arrow, and the unclassifiable Herbert Simon—and an array of other luminaries, including the mathematical psychologist Amos Tversky. I was by far the least impressive member of the panel, a thirty-year-old political psychologist just promoted to associate professor at the University of California, Berkeley. I owed my seat at the table not to a glorious career of achievement but rather to a quirky research program, which happened to be germane to the panel’s mission.


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Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Plutocrats, plutocrats, private military company, Republic of Letters, Richard Feynman, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

Only a year after the publication of Lombard Street, the French economist Léon Walras had presented a mathematically rigorous formulation of the classical theory of price formation in his Elements of Pure Economics.14 In 1937, the British economist and future Nobel laureate John Hicks had alleged that the central ideas of Keynes’ General Theory could in fact be reconciled with classical orthodoxy.15 It was in 1954, however, that a paper appeared that was, to those who believed, the discovery of a fifth gospel. The American economist Kenneth Arrow and the French mathematician Gerard Debreu published a formal proof that, given certain assumptions, a market economy would indeed tend to gravitate towards a “general equilibrium” in which a unique set of prices would ensure that there could be no excess demand or supply across all markets taken together.16 It was, in other words, a knock-down argument in favour of the canonical classical doctrine—a formal proof of Say’s Law.


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The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics by William R. Easterly

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Andrei Shleifer, business climate, Carmen Reinhart, central bank independence, clean water, colonial rule, correlation does not imply causation, creative destruction, endogenous growth, financial repression, Gini coefficient, Gunnar Myrdal, Hernando de Soto, income inequality, income per capita, inflation targeting, interchangeable parts, inventory management, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, large denomination, manufacturing employment, Network effects, New Urbanism, open economy, Productivity paradox, purchasing power parity, rent-seeking, Ronald Reagan, selection bias, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, trade liberalization, urban sprawl, Watson beat the top human players on Jeopardy!, Yogi Berra, Yom Kippur War

Statistical Abstract of the United States, 1995, figures for 1992, current dollar GDP 6020 billion, agriculture, forestry and fishing $116 billion. 18. World Bank, World Development Report, 1996, p. 210 (data for 1994).Just to confirm droughts and terrain, see p. 34 World Bank 198%. 19. World Bank, World Development Report, 1996, p. 88 (data for 1995). 20. This kind of self-fulfilling discrimination has long been postulated before by distinguished economists like Kenneth Arrow and Glen Loury, but Kremer was the first to apply it more generally to skill matching and economic growth. 21. Statistical Abstract ofthe United States, 1995, tables 52, 724. 22. Kosmin and Lachman 1993, p. 260. 23. Lipset 1997, pp. 151-152. 24. Psacharopoulos and Patrinos 1994, p. 6. 25. Psacharopoulos and Patrinos 1994, p. 37. 26. Patrinos 1997. 27. Narayan et al. 2000a. 28. New York Times, September 18, 1999. 29.


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The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care by T. R. Reid

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Berlin Wall, British Empire, double helix, employer provided health coverage, fudge factor, Kenneth Arrow, medical malpractice, profit maximization, profit motive, single-payer health, South China Sea, the payments system

Multiplied a few thousand times, that kind of treatment will increase a nation’s average life expectancy. But how much good was achieved, for the patient, for her family, for society as a whole? What does the number of bedridden ninety-five-year-olds tell us about the quality of a nation’s health care? Questions like that are largely the province of a relatively new academic discipline, health care economics. This field was started in the 1960s by the American Nobel laureate Kenneth Arrow. As with many other areas of contemporary economics, most of its leading lights are Americans—not surprising, given that health care spending now represents about one-sixth of the entire American economy.The analytic studies and the mathematical models of the health care economists are essential to the design of effective health care systems; they were extremely helpful to me during my global medical odyssey.


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The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis

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Albert Einstein, availability heuristic, Cass Sunstein, choice architecture, complexity theory, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Hofstadter, endowment effect, feminist movement, framing effect, hindsight bias, John von Neumann, Kenneth Arrow, loss aversion, medical residency, Menlo Park, Murray Gell-Mann, Nate Silver, New Journalism, Paul Samuelson, Richard Thaler, Saturday Night Live, statistical model, the new new thing, Thomas Bayes, Walter Mischel, Yom Kippur War

The meeting in question, billed as a conference on public economics, convened in June 1975 at a kibbutz just outside Jerusalem. And so it was on a farm that a theory that would become among the most influential in the history of economics made its public debut. Decision theory was Amos’s field, and so Amos did all the talking. The audience contained at least three current and future Nobel Prize winners in economics: Peter Diamond, Daniel McFadden, and Kenneth Arrow. “When you listened to Amos, you knew you were talking to a first-rate mind,” said Arrow. “You raise a question. He’s thought of the question already, and he has an answer.” After he listened to Amos’s presentation, Arrow had one big question for Amos: What is a loss? The theory obviously turned on the stark difference in people’s feelings when they faced potential losses rather than potential gains.


pages: 285 words: 86,174

Twilight of the Elites: America After Meritocracy by Chris Hayes

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affirmative action, Affordable Care Act / Obamacare, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, carried interest, circulation of elites, Climategate, Climatic Research Unit, collapse of Lehman Brothers, collective bargaining, creative destruction, Credit Default Swap, dark matter, David Brooks, David Graeber, deindustrialization, Fall of the Berlin Wall, financial deregulation, fixed income, full employment, George Akerlof, Gunnar Myrdal, hiring and firing, income inequality, Jane Jacobs, jimmy wales, Julian Assange, Kenneth Arrow, Mark Zuckerberg, mass affluent, mass incarceration, means of production, meta analysis, meta-analysis, money market fund, moral hazard, Naomi Klein, Nate Silver, peak oil, Plutocrats, plutocrats, Ponzi scheme, Ralph Waldo Emerson, rolodex, The Spirit Level, too big to fail, University of East Anglia, Vilfredo Pareto, We are the 99%, WikiLeaks, women in the workforce

For Harvard numbers, Ho cites a statement from the university’s Office of Career Services in 2005, indicating that close to half of Harvard students go through “the recruiting process to vie for investment banking and consulting jobs.” 34 “American CEOs looked very different”: Benjamin Wallace-Wells, “The Romney Economy,” New York, October 23, 2011. 35 “It’s the easiest way to see who was lucky enough to get a good elementary school education”: Quoted in Belinda Zhou, “Graduation Speech Ignites Heated Debate,” What’s What, October 26, 2010. 36 “The idea of meritocracy may have many virtues”: Amartya Sen, “Merit and Justice,” in Meritocracy and Economic Inequality, ed. Kenneth Arrow et al. (Princeton, N.J.: Princeton University Press, 2000), p. 5. 37 “meritocratic feedback loop”: Ho, Liquidated, p. 57. 38 Grover Norquist likened progressive taxation … to Hitler’s treatment of the Jews: The dialogue is quoted in Michael J. Graetz and Ian Shapiro, Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth (Princeton, N.J.: Princeton University Press, 2006), pp. 213–14. 39 “Our workers’ organization has become an end in itself”: Cited in John Kilcullen, “Robert Michels: Oligarchy,” http://www.humanities.mq.edu.au/Ockham/y64l11.html, accessed January 6, 2012. 40 “The most formidable argument against the sovereignty of the masses”: Robert Michels, Political Parties: A Sociological Study of the Oligarchical Tendencies of Modern Democracy, trans.

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

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active measures, Affordable Care Act / Obamacare, barriers to entry, business process, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial innovation, fixed income, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Robert Shiller, shareholder value, Steve Jobs, The Great Moderation, value at risk

These prevalent investors’ mistakes—dubbed Sloan’s “accruals anomaly”—were, however, corrected in the 2000s, as shown by the evidence that large accruals (earnings higher than cash flows) no longer attract investors’ funds; see Jeremiah Green, John Hand, and Mark Soliman, “Going, Going, Gone? The Apparent Demise of the Accruals Anomaly,” Management Science, 57 (2011): 797–816. 4. Someone cynically quipped: History doesn’t repeat itself, only historians do. 5. See, for example, Kenneth Arrow, “Path Dependence and Competitive Equilibrium,” in History Matters: Essays on Economic Growth, Technology, and Demographic Change, ed. William Sundstrom, Timothy Guinnane, and Warren Whatley (Stanford, CA: Stanford University Press, 2003). 6. Even a far larger disaster, British Petroleum’s (BP) 2010 oil spill in the Gulf of Mexico, costing the company tens of billions of dollars, didn’t dethrone BP from its membership in the group of major international oil companies.


pages: 389 words: 109,207

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

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Albert Einstein, anti-communist, asset allocation, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, Edward Thorp, en.wikipedia.org, Eugene Fama: efficient market hypothesis, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John Meriwether, John von Neumann, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Myron Scholes, New Journalism, Norbert Wiener, offshore financial centre, Paul Samuelson, publish or perish, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, short selling, speech recognition, statistical arbitrage, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond, zero-sum game

The wager has come to be known as the “St. Petersburg wager” or “St. Petersburg paradox.” It has provoked sporadic interest ever since. A mention in John Maynard Keynes’s 1921 Treatise on Probability made it part of the mental furniture of nearly every twentieth-century economist. Bernoulli’s wager makes an appearance in von Neumann and Morgenstern’s Theory of Games and Economic Behavior and in papers by Kenneth Arrow, Milton Friedman, and Paul Samuelson. The paradox can be resolved easily by noting that Peter would have to possess infinite wealth to make good on the game’s potential payouts. No one has infinite wealth. Therefore most of the terms of the infinite series are irrelevant. A minuscule chance of winning a quadrillion dollars is not worth what you might compute. It’s worth practically nothing because no one has a quadrillion dollars to award.


pages: 519 words: 104,396

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

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availability heuristic, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, loss aversion, market bubble, mental accounting, meta analysis, meta-analysis, Nash equilibrium, new economy, Paul Samuelson, payday loans, Philip Mirowski, Potemkin village, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, ultimatum game, working poor

It worked for Graham and for a few of his disciples, like Warren Buffett. Following Graham’s advice is easier said than done. During bull markets, less kindly known as bubbles, Mr. Market shows up every day quoting sky-high prices that only seem to go up. Most investors find it impossible to ignore the siren song. How could Mr. Market be so very wrong, day after day? As early as 1982, Stanford economist Kenneth Arrow identified Tversky and Kahneman’s work as a plausible explanation for stock market bubbles. Lawrence Summers took up this theme in a 1986 paper, “Does the Stock Market Rationally Reflect Fundamental Values?” Summers (now head of the National Economic Council for the Obama administration) was the first to make an extended case for what might now be called the coherent arbitrariness of stock prices.


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Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

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Antoine Gombaud: Chevalier de Méré, availability heuristic, backtesting, Benoit Mandelbrot, Black Swan, commoditize, complexity theory, corporate governance, corporate raider, currency peg, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, endowment effect, equity premium, fixed income, global village, hindsight bias, Kenneth Arrow, Long Term Capital Management, loss aversion, mandelbrot fractal, mental accounting, meta analysis, meta-analysis, Myron Scholes, Paul Samuelson, quantitative trading / quantitative finance, QWERTY keyboard, random walk, Richard Feynman, Richard Feynman, road to serfdom, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, Steven Pinker, stochastic process, survivorship bias, too big to fail, Turing test, Yogi Berra

Taken at a more extreme level, whenever numerous viable possibilities exist, the world splits into many worlds, one world for each different possibility—causing the proliferation of parallel universes. I am an essayist-trader in one of the parallel universes, plain dust in another. Finally, in economics: Economists studied (perhaps unwittingly) some of the Leibnizian ideas with the possible “states of nature” pioneered by Kenneth Arrow and Gerard Debreu. This analytical approach to the study of economic uncertainty is called the “state space” method—it happens to be the cornerstone of neoclassical economic theory and mathematical finance. A simplified version is called “scenario analysis,” the series of “what-ifs” used in, say, the forecasting of sales for a fertilizer plant under different world conditions and demands for the (smelly) product.


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, information asymmetry, Joseph Schumpeter, Kenneth Arrow, mental accounting, moral hazard, More Guns, Less Crime, oil shale / tar sands, Paul Samuelson, 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

Levitt, “Testing Theories of Discrimination: Evidence from The Weakest Link,” Journal of Law and Economics (October 2004), pp. 431–52. / 72 The theory of taste-based discrimination originates with Gary S. Becker, The Economics of Discrimination (Chicago: University of Chicago Press, 1957). / 72 The theory of information-based discrimination is derived from a number of papers, including Edmund Phelps, “A Statistical Theory of Racism and Sexism,” American Economic Review 62, no. 4 (1972), pp. 659–61; and Kenneth Arrow, “The Theory of Discrimination,” Discrimination in Labor Markets, ed. Orley Ashenfelter and Albert Rees (Princeton, N.J.: Princeton University Press, 1973). THE ONLINE DATING STORY: See Günter J. Hitsch, Ali Hortaçsu, and Dan Ariely, “What Makes You Click: An Empirical Analysis of Online Dating,” University of Chicago working paper, 2005. VOTERS LYING ABOUT DINKINS / GIULIANI: See Timur Kuran, Private Truths, Public Lies: The Social Consequences of Preference Falsification (Cambridge, Mass.: Harvard University Press, 1995); also Kevin Sack, “Governor Joins Dinkins Attack Against Rival,” New York Times, October 27, 1989; and Sam Roberts, “Uncertainty over Polls Clouds Strategy in Mayor Race,” New York Times, October 31, 1989.


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

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activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bernie Sanders, Black Swan, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, Mark Zuckerberg, mass immigration, McMansion, mittelstand, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, too big to fail, women in the workforce, young professional

Larry Summers, who is known to be a somewhat prickly intellectual genius, is atypical yet exemplary of the dynamics that rule the world of high-level networking: Despite courting controversy throughout his career, he occupies a central position that touches upon virtually all other networks. Ever restless and on the lookout for new challenges, pushing boundaries and climbing to new heights, Summers has had several exceedingly successful careers and held some of the most important positions in the U.S. government. His platinum resume was practically preordained in his DNA, as he is the son of two economists and the nephew of two Nobel laureates in economics, Paul Samuelson and Kenneth Arrow. His father taught at Yale University, and Samuelson had been an adviser to President Kennedy. Meteoric Rise Summers’s stellar professional rise occurred with lightning speed. He was accepted into the Massachusetts Institute of Technology at age sixteen and received tenure at Harvard University at only twenty-eight years old. That same year, personal tragedy struck when he was diagnosed with late-stage Hodgkin’s disease and endured nine grueling months of chemotherapy.


pages: 403 words: 111,119

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth

3D printing, Asian financial crisis, bank run, basic income, battle of ideas, Berlin Wall, bitcoin, blockchain, Branko Milanovic, Bretton Woods, Buckminster Fuller, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, choice architecture, clean water, cognitive bias, collapse of Lehman Brothers, complexity theory, creative destruction, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, dematerialisation, Douglas Engelbart, Douglas Engelbart, en.wikipedia.org, energy transition, Erik Brynjolfsson, ethereum blockchain, Eugene Fama: efficient market hypothesis, experimental economics, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, Financial Instability Hypothesis, full employment, global supply chain, global village, Henri Poincaré, hiring and firing, Howard Zinn, Hyman Minsky, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, land value tax, Landlord’s Game, loss aversion, low skilled workers, M-Pesa, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, megacity, mobile money, Mont Pelerin Society, Myron Scholes, neoliberal agenda, Network effects, Occupy movement, off grid, offshore financial centre, oil shale / tar sands, out of africa, Paul Samuelson, peer-to-peer, planetary scale, price mechanism, quantitative easing, randomized controlled trial, Richard Thaler, Ronald Reagan, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, smart cities, smart meter, South Sea Bubble, statistical model, Steve Ballmer, The Chicago School, The Great Moderation, the map is not the territory, the market place, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, Torches of Freedom, trickle-down economics, ultimatum game, universal basic income, Upton Sinclair, Vilfredo Pareto, wikimedia commons

And, he reasoned, if those markets were comprised of fully informed, small-scale competitive sellers and buyers, then the economy would reach a point of equilibrium that maximised total utility. In other words – in a neat echo of Smith’s invisible hand – it would, for any given income distribution, produce the best possible outcome for society as a whole. The mathematical techniques did not yet exist for Walras to prove his hunch but his agenda was later picked up by Kenneth Arrow and Gerard Debreu, who set out its equations in their 1954 model of general equilibrium. It appeared to be a landmark proof, giving microeconomic underpinning to macroeconomic analysis, launching a seemingly unified economic theory and laying the foundations of what has been known ever since as ‘modern macro’.4 The theory looks complete, sounds impressively like physics, and is set out in authoritative equations.


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, creative destruction, 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, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, 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 inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Economist Arthur Laffer was apparently similarly confused: “If you like the Post Office and the Department of Motor Vehicles and you think they’re run well, just wait till you see Medicare, Medicaid, and health care done by the government.” Arthur Laffer on CNN Newsroom, August 4, 2009. Clip available from Media Matters at http://mediamatters.org/mmtv/200908040014. 3 James Buchanan, Public Choice: The Origins and Development of a Research Program. 4 See, for example Kenneth Arrow, Social Choice and Individual Values, and Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups. 5 Buchanan, Public Choice, 8-9. 6 Rent seeking is the economic term used to describe behavior that extracts unearned value from other participants in the economy, without making any contribution to productivity, for example by gaining control of land and natural resources or by taking advantage of regulations that may affect consumers or businesses. 7 Such questions are prevalent throughout both Plato’s Republic and Aristotle’s Politics. 8 A sunset clause creates an expiration date, at which point a law will go off the books unless it is renewed.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

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AI winter, algorithmic trading, asset allocation, banking crisis, barriers to entry, Big bang: deregulation of the City of London, butterfly effect, buttonwood tree, buy low sell high, capital asset pricing model, citizen journalism, collateralized debt obligation, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, en.wikipedia.org, experimental economics, financial innovation, fixed income, Gordon Gekko, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, John Nash: game theory, Kenneth Arrow, Khan Academy, load shedding, Long Term Capital Management, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Renaissance Technologies, Richard Stallman, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, semantic web, Sharpe ratio, short selling, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, too big to fail, transaction costs, Turing machine, Upton Sinclair, value at risk, Vernor Vinge, yield curve, Yogi Berra, your tax dollars at work

and driven the Rolls off to Mexico with the Lamborghini girls. I meekly explained that I wasn’t the attendant, and gave the keys back. This remains one of my great regrets. Eventually, I navigated my Trans Am to UCLA and then on to RAND. I was blissfully unaware that I was passing through the same hallways used by some of the seminal thinkers of modern finance and economics: William Sharpe, Harry Markowitz, Kenneth Arrow, and George Dantzig. Markowitz and Sharpe, in particular, pioneered the ideas of balancing risk and reward in a systematic way, which when applied to finance, eventually led to their sharing the Nobel Prize in 1990. To digress just a bit, RAND’s interest in systematically approaching risk and reward, optimization, decision under uncertainty, and game theory was not initially conceived in the context of finance.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Insurance, in other words, is where the risks and uncertainties of daily life meet the risks and uncertainties of finance. To be sure, actuarial science gives insurance companies an in-built advantage over policy-holders. Before the dawn of modern probability theory, insurers were the gamblers; now they are the casino. The case can be made, as it was by Dickie Scruggs before his fall from grace, that the odds are now stacked unjustly against the punters/policy-holders. But as the economist Kenneth Arrow long ago pointed out, most of us prefer a gamble that has a 100 per cent chance of a small loss (our annual premium) and a small chance of a large gain (the insurance payout after disaster) to a gamble that has a 100 per cent chance of a small gain (no premiums) but an uncertain chance of a huge loss (no payout after a disaster). That is why the guitarist Keith Richards insured his fingers and the singer Tina Turner her legs.


pages: 494 words: 142,285

The Future of Ideas: The Fate of the Commons in a Connected World by Lawrence Lessig

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AltaVista, Andy Kessler, barriers to entry, business process, Cass Sunstein, commoditize, computer age, creative destruction, dark matter, disintermediation, Donald Davies, Erik Brynjolfsson, George Gilder, Hacker Ethic, Hedy Lamarr / George Antheil, Howard Rheingold, Hush-A-Phone, HyperCard, hypertext link, Innovator's Dilemma, invention of hypertext, inventory management, invisible hand, Jean Tirole, Jeff Bezos, Joseph Schumpeter, Kenneth Arrow, Larry Wall, Leonard Kleinrock, linked data, Marc Andreessen, Menlo Park, Network effects, new economy, packet switching, peer-to-peer, peer-to-peer model, price mechanism, profit maximization, RAND corporation, rent control, rent-seeking, RFC: Request For Comment, Richard Stallman, Richard Thaler, Robert Bork, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Silicon Valley, smart grid, software patent, spectrum auction, Steve Crocker, Steven Levy, Stewart Brand, Ted Nelson, Telecommunications Act of 1996, The Chicago School, transaction costs, zero-sum game

This has become especially significant as the domain name system has had to deal with the conflict between trademarks and domain names. This has tempted the World Intellectual Property Association to build control for trademark interests into the very architecture of the network. See ¶¶23-28, “Executive Summary of the Interim Report of the Second WIPO Internet Domain Name Process,” available at http://wipo2.wipo.int. 61 The origin of modern economic work here is Kenneth Arrow's “Economic Welfare and the Allocation of Resources for Invention,” in National Bureau Committee for Economic Research, The Rate and Direction of Inventive Activity, Economic and Social Factors, Richard Nelson, ed. (Princeton, N.J.: Princeton University Press, 1962), 609. Harold Demsetz responded to this by arguing in favor of a stronger property-based regime. See Harold Demsetz, “Information and Efficiency: Another Viewpoint,” Journal of Law & Economics 12 (1969): 1.


pages: 437 words: 115,594

The Great Surge: The Ascent of the Developing World by Steven Radelet

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Admiral Zheng, agricultural Revolution, Asian financial crisis, bank run, Berlin Wall, Branko Milanovic, business climate, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, clean water, colonial rule, creative destruction, demographic dividend, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, Erik Brynjolfsson, European colonialism, F. W. de Klerk, failed state, Francis Fukuyama: the end of history, Gini coefficient, global supply chain, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invention of the steam engine, James Watt: steam engine, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, land reform, low skilled workers, M-Pesa, megacity, Mikhail Gorbachev, off grid, oil shock, out of africa, purchasing power parity, race to the bottom, randomized controlled trial, Robert Gordon, Second Machine Age, secular stagnation, Simon Kuznets, South China Sea, special economic zone, Steven Pinker, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, women in the workforce, working poor

In lower-middle-income developing countries (including China), per capita wealth increased a substantial 49 percent. The improvement was not across all countries. In Nigeria, per capita wealth fell because of rapid depletion of petroleum deposits and other resources. In the majority of countries, per capita wealth grew, after adjusting for changes in natural resources and other types of capital assets. More detailed studies on a smaller number of countries provide similar results. Nobel laureate Kenneth Arrow, Partha Dasgupta, and their coauthors provide an in-depth accounting of what they call “comprehensive” wealth and different forms of capital, including natural capital, in five countries: the United States, China, Brazil, India, and Venezuela. They explore the extent to which different types of capital are changing and comprehensive wealth is increasing. They find that the stock of natural capital declined between 1995 and 2000 in all five countries studied.

Making Globalization Work by Joseph E. Stiglitz

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affirmative action, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, Berlin Wall, business process, capital controls, central bank independence, corporate governance, corporate social responsibility, currency manipulation / currency intervention, Doha Development Round, Exxon Valdez, Fall of the Berlin Wall, Firefox, full employment, Gini coefficient, global reserve currency, Gunnar Myrdal, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inventory management, invisible hand, John Markoff, Kenneth Arrow, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, North Sea oil, offshore financial centre, oil rush, open borders, open economy, price stability, profit maximization, purchasing power parity, quantitative trading / quantitative finance, race to the bottom, reserve currency, rising living standards, risk tolerance, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, trickle-down economics, union organizing, Washington Consensus, zero-sum game

See Ha-Joan Chang, "Kicking Away the Ladder: Infant Industry Promotion in Historical Perspective," Oxford Development Studies, vol. 31, no. 1 (2003), pp. 2132; and Partha Dasgupta and Joseph E. Stiglitz, "Learning by Doing, Market Structure, and Industrial and Trade Policies," Oxford Economic Papers, vol. 40, no. 2 (1988), pp. 246-68. The general theory of "learning"—and why government action may be required—was developed by Nobel Prize–winning economist Kenneth Arrow in "The Economic Implications of Learning by Doing," Review of Econonzic Studies, vol. 29, no. 3 (June 1962), pp 155-73. 20. A dramatic illustration was provided by America's illegal imposition of steel tariffs on March 20, 2002, in response to political pressure from steel producers. (They were ended on December 4, 2003, after an adverse WTO ruling.) It was 304 NOTES TO PAGES 72-74 estimated by the Consuming Industries Trade Action Coalition that the steel tariffs led to the loss of nearly 200,000 American jobs—while total employment in the steel-producing sector is only 190,000.


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, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, 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

They are nothing more than an IOU, a promise to pay, with interest, which can be bought and sold. 32 My earlier book Freefall explained how the neoliberal ideology that underpinned the eurozone led to the financial crisis, and in Globalization and Its Discontents, I explained how the same ideology has resulted in globalization not living up to its promise. Later in this book, I describe some of the basic economic research that overturned the premises of market fundamentalism/neoliberalism. 33 The pathbreaking work was that of Kenneth Arrow and Gerard Debreu (for which both received the Nobel Prize). (Kenneth J. Arrow, “An Extension of the Basic Theorems of Classical Welfare Economics,” in Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability, ed. J. Neyman [Berkeley: University of California Press, 1951], pp. 507–32; and Gerard Debreu, “Valuation Equilibrium and Pareto Optimum,” Proceedings of the National Academy of Sciences 40, no. 7 [1954]: 588–92; and Debreu, The Theory of Value [New Haven, CT: Yale University Press, 1959.])


pages: 868 words: 147,152

How Asia Works by Joe Studwell

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affirmative action, anti-communist, Asian financial crisis, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collective bargaining, crony capitalism, cross-subsidies, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, failed state, financial deregulation, financial repression, Gini coefficient, glass ceiling, income inequality, income per capita, industrial robot, Joseph Schumpeter, Kenneth Arrow, land reform, land tenure, large denomination, liberal capitalism, market fragmentation, non-tariff barriers, offshore financial centre, oil shock, open economy, passive investing, purchasing power parity, rent control, rent-seeking, Right to Buy, Ronald Coase, South China Sea, The Wealth of Nations by Adam Smith, urban sprawl, Washington Consensus, working-age population

Paul Bairoch, Economic and World History (Brighton: Wheatsheaf, 1993), p. 23. 13. Quoted in Tessa Morris Suzuki, A History of Japanese Economic Thought (London: Routledge, 1989), p. 60. 14. ‘My Six-year-old Son Should Get a Job’, chapter 3, Ha-Joon Chang, Bad Samaritans (London: Random House, 2007). 15. In modern economics the term ‘learning by doing’ was popularised by the Nobel Laureate Kenneth Arrow’s 1962 paper ‘The Economic Implications of Learning by Doing’. To my mind, however, Arrow hijacked a concept that makes much more sense in its everyday usage. Arrow’s paper asserts that the fact that everyone learns by doing means that the learning of new technologies is an automatically generated part of the economic process. Learning by doing thereby becomes another pillar of the win–win ideas of modern economics in which the market takes care of everything.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

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3Com Palm IPO, Albert Einstein, asset allocation, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy low sell high, carried interest, Chuck Templeton: OpenTable, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, compound rate of return, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, statistical arbitrage, stem cell, survivorship bias, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

Rock beats (breaks) Scissors, Scissors beats (cuts) Paper, and Paper beats (covers) Rock. Another nontransitive example with great practical impact is voting preferences. Often a majority of voters prefer candidate A over candidate B, candidate B over candidate C, and candidate C over candidate A. In these elections, where voting preference is nontransitive, who gets elected? It depends on the structure of the election process. Mathematical economist Kenneth Arrow received the Nobel Prize in Economics for showing that no voting procedure exists that satisfies an entire list of intuitively natural desirable properties. A Discover magazine article on this subject argued that, with a more “reasonable” election procedure, based on voter comparisons of all the major Democratic and Republican candidates, in 2000 John McCain would have received the Republican nomination and then been elected president instead of George W.


pages: 395 words: 116,675

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

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affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, altcoin, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, British Empire, Broken windows theory, Columbian Exchange, computer age, Corn Laws, cosmological constant, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, cryptocurrency, David Ricardo: comparative advantage, demographic transition, Deng Xiaoping, discovery of DNA, Donald Davies, double helix, Downton Abbey, Edward Glaeser, Edward Lorenz: Chaos theory, Edward Snowden, endogenous growth, epigenetics, ethereum blockchain, facts on the ground, falling living standards, Ferguson, Missouri, financial deregulation, financial innovation, Frederick Winslow Taylor, Geoffrey West, Santa Fe Institute, George Gilder, George Santayana, Gunnar Myrdal, Henri Poincaré, hydraulic fracturing, imperial preference, income per capita, indoor plumbing, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Khan Academy, knowledge economy, land reform, Lao Tzu, long peace, Lyft, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, meta analysis, meta-analysis, mobile money, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, Necker cube, obamacare, out of africa, packet switching, peer-to-peer, phenotype, Pierre-Simon Laplace, price mechanism, profit motive, RAND corporation, random walk, Ray Kurzweil, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, rising living standards, road to serfdom, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, sharing economy, smart contracts, South Sea Bubble, Steve Jobs, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, women in the workforce

It has been an article of faith for decades in both of their professions that science would not get funded if government did not do it, and economic growth would not happen if science did not get funded by the taxpayer. This received wisdom has been handed down for more than half a century. It was the economist Robert Solow who demonstrated in 1957 that innovation in technology was the source of most economic growth – at least in societies that were not expanding their territory or growing their populations. It was his economist colleagues Richard Nelson and Kenneth Arrow who explained in 1959 and 1962 respectively that government funding of science was necessary, because it is cheaper to copy others than to do original research. This makes science a public good, a service, like the light from a lighthouse, that must be provided at public expense, because nobody will supply it for free. No private individual will do basic science, for the insights that follow from it will be freely available to his rivals.


pages: 651 words: 180,162

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

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Air France Flight 447, Andrei Shleifer, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, Chuck Templeton: OpenTable, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, financial independence, Flash crash, Gary Taubes, George Santayana, Gini coefficient, Henri Poincaré, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, meta analysis, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

Kirkpatrick, 2005, “The Evolution of Infidelity in Socially Monogamous Passerines: The Strength of Direct and Indirect Selection on Extrapair Copulation Behavior in Females.” American Naturalist 165 (s5). Aron, Raymond, 1964, Dimensions de la conscience historique. Agora/Librairie Plon. Arrow, Kenneth, 1971, “Aspects of the Theory of Risk-Bearing,” Yrj¨o Jahnsson Lectures (1965), reprinted in Essays in the Theory of Risk Bearing, edited by Kenneth Arrow. Chicago: Markum. Atamas, S. P., and J. Bell, 2009, “Degeneracy-Driven Self-Structuring Dynamics in Selective Repertoires.” Bulletin of Mathematical Biology 71(6): 1349–1365. Athavale, Y., P. Hosseinizadeh, et al., 2009, “Identifying the Potential for Failure of Businesses in the Technology, Pharmaceutical, and Banking Sectors Using Kernel-Based Machine Learning Methods.” IEEE. Aubet, Maria Eugenia, 2001, The Phoenicians and the West: Politics, Colonies and Trade, Cambridge: Cambridge University Press.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Much of the literature reflected the Gordon-Liebhafsky theorem that: “provided that it achieves a certain threshold of intelligibility, the greater the obscurity of a piece written by an economist, the greater is the likelihood that it will be recognized as a classic or seminal work.”35 For financiers, theory and models were secondary to profit. Merton’s dynamic hedging or replication approach allowed the creation of derivatives and their risk management, helping banks to trade a bewildering variety of instruments. In the 1950s, two economists, Kenneth Arrow and Gerard Debreu, showed that attaining the nirvana of economic equilibrium required state securities, contracts to buy or sell everything at any time period in every place until infinity or the end of the world, whichever was first. This theoretically perfect world now justified any and every type of derivative and financial product. Financial Fundamentalism In the eighteenth century, Western societies shifted from medieval systems of aristocratic and religious authority to models of reason, scientific method, rational discourse, personal liberty, and individual responsibility.


pages: 551 words: 174,280

The Beginning of Infinity: Explanations That Transform the World by David Deutsch

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agricultural Revolution, Albert Michelson, anthropic principle, artificial general intelligence, Bonfire of the Vanities, conceptual framework, cosmological principle, dark matter, David Attenborough, discovery of DNA, Douglas Hofstadter, Eratosthenes, Ernest Rutherford, first-past-the-post, Georg Cantor, Gödel, Escher, Bach, illegal immigration, invention of movable type, Isaac Newton, Islamic Golden Age, Jacquard loom, Jacquard loom, John Conway, John von Neumann, Joseph-Marie Jacquard, Kenneth Arrow, Loebner Prize, Louis Pasteur, pattern recognition, Pierre-Simon Laplace, Richard Feynman, Richard Feynman, Search for Extraterrestrial Intelligence, Stephen Hawking, supervolcano, technological singularity, The Coming Technological Singularity, the scientific method, Thomas Malthus, Thorstein Veblen, Turing test, Vernor Vinge, Whole Earth Review, William of Occam, zero-sum game

Also, it is not only about people’s top preferences: once we are considering the details of decision-making in large groups – how legislatures and parties and factions within parties organize themselves to contribute their wishes to ‘society’s wishes’ – we have to take into account their second and third choices, because people still have the right to contribute to decision-making if they cannot persuade a majority to agree to their first choice. Yet electoral systems designed to take such factors into account invariably introduce more paradoxes and no-go theorems. One of the first of the no-go theorems was proved in 1951 by the economist Kenneth Arrow, and it contributed to his winning the Nobel prize for economics in 1972. Arrow’s theorem appears to deny the very existence of social choice – and to strike at the principle of representative government, and apportionment, and democracy itself, and a lot more besides. This is what Arrow did. He first laid down five elementary axioms that any rule defining the ‘will of the people’ – the preferences of a group – should satisfy, and these axioms seem, at first sight, so reasonable as to be hardly worth stating.


pages: 578 words: 168,350

Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies by Geoffrey West

Alfred Russel Wallace, Anton Chekhov, Benoit Mandelbrot, Black Swan, British Empire, butterfly effect, carbon footprint, Cesare Marchetti: Marchetti’s constant, clean water, complexity theory, computer age, conceptual framework, continuous integration, corporate social responsibility, correlation does not imply causation, creative destruction, dark matter, Deng Xiaoping, double helix, Edward Glaeser, endogenous growth, Ernest Rutherford, first square of the chessboard, first square of the chessboard / second half of the chessboard, Frank Gehry, Geoffrey West, Santa Fe Institute, Guggenheim Bilbao, housing crisis, Index librorum prohibitorum, invention of agriculture, invention of the telephone, Isaac Newton, Jane Jacobs, Jeff Bezos, Johann Wolfgang von Goethe, John von Neumann, Kenneth Arrow, laissez-faire capitalism, life extension, Mahatma Gandhi, mandelbrot fractal, Marchetti’s constant, Masdar, megacity, Murano, Venice glass, Murray Gell-Mann, New Urbanism, Peter Thiel, profit motive, publish or perish, Ray Kurzweil, Richard Feynman, Richard Feynman, Richard Florida, Silicon Valley, smart cities, Stephen Hawking, Steve Jobs, Stewart Brand, technological singularity, The Coming Technological Singularity, The Death and Life of Great American Cities, the scientific method, too big to fail, transaction costs, urban planning, urban renewal, Vernor Vinge, Vilfredo Pareto, Von Neumann architecture, Whole Earth Catalog, Whole Earth Review, wikimedia commons, working poor

To give you a sense of the extraordinary shift in perception that has occurred over just the last twenty years, here’s an anecdote from the early days of SFI. Among its founding fathers were two other major figures of twentieth-century academia, both Nobel laureates: Philip Anderson, a condensed matter physicist from Princeton University who had worked on superconductivity and was an inventor, among many other things, of the mechanism of symmetry breaking that underlies the prediction of the Higgs particle; and Kenneth Arrow from Stanford University, whose many contributions to the fundamental underpinnings of economics, from social choice to endogenous growth theory, have been hugely influential. He was the youngest person ever to have been awarded the Nobel Memorial Prize for economics, which five of his students have also received. Anderson and Arrow together with David Pines, also a distinguished condensed matter physicist and founder of SFI, initiated the first major program that put SFI on the map.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

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asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra, zero-sum game

“He doesn’t have the capability and he’s not broad-based. I’m not sure it’s the right thing.” But Corzine stood up for Steck. “Shut the fuck up,” Corzine said. “He just saved the firm.” Steck became a partner. CHAPTER 13 POWER One of the people Goldman hired as a consultant during its consultant-hiring spree was Lawrence Summers, a Philadelphia-born Harvard economist whose two uncles—Paul Samuelson and Kenneth Arrow—had both won Nobel Prizes in economics. Summers’s parents, Robert and Anita, were also economics professors. During the summer of 1986, when Rubin and Friedman were still the co-heads of Goldman’s fixed-income group, Jacob Goldfield, a precocious and gifted young Goldman trader, suggested to Rubin that he and Summers should meet. Goldfield grew up in the Bronx, where his mother was a clerk in the New York City Health Department and his father had a small store, wholesaling women’s clothing.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

There is good reason to believe, however, that the price signal has less of an impact on emissions than public investment and changes to building codes (requiring thermal insulation, for example). 56. The idea that private property and the market allow (under certain conditions) for the coordination and efficient use of the talents and information possessed by millions of individuals is a classic that one finds in the work of Adam Smith, Friedrich Hayek, and Kenneth Arrow and Claude Debreu. The idea that voting is another efficient way of aggregating information (and more generally ideas, reflections, etc.) is also very old: it goes back to Condorcet. For recent research on this constructivist approach to political institutions and electoral systems, see the online technical appendix. 57. For example, it is important to be able to study where political officials from various countries stand in the wealth and income hierarchies (see previous chapters).


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, assortative mating, 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, end world poverty, 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, Kenneth Arrow, 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

—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.” —Kenneth Arrow, Nobel Laureate in Economics, Joan Kenney Professor of Economics, Stanford University “A delightfully brilliant guide to our irrationality—and how to overcome it—in the marketplace and everyplace.” —Geoffrey Moore, author of Crossing the Chasm and Dealing with Darwin “Dan Ariely is one of the most original and consistently interesting social scientists I know. His research covers an unusually broad range of topics, and in every one of them he has produced some distinctive findings and ideas.