The Market for Lemons

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pages: 252 words: 73,131

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

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

Unlike some other recipients of the prize, he hasn’t used his Nobel to secure guru status in politics or business, nor does he chase after high-paying gigs through consulting or corporate board appointments. He seems, to the best of our observation, content pondering big questions in the relaxed and unhurried manner that’s defined his career: when we e-mailed him to ask if he would talk to us about his classic paper on asymmetric information, “The Market for ‘Lemons,’” he responded, “Sure, happy to talk whenever is good for you.”5 In explaining how he came to do the work that ultimately won him a Nobel Prize, the Berkeley economist recalled his experiences as a PhD student at MIT in the 1960s (in the economics department built by Paul Samuelson). He arrived at graduate school just as economists were starting to get past the extreme abstraction that had ruled the profession in earlier decades.

In Akerlof’s view, this was hard to reconcile with extended stretches that many Americans spend without a job, despite a willingness to do just about anything for pay.7 Lots of people do scan the want ads looking for something better than the burger-flipping or telemarketing opportunities that immediately present themselves. But this view of unemployment ignored many of the brutal job market realities experienced by the long-term unemployed that he felt a model should be able to explain. That’s what led him back to the market for lemons, which was a more satisfying framework for understanding why the labor market doesn’t work for so many people. (It wasn’t Akerlof’s last word on why the labor market falls so far short of the Arrow-Debreu ideal, but it was at least a model that he found to be a lot more satisfying than anything that preceded it.). Even if the market for unemployed workers doesn’t quite collapse under the weight of “adverse selection” (the absence of higher-quality items from the market because their owners keep them), it’s possible to see the connection between the markets for used cars and “used” workers: if a job applicant’s previous employer didn’t want to keep him on the payroll, it’s worth asking why not.

You can also imagine that the problem deepens the longer you’ve been out of work: Why on earth hasn’t she found someone willing to give her a job, and what are other prospective employers seeing that I don’t? That same logic explains why, if you’re still single by the time you reach a certain age, it becomes harder and harder to convince a potential mate that there isn’t something wrong with you. And so, voilà, you have markets with lots of unsold used cars and lots of unemployed people desperate for a job at any wage. A New Economic Paradigm “The Market for ‘Lemons’” did more than just build the foundation for the field of information economics. It changed the way economists think about models. As we’ve seen, the lemons model doesn’t talk of buyers, sellers, capital, and labor as extreme abstractions, as Akerlof’s immediate predecessors had: there are cars and dealers and customers with money to spend in the used car market. It also doesn’t build a model from scratch: Where did all these cars come from, and how did each dealer come to get his hands on one?


pages: 545 words: 137,789

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

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

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

Adam Smith’s Invisible Hand 3. Friedrich Hayek’s Telecommunications System 4. The Perfect Markets of Lausanne 5. The Mathematics of Bliss 6. The Evangelist 7. The Coin-Tossing View of Finance 8. The Triumph of Utopian Economics PART TWO: REALITY-BASED ECONOMICS 9. The Prof and the Polar Bears 10. A Taxonomy of Failure 11. The Prisoner’s Dilemma and Rational Irrationality 12. Hidden Information and the Market for Lemons 13. Keynes’s Beauty Contest 14. The Rational Herd 15. Psychology Returns to Economics 16. Hyman Minsky and Ponzi Finance PART THREE: THE GREAT CRUNCH 17. Greenspan Shrugs 18. The Lure of Real Estate 19. The Subprime Chain 20. In the Alphabet Soup 21. A Matter of Incentives 22. London Bridge Is Falling Down 23. Socialism in Our Time Conclusion Notes Acknowledgments Index Also by the Author INTRODUCTION “I am shocked, shocked, to find that gambling is going on in here!”

Reality-based economics is less unified than utopian economics: because the modern economy is labyrinthine and complicated, it encompasses many different theories, each applying to a particular market failure. These theories aren’t as general as the invisible hand, but they are more useful. Once you start to think about the world in terms of some of the concepts I outline, such as the beauty contest, disaster myopia, and the market for lemons, you may well wonder how you ever got along without them. The emergence of reality-based economics can be traced to two sources. Within orthodox economics, beginning in the late 1960s, a new generation of researchers began working on a number of topics that didn’t fit easily within the free market model, such as information problems, monopoly power, and herd behavior. At about the same time, two experimental psychologists, Amos Tversky and Daniel Kahneman, were subjecting rational economic man—Homo economicus—to a withering critique.


pages: 226 words: 59,080

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

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

In this new style, economic theory is not just the exploration of deviations from the single model of perfect competition. Instead, in this new style, the economic model is customized to describe the salient features of reality that describe the special problem under consideration. Perfect competition is only one model among many, although itself an interesting special case. Since the ‘Market for “Lemons”’ [the research that won Akerlof his Nobel Prize] was an early paper in this new style of economics, its origins and history are a saga in that change.” Akerlof, “Writing the ‘The Market for “Lemons”’: A Personal and Interpretive Essay” (2001 Nobel Prize lecture), http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2001/akerlof-article.html?utm_source=facebook&utm_medium=social&utm_campaign=facebook_page. ‡‡ This is the famous Israeli day care center experiment reported in Uri Gneezy and Aldo Rustichini, “A Fine Is a Price,” Journal of Legal Studies 29, no. 1 (January 2000): 1–17.

Economists Agree the Stimulus Lifted the Economy” (Wolfers), 135n “When Economics Students Rebel” (Wren-Lewis), 197n White, Harry Dexter, 1–2 white flight, segregation and, 42 “Why We Learn Nothing from Regressing Economic Growth on Policies” (Rodrik), 35n Wicksell, Knut, 119 Williamson, John, 159–60 Wolfers, Justin, 135n World Bank, 1n, 2, 87 Washington Consensus and, 160 World War II, 2n, 108, 165 Wren-Lewis, Simon, 197n, 198 “Writing ‘The Market for “Lemons”‘: A Personal and Interpretive Essay” (Akerlof), 69n W. W. Norton, xiv–xv Wylie, Andrew, xiv Yale University, 103, 107, 109 ALSO BY DANI RODRIK The Globalization Paradox: Democracy and the Future of the World Economy One Economics, Many Recipes: Globalization, Institutions, and Economic Growth Has Globalization Gone Too Far? Copyright © 2015 by Dani Rodrik All rights reserved First Edition For information about permission to reproduce selections from this book, write to Permissions, W.


pages: 466 words: 127,728

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

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

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

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

. : Radley Balko, Rise of the Warrior Cop: The Militarization of America’s Police Forces (New York: Public Affairs, 2013). Author Jonah Goldberg has documented fascism’s history . . . : Jonah Goldberg, Liberal Fascism: The Secret History of the American Left from Mussolini to the Politics of Meaning (New York: Doubleday, 2008). More ominous was his remark . . . : Quoted in Balko, Warrior Cop, p. 333. SELECTED SOURCES ARTICLES Akerlof, George A. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84, no. 3 (August 1970), pp. 488–500. Alderman, Liz. “Under Chinese, a Greek Port Thrives.” New York Times, October 19, 2012, http://www.nytimes.com/2012/10/11/business/global/chinese-company-sets-new-rhythm-in-port-of-piraeus.html. Alderman, Liz, and Demitris Bounias. “Privatizing Greece, Slowly but Not Surely.”


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

Buyers, aware of this possibility, might therefore be wary of buying a used anything from someone they don’t know, or they might be unwilling to pay the price asked for. As a result, honest sellers (unable to show that they are honest) would have trouble getting a good price for their goods, driving some of them out of the market—a decision that leaves the market overpopulated with dishonest sellers, which further erodes buyers’ trust and prices and so on in a vicious cycle called “adverse selection.”26 The original paper about adverse selection, “The Market for Lemons,” dealt with the case of used cars, but the phenomenon is so pervasive, rearing its head in important markets like those for insurance, that the economist behind the lemons model, George Akerlof, eventually earned a Nobel Prize for this insight.27 The lemons problem explains why middlemen so often appear in markets for used goods: they not only have the expertise to judge quality, but they can vouch for it with their reputation.

Doney and Joseph P. Cannon, “An Examination of the Nature of Trust in Buyer-Seller Relationships,” Journal of Marketing 61, no. 2 (April 1997): 35–51. 26.In insurance contexts, the vicious cycle is sometimes called the death spiral. See David M. Cutler and Richard J. Zeckhauser, “Adverse Selection in Health Insurance,” Forum for Health Economics & Policy (1998). 27.George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” The Quarterly Journal of Economics 84, no. 3 (August 1970): 488–500. 28.Joel Grover and Matt Goldberg, “False Claims, Lies Caught on Tape at Farmers Markets,” NBC Los Angeles, September 23, 2010. 29.Shoshana Walter, “Farm Fakes: A History of Fraudulent Food,” Modern Farmer, May 3, 2013. 30.Specifically, the bill created a way for the markets to tax vendors at farmers’ markets to fund these outside inspectors.


pages: 263 words: 75,610

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

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

According to the Harris Poll, 59 percent of consumers are uncomfortable with web sites that tailor their content or ads based on a person’s preferences. 2. This rests on the view that where information asymmetries persist, markets could become inefficient. Buyers could end up with low-quality goods they paid too high a price for—an inefficient allocation of resources. And if buying again, they may choose a good with the lowest price, knowing they do not know quality (see Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” 488–500). Or market participants could hide some of their qualities to obtain a good or service at a price they otherwise would not be able to. Third, market participants could hide their intention to change their behavior when it is the basis of the transaction (think of a person who begins to drive recklessly after having taken out comprehensive car insurance).

See http://googleblog.blogspot.com/2007/07/robots-exclusion-protocol-now-with-even.html (thanks to David Ryan for pointing this out). 14. Ward, “Fading Data Could Improve Privacy.” Bibliography Agre, Phil and Marc Rotenberg, eds. Technology and Privacy: The New Landscape. Cambridge, MA: MIT Press. 1997. Aimone, James B., Janet Wiles, and Fred H. Gage. “Computational Influence of Adult Neurogenesis on Memory Encoding.” Neuron 61 (2009): 187–202. Akerlof, George A. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84 (1970): 488–500. Anderson, Benedict. Imagined Communities. rev. ed. London: Verso. 1991. Anderson, J. R. and L. J. Schooler. “Reflections of the Environment in Memory.” Psychological Science 2 (1991): 396–408. Arnsdorf, Isaac. “Seattle Attorney Finds that the Internet Won’t Let Go of His Past.” The Seattle Times (Aug. 17, 2008).


pages: 385 words: 111,807

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

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

Another way to put it is to say that a society is in a state of Pareto optimality if no one can be made better off without making someone worse off. 7. In Akerlof’s classic example of ‘the market for lemons’, given the difficulty of ascertaining the quality of used cars before purchase, prospective buyers will not be willing to stump up good money even for what is a truly good second-hand car. Given this, owners of good used cars will shun the market, lowering the average quality of cars further, leading, in the extreme case, to the disappearance of the market itself. See G. Akerlof, ‘The market for “lemons”: quality uncertainty and the market mechanism’, Quarterly Journal of Economics, vol. 84, no. 4 (1970). 8. The remaining two volumes were edited by Engels and published after Marx’s death. 9.


pages: 561 words: 87,892

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

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

To put China’s gold medal haul into context, the Middle Kingdom managed to win only five gold medals in the Seoul Olympics in 1988. 7. For an informed discussion of the client state problem, see Tony Judt’s Post War: A History of Europe since 1945 (William Heinemann, London, 2005). 8. An Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776. As it turned out, this was a remarkably auspicious year for political and economic developments. 9. See, for example, ‘The market for lemons: quality uncertainty and the market mechanism’, the groundbreaking paper by George A. Akerlof, Quarterly Journal of Economics, 84.3 (1970), pp. 488–500. 10. For an interesting modern discussion of the role of ‘good government’, see Timothy Besley’s ‘ ‘Principled Agents?’ The Political Economy of Good Government’, The Lindahl Lectures (Oxford, 2006). The case for government in general is famously well expressed in Thomas Hobbes’s Leviathan, where the ‘state of nature’ gives rise to continuous wars leaving human lives ‘solitary, poor, nasty, brutish and short’.

The classic modern-day texts on these issues include John Rawls, A Theory of Justice (Harvard University Press, Cambridge, MA, 1971) and Robert Nozick, Anarchy, State and Utopia (Basic Books, New York, 1974). SELECT BIBLIOGRAPHY Aherne, A., Gagnon, J., Haltmaier, J. and Kamin, S., Preventing Deflation: Lessons from Japan’s Experience in the 1990s, Federal Reserve International Finance Discussion Paper, Washington DC, 2002 Akerlof, G., ‘The market for lemons: quality uncertainty and the market mechanism’, Quarterly Journal of Economics, 84.3 (1970), pp. 488–500 Balassa, B., ‘The purchasing power doctrine: a reappraisal’, Journal of Political Economy, 72 (1964), pp. 584–96 Barbone, L., Bontch-Osmolovssky, M. and Zaidi, S., The Foreign-born Population in the European Union and its Contribution to National Tax and Benefit Systems, World Bank, Washington, DC, April 2009 Baumol, W., Litan, R. and Schramm, C., Good Capitalism, Bad Capitalism and the Economics of Growth and Prosperity, Yale University Press, New Haven, 2007 Bernanke, B., The Great Moderation, Federal Reserve, Washington DC, 2004 ———, The Global Savings Glut, Federal Reserve, Washington DC, 2005 Besley, T., ‘Principled Agents?

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

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

Both the Krugman/Layard manifesto and a recording of the debate can be found at http://www.manifestoforeconomicsense.org/ (accessed Jan. 2013). Krugman, End This Depression Now!. Source: OECD Economic Outlook 2012. P. Krugman, ‘Dubya’s Double Dip?’, New York Times, 2 Aug. 2002, at http://www. nytimes.com/2002/08/02/opinion/dubya-­s-­double-­dip.html (accessed Jan. 2013). CHAPTER 6: LOSS OF TRUST, LOSS OF GROWTH   1. G. Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, 84.3 (Aug. 1970): 488–500.   2. J. Wood and P. Berg, ‘Rebuilding Trust in Banks’, Gallup Business Journal, at http:// businessjournal.gallup.com/content/148049/rebuilding-­trust-­banks.aspx#2 (accessed Jan. 2013).   3. B. Stevenson and J. Wolfers, ‘Trust in Public Institutions over the Business Cycle’, Federal Reserve Bank of San Francisco Working Paper Series 2011-­11, San Francisco, Mar. 2011.   4.

‘Vicodin (Hydrocodone Bitartrate and Acetaminophen, USP)’, Chicago, Sept. 2011 Acemoglu, D. and Robinson, J. Why Nations Fail: The Origins of Power, Prosperity and Poverty, Crown, New York, 2012 Ahamad, L. Lords of Finance, Random House, New York, 2009 Aherne, A., Gagnon, J., Haltmaier, J. and Kamin, S. ‘Preventing Deflation: Lessons from Japan’s Experience in the 1990s’, Federal Reserve International Finance Discussion Paper, Washington, DC, 2002 Akerlof, G. ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, 84.3 (Aug. 1970): 488–500 ‘A Makeshift Budget’, The Times, 28 Apr. 1931 ‘An Emergency Budget’, The Times, 11 Sept. 1931 Arrow. K. J. The Limits of Organization, The Fels Lectures on Public Policy Analysis, Norton, New York, 1974 Bacon, J. The Illustrated Atlas of Jewish Civilization, André Deutsch, London, 1990 Balls, E.


pages: 503 words: 131,064

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

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

attribute substitution Daniel Kahneman and Shane Frederick (2002), “Representativeness Revisited: Attribute Substitution in Intuitive Judgment,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman, eds., Heuristics and Biases: The Psychology of Intuitive Judgment, Cambridge University Press, 49–81. a lemons market George Akerlof (1970), “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, 83:488–500. George E. Hoffer and Michael D. Pratt (1987), “Used Vehicles, Lemons Markets, and Used Car Rules: Some Empirical Evidence,” Journal of Consumer Policy, 10:409–14. Steven E. Kaplan, Pamela B. Roush, and Linda Thorne (2007), “Andersen and the Market for Lemons in Audit Reports,” Journal of Business Ethics, 70:363–73. Globalization is making Rick Mullin (2011), “Shock to the System: Big Questions About Drug Safety Arise in the Wake of Rampant Supply-Chain Globalization,” Chemical & Engineering News, 89:11–20.


pages: 386 words: 122,595

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

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

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

But once there is a discount built into the market, owners of high-quality cars become even less likely to sell them—which guarantees the market will be full of lemons. In theory, the market for high-quality used cars will not work, much to the detriment of anyone who may want to buy or sell such a car. (In practice, such markets often do work for reasons explained by the gentlemen with whom Mr. Akerlof shared his Nobel prize; more on that in a moment.) “The Market for Lemons” is characteristic of the kinds of ideas recognized by the Nobel committee. It is, in the words of the Royal Swedish Academy of Sciences, “a simple but profound and universal idea, with numerous implications and widespread applications.” Health care, for example, is plagued with information problems. Consumers of health care—the patients—almost always have less information about their care than their doctors do.


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The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy

A far more complete discussion of many of the topics addressed in this section is contained in Alan Blinder, After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (London: Penguin, 2013), Pt. II. 25. Turner, The Turner Review, pp. 32–5. 26. Haldane, Brennan and Madouros, Figure 19. 27. See Independent Commission on Banking, Fig. 5.5, and Ben Broadbent, ‘Deleveraging’, 15 March 2012, http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech553.pdf, Figure 3. 28. Broadbent, ‘Deleveraging’, p. 4. 29. George Akerloff, ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, vol. 84, no. 3 (1970), pp. 488–500. 30. Derivative transactions include a variety of financial contracts, including structured debt obligations, swaps, futures, options, caps, floors, collars, forwards, and various combinations of these. See http://en.wikipedia.org/wiki/Derivative_(finance). 31. See Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and the Markets (London: Penguin, 2004). 32.

‘The World our Grandchildren will Inherit: The Rights Revolution and Beyond’, National Bureau of Economic Research Working Paper 17994, April 2012. www.nber.org. Admati, Anat and Martin Hellwig. The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It (Princeton: Princeton University Press, 2013). Ahamed, Liaquat. Lords of Finance: The Bankers who Broke the World (New York: Penguin, 2009). Akerloff, George. ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, vol. 84, no. 3 (1970), pp. 488–500. Alesina, Alberto and Silvia Ardagna. ‘Large Changes in Fiscal Policy: Taxes versus Spending’, Tax Policy and the Economy, vol. 24 (2010), ed. Jeffrey R. Brown (Cambridge, MA: National Bureau of Economic Research). http://www.nber.org/chapters/c11970.pdf?new_window=1. Alessandri, Piergiorgio and Andrew Haldane.


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

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

., 1994, I, Candidate for Governor: And How I Got Licked (originally published 1935), London, University of California Press, p. 109. 3: Intermediation 1. McCardie, J., Armstrong v. Jackson (1917) 2KB 822. 2. George Akerlof employed the used car market as an example to highlight how markets can break down when information asymmetry is present in his classic 1970 article: Akerlof, G.A., 1970, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, 84 (3), pp. 488–500. 3. Shiller, R.J., 1981, ‘Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?’, The American Economic Review, 71 (3), June, pp. 421–36. 4. Kay, J., 2012, ‘The Kay Review of UK Equity Markets and Long-Term Decision Making’, Final Report, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253454/bis-12–917-kay-review-of-equity-markets-final-report.pdf. 5.

, Journal of Finance, 66 (6), December, pp. 2055–82. Adams, J., 1995, Risk: The Policy Implications of Risk Compensation and Plural Rationalities, London, Routledge. Adams, R.McC., 1981, Heartland of Cities, Chicago, University of Chicago Press. Admati, A.R., and Hellwig, M.F., 2013, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It, Princeton and Oxford, Princeton University Press. Akerlof, G.A., 1970, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, 84 (3), pp. 488–500. Albert, M., 1993, Capitalisme contre capitalisme, Paris, Seuil; trans. P. Haviland as Capitalism vs Capitalism, London, Whurr Publishers. Americans for Financial Reform, 2014, 11 December, http://ourfinancialsecurity.org/#. Andrews, S., 2010, ‘Larry Fink’s $12 Trillion Shadow’, Vanity Fair, April.

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

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

A "fair" premium based on the average incidence of divorce would be unprofitable for the insurance company. Culture and Prosperity { 239} Asymmetric information issues pervade risk markets. The insurer would sensibly raise the premium to match the characteristics of those who want policies. But this makes divorce insurance attractive only to those whose marriages are truly on the rocks. The cautious insurer must raise the premium still further. A divorce insurance market would be like the market for lemons. As in the wallet auction, there is no price at which a seller would wish to sell at which a buyer would wish to buy. So no market can exist, and there are no markets in divorce insurance. Divorce is extreme: the gap in knowledge between the potential insurer and the insured is insurmountable. To offer marriage and divorce insurance, an insurance company would have to make an intolerable intrusion into personal affairs.

I have written books on the tax and benefit system (Dilnot, Kay, and Morris [1984]; Kay and King [1990]), and while I don't now hold all the views I did then, I still urge the reader to read (or better still buy) them. 7. See chapter 7, note 14. 8. See Easterly (200 1) for a discussion of some of the issues. {bibliography} • • • • • • • • • • • • • • • • • • • Adams,]. 1995. Risk. London: UCL Press. Akerlof, G. A. 1970. "The Market for Lemons: Quality Uncertainty and the Market Mechanism." Quarterly Journal ofEconomics 84 (August): 488-500. ---. 1984. An Economic Theorist's Book ofTales. Cambridge: Cambridge University Press. ---. 2001. Behavioural Macroeconomics and Macroeconomic Behaviour. Nobel Prize Lecture, Stockholm. Albert, M. 1990. Capitalisme contre capitalisme. Paris: Seuil; trans. P. Haviland, as Capitalism vs. Capitalism.

State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

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Asian financial crisis, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, Nick Leeson, Potemkin village, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, Washington Consensus

Whether the Europeans know significantly more than Americans about how to square this circle remains to be seen. In any event, the art of state-building will be a key component of national power, as important as the ability to deploy traditional military force to the maintenance of world order. bibliography Akerlof, George A. 1982. “Labor Contracts as Partial Gift Exchange,” Quarterly Journal of Economics 47(4): 543–69. ——. 1970. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84: 488–500. Alchian, Armen A. 1950. “Uncertainty, Evolution, and Economic Theory,” Journal of Political Economy 58: 211–21. Alchian, Armen A., and Demsetz, H. 1972. “Production, Information Costs, and Economic Organization,” American Economic Review 62(5): 777–95. Allison, Graham T. Jr. 1971. Essence of Decision (Boston: Little, Brown).


pages: 242 words: 68,019

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

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

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


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

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

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

David Miles, Bank of England, “Monetary Policy in Extraordinary Times,” speech given to the Centre for Economic Policy Research and London Business School, February 23, 2011. http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech475.pdf 77. Investopedia staff, “Case Study: The Collapse of Lehman Brothers,” Investopedia; April 2, 2009. http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp#axzz1bZ61K9wz. 78. George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (Aug. 1970). http://sws.bu.edu/ellisrp/EC387/Papers/1970Akerlof_Lemons_QJE.pdf. 79. “Lehman Brothers F1Q07 (Qtr End 2/28/07) Earnings Call Transcript,” Seeking Alpha, Mar. 14, 2007. http://seekingalpha.com/article/29585-lehman-brothers-f1q07-qtr-end-2-28-07-earnings-call-transcript?part=qanda. 80.


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The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

The question of why the interest was higher seems not to have been asked. See Hellwig (2009) and the references given there, as well as Acharya et al. (forthcoming). 30. Any potential buyer of the loan would fear that the bank might be selling bad loans while keeping good ones. This is an example of what is known in economics as a “lemons problem,” after Akerlof’s (1970) Nobel Prize–winning analysis of what he called the market for “lemons.” Akerlof (1970) shows that markets in which sellers have better information than buyers may work very differently from ordinary markets. For example, in the market for used cars, potential buyers might require large discounts in compensation for the risk that sellers might be hiding important information about their cars and about their reasons for selling them. If these discounts induce owners of good cars to refrain from selling and instead to hold onto their cars a bit longer, the market for used cars might, in fact, work as a market for bad cars, “lemons.”

“The Role of Securitization in Mortgage Renegotiation.” Journal of Financial Economics 102 (3): 559–578. Ahamed, Liaquat. 2009. Lords of Finance. New York: Penguin. Aiyar, Shekhar, Charles W. Calomiris, and Tomasz Wieladek. 2012. “Does Macro-Pru Leak? Evidence from a UK Policy Experiment.” NBER Working Paper 17822. National Bureau of Economic Research, Cambridge, MA. Akerlof, George A. 1970. “The Market for “Lemons”: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84 (3): 488–500. Akerlof, George A., and Paul M. Romer. 1993. “Looting: The Economic Underworld of Bankruptcy for Profit.” Brookings Papers on Economic Activity 1993 (2): 1–73. Alesina, Alberto, and Lawrence J. Summers. 1993. “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence.”


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

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

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


pages: 389 words: 98,487

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

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

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


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

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

Akerlof and Stiglitz shared the 2001 Nobel Memorial Prize in Economic Sciences with Michael Spence for their work on information asymmetry, the idea that markets do not efficiently allocate resources when there is a large gap between the information available to sellers and buyers. Akerlof’s most famous paper—one of the most frequently cited papers in the history of economics—is George A. Akerlof, “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84(3, 1970): 488–500. In this paper, Akerlof uses the market for used cars as an example of the “lemon effect”: where the quality of cars is low, the owners of good cars will not put their cars up for sale because buyers, who lack information, will assume those good cars are merely average. As a result, the overall quality of used cars being sold is low, and it is difficult for sellers and buyers of higher-quality used cars to find each other.


pages: 523 words: 111,615

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

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

“Technical Change, Inequality, and the Labor Market.” Journal of Economic Literature 40:1, pp. 7–72. Acemoglu, Daron, and James Robinson. 2008. “The Role of Institutions in Growth and Development.” Working Paper No. 10. Washington, DC: Commission on Growth and Development. Achenbach, Joel. 2010. “The National Debt and Washington’s Deficit of Will.” Washington Post, 15 April. Akerlof, George. 1970. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84:3, pp. 488–500. Alesina, Alberto, and Edward Glaeser. 2006. Fighting Poverty in the US and Europe: A World of Difference. Oxford: Oxford University Press. Alesina, Alberto, Edward Glaeser, and Bruce Sacerdote. 2001. “Why Doesn’t the US Have a European-style Welfare State?” Discussion Paper No. 1933. Cambridge, MA: Harvard Institute for Economic Research.


pages: 209 words: 89,619

The Precariat: The New Dangerous Class by Guy Standing

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8-hour work day, banking crisis, barriers to entry, Bertrand Russell: In Praise of Idleness, call centre, Cass Sunstein, centre right, collective bargaining, corporate governance, crony capitalism, deindustrialization, deskilling, fear of failure, full employment, hiring and firing, Honoré de Balzac, housing crisis, illegal immigration, immigration reform, income inequality, labour market flexibility, labour mobility, land reform, libertarian paternalism, low skilled workers, lump of labour, marginal employment, Mark Zuckerberg, means of production, mini-job, moral hazard, Naomi Klein, nudge unit, pensions crisis, placebo effect, post-industrial society, precariat, presumed consent, quantitative easing, remote working, rent-seeking, Richard Thaler, rising living standards, Ronald Coase, Ronald Reagan, science of happiness, shareholder value, Silicon Valley, The Market for Lemons, The Nature of the Firm, The Spirit Level, Tobin tax, transaction costs, universal basic income, unpaid internship, winner-take-all economy, working poor, working-age population, young professional

This commodification of education is a societal sickness. There is a price to pay. If education is sold as an investment good, if there is an unlimited supply of certificates and if these do not yield the promised return, in terms of access to good jobs and high income with which to pay off debts incurred because 72 THE PRECARIAT they were nudged to buy more of the commodity, more entering the precariat will be angry and bitter. The market for lemons comes to mind. As does the old Soviet joke, in which the workers said, ‘They pretend to pay us, we pretend to work’. The education variant would be as follows: ‘They pretend to educate us, we pretend to learn’. Infantilising the mind is part of the process, not for the elite but for the majority. Courses are made easier, so that pass rates can be maximised. Academics must conform. Streaming schooling for the precariat There are signs that commodified educational systems are being restructured to stream youth into the flexible labour system, based on a privileged elite, a small technical working class and a growing precariat.


pages: 350 words: 103,988

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

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

Aczel, Amir D. 1996. Fermat’s Last Theorem, New York, Delta. Aghion, Philippe, Caroli, Eve, and Garcia-Penalosa, Cecilia. 1999. “Inequality and Economic Growth: The Perspective of the New Growth Theories.” Journal of Economic Literature 37, 1615–1660. Aghion, Philippe, and Tirole, Jean. 1994. “The Management of Innovation.” Quarterly Journal of Economics 109, 1185–1210. Akerlof, George. 1970. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84, 488–500. Albanesi, Stefania. 2000. “Inflation and Inequality.” Unpublished, Northwestern University, Chicago. Alesina, Alberto. 1997. “The Political Economy of High and Low Growth.” In B. Pleskovic and J. Stiglitz, eds., Annual World Bank Conference on Development Economics. Alpers, Svetlana. 1988.


pages: 339 words: 95,988

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

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

THE BRAND-NEW USED-CAR CONUNDRUM: This thesis, and indeed much of what we think today about “asymmetric information,” stems from a paper that George A. Akerlof wrote during his first year as an assistant professor at Berkeley in 1966–67. It was rejected three times—two of the journals told Akerlof that they “did not publish papers on topics of such triviality,” as he later recalled—before being published as George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, August 1970. Some thirty years later, the paper won Akerlof the Nobel Prize in Economics; he is widely considered the nicest man to have ever won the award. THE ENRON TAPES: As of this writing, the tapes could be heard on http:// www.cbsnews.com/stories/2004/06/01/eveningnews/main6_20626.shtml. See also Richard A.


pages: 586 words: 159,901

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

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

"Leveraged Lives," Texas Observer. December 23, p. 1. Aggharwal, Rajesh (1995). "Capital Structure After Debt Restructurings: Why Do Firms Remain Overleveraged?," Dartmouth College mimeo Qune). Aghion, Philippe, Oliver Hart, and John Moore (1992). "The Economics of Bankruptcy Reform," Massachusetts Institute of Technology Economics Department Working Paper 92-11, May. Akerlof, George (1970). "The Market for Lemons: Quality Uncertainty and the Market Mechanism." Quarterly Journal of Economics 84 (August), pp. 488-500. Alberts, William W., and Nikhil P. Varaiya (1989). "Assessing the Profitability of Growth by Acquisition," International Journal of Industrial Organization!, pp. 133-149. Ando, Albert, and Franco Modigliani (1963). "The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests," American Economic Review 55, pp. 55-84.


pages: 289 words: 113,211

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

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

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


pages: 543 words: 147,357

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

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

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


pages: 510 words: 120,048

Who Owns the Future? by Jaron Lanier

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

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


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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

Acharya, Viral, Matthew Richardson, Stijn van Nieuwerburgh, and Lawrene J. White. 2011. Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance. Princeton, NJ: Princeton University Press. Adelino, Manuel, Antoinette Schoar, and Felipe Severino. 2011. “Credit Supply and House Prices: Evidence from Mortgage Market Segmentation.” Unpublished paper, Tuck School, Dartmouth College. Akerlof, George A. 1970. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84(3):488–500. ———. 1976. “The Economics of Caste and of the Rat Race and Other Woeful Tales.” Quarterly Journal of Economics 90(4):599–617. Akerlof, George A., and Rachel E. Kranton. 2010. Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being. Princeton, NJ: Princeton University Press.


pages: 432 words: 127,985

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

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

WILLIAMS, JULIE. Senior counsel for the Bank Board. WISCHER, JUDY. CEO of Lincoln Savings. WRIGHT, BETTY. Second wife of Jim Wright. WRIGHT, JAMES “JIM,” JR. (D-TX). Speaker of the House, 1987–1989. WYLIE, CHALMERS P. (R-OH). Member of the House Banking Committee. REFERENCES Adams, Jim Ring. 1990. The Big Fix: Inside the S&L Scandal, New York: John Wiley & Sons. Akerlof, George. 1970. “The Market for ‘Lemons’: Quality, Uncertainty, and the Market Mechanism.” Quarterly Journal of Economics 84 (3):488–500. Akerlof, George, and Paul M. Romer. 1993. “Looting: The Economic Underworld of Bankruptcy for Profit.” Brookings Papers on Economic Activity 2:1–73. American Banker, 1987. Article dated February 10. Barry, John M. 1989. The Ambition and the Power: The Fall of Jim Wright; A True Story of Washington, New York: Viking Penguin.


pages: 1,104 words: 302,176

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

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

Obesity, Business and Public Policy. Cheltenham, UK/Northhampton, MA: Edward Elgar. Aeppel, Timothy. (2015). “Jobs and the Clever Robot,” Wall Street Journal, February 25, pp. A1, A10. Agar, Jon. (2013). Constant Touch: A Global History of the Mobile Phone. London: Icon. Agus, David B. (2012). “The 2000-Year-Old Wonder Drug,” The New York Times, December 12, p. A31. Akerlof, George A. (1970). “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (August): 488–500. Alexander, June Granatir. (2009). Daily Life in Immigrant America, 1870–1920: How the Second Great Wave of Immigrants Made Their Way in America. Chicago, IL: Ivan R. Dee. Alexopoulos, Michell, and Cohen, Jon. (2009). “Measuring Our Ignorance, One Book at a Time: New Indicators of Technological Change 1909–1949,” Journal of Monetary Economics 56, no. 4 (May): 450–70.