George Akerlof

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pages: 252 words: 73,131

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

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

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

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

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


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, 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, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, MITM: man-in-the-middle, 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, Stanford marshmallow experiment, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel

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

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

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


pages: 611 words: 130,419

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Albert Einstein, algorithmic trading, Andrei Shleifer, autonomous vehicles, bank run, banking crisis, basic income, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, disintermediation, Donald Trump, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, full employment, George Akerlof, germ theory of disease, German hyperinflation, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, market bubble, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, publish or perish, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

Acknowledgments My 2017 American Economic Association (AEA) presidential address, “Narrative Economics,” was published in the April 2017 issue of the association’s journal, the American Economic Review. Many passages from that presidential address have found their way, often with modifications, into this book. This book is strongly influenced by two books I wrote with George Akerlof, Animal Spirits (2009) and Phishing for Phools (2015). Another strong influence is the book George Akerlof wrote with Rachel Kranton, Identity Economics (2011). Narratives play a role in all these books. Working with George aided my thinking immeasurably. The research that underlies this book has taken place over decades. I acknowledge research support over the years from the US National Science Foundation, the Cowles Foundation for Research in Economics at Yale University, the Smith Richardson Foundation, the Whitebox Foundation via the Yale School of Management, and the James Tobin research fellowships at Yale.

In fact, publishers who want to survive in a highly competitive business where others use book jackets have had no choice, for the book jacket is part of what George Akerlof and I called a phishing equilibrium. In a competitive market in which competitors manipulate customers, and in which profit margins are competed away to normal levels, no one company can choose not to engage in similar manipulations. If they tried, they might be forced into bankruptcy. A phishing equilibrium with a certain acceptable level of dishonesty in narrative is therefore established.14 Phishing equilibria may not be all that bad. In the case of the book cover, there has developed an art of book jackets that sometimes have significant value. Another example of marketing-driven contagion is “the news”: the harvest of new information that news publishers hope will grab people’s attention on a given day. “Phools,” as George Akerlof and I call them, who do not think about the marketing efforts, are apt to think that events exogenously give us the news by jumping out at us.

But Keynes was not talking about pure economics as we understand it today. His words “vengeance” and “despairing convulsions of revolution” suggest narratives filled with moral underpinnings, reaching to the deeper meaning of our activities. From Irrational Exuberance to Narrative Economics This book is the capstone of a train of thought that I have been developing over much of my life. It draws on work that I and my colleagues, notably George Akerlof, have done over decades,13 culminating in my presidential address, “Narrative Economics,” before the American Economic Association in 2017 and my Marshall Lectures at Cambridge University in 2018. This book makes a broad attempt at synthesizing the ideas in all these works, linking these ideas to epidemiology (the branch of science concerned with the spread of diseases) and putting forth the notion that thought viruses are responsible for many of the changes we observe in economic activities.


pages: 471 words: 97,152

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

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

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

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

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


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Finance and the Good Society by Robert J. Shiller

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

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

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

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


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

"Robert Solow", 3Com Palm IPO, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, Paul Samuelson, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, Supply of New York City Cabdrivers, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

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

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

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


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The Future of Capitalism: Facing the New Anxieties by Paul Collier

"Robert Solow", accounting loophole / creative accounting, Airbnb, assortative mating, bank run, Berlin Wall, Bernie Sanders, bitcoin, Bob Geldof, bonus culture, business cycle, call centre, central bank independence, centre right, Commodity Super-Cycle, computerized trading, corporate governance, creative destruction, cuban missile crisis, David Brooks, delayed gratification, deskilling, Donald Trump, eurozone crisis, financial deregulation, full employment, George Akerlof, Goldman Sachs: Vampire Squid, greed is good, income inequality, industrial cluster, information asymmetry, intangible asset, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge economy, late capitalism, loss aversion, Mark Zuckerberg, minimum wage unemployment, moral hazard, negative equity, New Urbanism, Northern Rock, offshore financial centre, out of africa, Peace of Westphalia, principal–agent problem, race to the bottom, rent control, rent-seeking, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, sovereign wealth fund, The Wealth of Nations by Adam Smith, theory of mind, too big to fail, trade liberalization, urban planning, web of trust, zero-sum game

Academia has become increasingly compartmentalized into silos of specialism. This yields advantages in depth of knowledge, but the present task spans several of these silos. This book has only been possible because I have learned from collaborations with an exceptionally wide range of specialists of world-renown. The new social divergence is partly driven by changes in social identities; from George Akerlof, I have learned the new psycho-economics of how people behave in groups. It is partly driven by globalization gone wrong; from Tony Venables, I have learned the new economic dynamics of metropolitan agglomeration and why provincial cities can implode. It is partly driven by the deteriorating behaviour of firms; from Colin Mayer, I have learned what can be done about this loss of purpose. Most fundamentally, it is driven by the Utilitarian takeover of public policy; from Tim Besley, I have learned a new fusion of moral theory and political economy, and from Chris Hookway, I have learned the philosophical origins of pragmatism.

By joining them up into a causal chain, actions that are not in our immediate self-interest may then look rational, creating enlightened self-interest. At its best, this expands our knowledge. At its worst, it creates a rupture between reality and what we believe – narratives as ‘fake news’.15 True or false, stories are powerful. In their devastating analysis of the financial crisis, two Nobel Laureates, George Akerlof and Robert Shiller, conclude that ‘stories no longer merely explain the facts, they are the facts’.16 What is true of financial crises turns out also to apply to the outbreak of mass violence. New research finds that the best way of predicting such outbreaks is to monitor the narratives circulating in the media.17 The three types of narrative – belonging, obligation and causality – fit together to forge a web of reciprocal obligations.

A world filled only by economic man would not be the triumphantly functional paradise envisaged by simple economics textbooks, where selfishness is apparently all that is needed. Those textbooks presuppose a society in which rules have already been agreed and are respected. ECON 101 starts where SOC PSY 999 and POL SCI 999 finish. Economists are belatedly recognizing this: the pioneers have been George Akerlof and his co-author Rachel Kranton.20 But as it catches up, economics also brings some useful insights. One such recent insight, with huge implications, concerns the evolution of ethical norms. It comes from Tim Besley, who takes his inspiration from biology: norms, like genes, get transmitted from parents to children.21 But the process looks very different. Tim starts from an imagined society in which some people hold one norm, and others a different one.


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

"Robert Solow", 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, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

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

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

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


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

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

Phishing for Phools Phishing for Phools THE ECONOMICS OF MANIPULATION AND DECEPTION GEORGE A. AKERLOF AND ROBERT J. SHILLER Princeton University Press • PRINCETON AND OXFORD Copyright © 2015 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu Jacket illustration © Edward Koren. Jacket design by Jason Alejandro. “(How Much Is That) Doggie in the Window?” Written by Bob Merrill. Copyright © 1953, 1981 Golden Bell Songs. Used by permission. All Rights Reserved ISBN 978-0-691-16831-9 British Library Cataloging-in-Publication Data is available This book has been composed in Adobe Galliard and Formata by Princeton Editorial Associates Inc., Scottsdale, Arizona Printed on acid-free paper. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 CONTENTS PREFACE vii INTRODUCTION Expect to Be Manipulated: Phishing Equilibrium 1 PART ONE Unpaid Bills and Financial Crash CHAPTER ONE Temptation Strews Our Path 15 CHAPTER TWO Reputation Mining and Financial Crisis 23 PART TWO Phishing in Many Contexts CHAPTER THREE Advertisers Discover How to Zoom In on Our Weak Spots 45 CHAPTER FOUR Rip-offs Regarding Cars, Houses, and Credit Cards 60 CHAPTER FIVE Phishing in Politics 72 CHAPTER SIX Phood, Pharma, and Phishing 84 CHAPTER SEVEN Innovation: The Good, the Bad, and the Ugly 96 CHAPTER EIGHT Tobacco and Alcohol 103 CHAPTER NINE Bankruptcy for Profit 117 CHAPTER TEN Michael Milken Phishes with Junk Bonds as Bait 124 CHAPTER ELEVEN The Resistance and Its Heroes 136 PART THREE Conclusion and Afterword CONCLUSION: EXAMPLES AND GENERAL LESSONS New Story in America and Its Consequences 149 AFTERWORD The Significance of Phishing Equilibrium 163 ACKNOWLEDGMENTS 175 NOTES 181 BIBLIOGRAPHY 233 INDEX 257 PREFACE It’s “the economy, stupid!”

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

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


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

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

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

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

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


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To Sell Is Human: The Surprising Truth About Moving Others by Daniel H. Pink

always be closing, Atul Gawande, barriers to entry, business cycle, call centre, Cass Sunstein, Checklist Manifesto, choice architecture, complexity theory, Credit Default Swap, Daniel Kahneman / Amos Tversky, disintermediation, future of work, George Akerlof, information asymmetry, Jeff Bezos, Kickstarter, longitudinal study, Marc Andreessen, Menlo Park, out of africa, Richard Thaler, rolodex, Ronald Reagan, Steve Jobs, The Market for Lemons, Upton Sinclair, Wall-E, zero-sum game

Rosabeth Moss Kanter, “The ‘White Coat’ Economy of Massachusetts,” Boston Globe, May 9, 2006; Derek Thompson, “America 2020: Health Care Nation,” Atlantic, August 17, 2010, available at http://www.theatlantic.com/business/archive/2010/08/america-2020-health-care-nation/61647/. CHAPTER 3. FROM CAVEAT EMPTOR TO CAVEAT VENDITOR 1. George A. Akerlof, “Writing ‘The Market for “Lemons’”: A Personal and Interpretive Essay,” available at http://www.nobelprize.org/nobel_prizes/economics/laureates/2001/akerlof-article.html. 2. George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (August 1970): 488–500. 3. Ibid, 489. 4. Joe Girard with Stanley H. Brown, How to Sell Anything to Anybody (New York: Fireside, 2006; 1977), 6. 5. Ibid., 251. 6. Ibid., 121, 173. 7.

It turns out that these two word clouds, taken together, can help us puncture one of the most pervasive myths about selling in all its forms. The beliefs embedded in that first image—that sales is distasteful because it’s deceitful—aren’t so much inherently wrong as they are woefully outdated. And the way to understand that is by pulling back the layers of that second image. Lemons and Other Sour Subjects In 1967, George Akerlof, a first-year economics professor at the University of California, Berkeley, wrote a thirteen-page paper that used economic theory and a handful of equations to examine a corner of the commercial world where few economists had dared to tread: the used-car market. The first two academic journals where young Akerlof submitted his paper rejected it because they “did not publish papers on topics of such triviality.”1 The third journal also turned down Akerlof’s study, but on different grounds.

In almost every pitch, the main ingredients are words—or in the case of one type, a word—but you can flavor certain varieties with images. For example, you can enliven question pitches, one-word pitches, and rhyming pitches by accompanying them with a single photograph or illustration that captures your idea. As digital communication relies less on text and more on images, your subject line and Twitter pitches can link to a compelling visual. You can even use props. For instance, if George Akerlof, the economist I discussed in Chapter 3, were pitching his idea about the cascading consequences of information asymmetry, he might hold up a lemon. Likewise, video offers a way to combine the efficiency of electronic communication with the intimacy of seeing another person’s face and hearing her voice. One excellent technique on this front is sending short video messages by e-mail, which you can do almost effortlessly, and usually for free, on QuickTime (get the details at: http://www.quicktime.com).


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

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

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

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

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


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

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

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

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

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


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

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

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

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

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


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The Unbanking of America: How the New Middle Class Survives by Lisa Servon

Affordable Care Act / Obamacare, Airbnb, basic income, Build a better mousetrap, business cycle, Cass Sunstein, choice architecture, creative destruction, Credit Default Swap, employer provided health coverage, financial exclusion, financial independence, financial innovation, gender pay gap, George Akerlof, gig economy, income inequality, informal economy, Jane Jacobs, Joseph Schumpeter, late fees, Lyft, M-Pesa, medical bankruptcy, microcredit, Occupy movement, payday loans, peer-to-peer lending, precariat, Ralph Nader, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, sharing economy, too big to fail, transaction costs, unbanked and underbanked, underbanked, universal basic income, Unsafe at Any Speed, We are the 99%, white flight, working poor, Zipcar

White, “Why Banks Love Debit Cards Again,” Time, March 28, 2013. http://business.time.com/2013/03/28/why-banks-love-debit-cards-again/ Despite these two huge suits: Pew Charitable Trusts, “Checks and Balances,” p. 3. 34 “have lost an essential tool”: Jessica Silver-Greenberg and Robert Gebeloff, “Arbitration Everywhere: Stacking the Deck of Justice,” New York Times, DealBook blog, October 31, 2015. http://www.nytimes.com/2015/11/01/business/dealbook/arbitration-everywhere-stacking-the-deck-of-justice.html “they tend to do them”: Ibid. George Akerlof and Robert Shiller: George A. Akerlof and Robert Shiller, Phishing for Phools: The Economics of Manipulation and Deception (Prince­ton, NJ: Princeton University Press), p. xi. 36 made it a common catchphrase: Renee Haltom, “Failure of Continental Illinois,” Federal Reserve History, November 22, 2013. http://www.federalreservehistory.org/Events/DetailView/47 37 “other people’s money”: Other People’s Money is the title of Louis Brandeis’s 1914 treatise.

Hackett links this shift to companies’ fear that lawsuits will force them to “abandon lucrative billing practices. . . . When banks make mistakes or do bad things,” Hackett says, “they tend to do them many times and to many people.” Banks are not the only type of business to engage in practices that aren’t in the best interest of consumers. In their book Phishing for Phools, the Nobel Prize–winning economists George Akerlof and Robert Shiller argue that the free market is set up to reward tricksters. Business people, they say, are under pressure to compete and to make the most profit possible. This environment leads them to engage in manipulation and deception. “The economic system,” Akerloff and Shiller write, “is filled with trickery.” Manipulation and deception, from opaque fees to unethical debt-collection practices, run through the entire consumer financial-services system.


pages: 303 words: 83,564

Exodus: How Migration Is Changing Our World by Paul Collier

Ayatollah Khomeini, Boris Johnson, charter city, Edward Glaeser, experimental economics, first-past-the-post, full employment, game design, George Akerlof, global village, guest worker program, illegal immigration, income inequality, informal economy, mass immigration, moral hazard, open borders, risk/return, Silicon Valley, sovereign wealth fund, Steven Pinker, The Wealth of Nations by Adam Smith, transaction costs, University of East Anglia, white flight, zero-sum game

Economists have a glib little ethical toolkit called utilitarianism. It works a treat for the typical task, which is why it has become standard. But for a question such as the ethics of migration it is woefully inadequate. The resulting book is an attempt to generate a unified analysis of a wide array of disparate specialist research, across social science and moral philosophy. Within economics my key influences have been the writings of George Akerlof through his innovative ideas on identity, and Frédéric Docquier for his rigorous investigation of the migration process, and especially discussion with Tony Venables both on economic geography and as a sparring partner for the model that is the analytic workhorse of this book. In social psychology I have drawn on discussions with Nick Rawlings and the works of Steven Pinker, Jonathan Haidt, Daniel Kahneman, and Paul Zak.

In turn, institutions, narratives, and norms facilitate the emergence of effective organizations that enable their workforce to be productive. Typically, high productivity depends upon reconciling large size with worker motivation. Economists have long realized that big is productive: large organizations are able to reap economies of scale. But only recently have they developed a convincing analysis of motivation. Incentives are evidently part of the story, but the work of Nobel laureate George Akerlof and Rachel Kranton has opened up a new appreciation of how successful organizations motivate through identity. An effective firm persuades its workers to adopt identities that are conducive to productivity.7 Akerlof’s central idea comes through posing the question “What makes a good plumber?” He argues that the essential step is neither technical training nor incentive pay, but whether the plumber has made the leap of identity: “I am a good plumber.”

Migrants will tend to come from among those people who have the most positive attitudes to work: they want to move to jobs in effective organizations where their talents will be harnessed.8 This feeds back to the remaining population. The conscientious teacher has emigrated; it is the ineffective one who is still in the classroom. It is this ineffective teacher with whom young teachers interact and who sets the norms of what is expected. With fewer “insider” role models to imitate, remaining workers are more likely to choose to self-identify as “outsiders.” Nobel laureate George Akerlof and Rachel Kranton have developed a model that predicts just such an effect. As “insiders” selectively emigrate, those left behind face higher costs of becoming insiders themselves: they would stick out like a sore thumb. But as fewer people choose to become insiders, the productivity of those left behind declines.9 While their model has yet to be tested in poor countries, there is some supporting evidence.


pages: 290 words: 76,216

What's Wrong with Economics? by Robert Skidelsky

"Robert Solow", additive manufacturing, agricultural Revolution, Black Swan, Bretton Woods, business cycle, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, disruptive innovation, Donald Trump, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

One therefore has only to specify the information set possessed by the agent, and the forecasting ‘problem’ is ‘solved’. The key to understanding the rational expectations revolution is that mainstream economists believe they have cracked the uncertainty problem. Expectations about the future are simply probability distributions over a sequence of events. Uncertainty is reduced to probability, and can thus be labelled a special case of certainty. Economists like Nobel Laureates George Akerlof (b.1940) and Joseph Stiglitz (b.1943) have pointed to the existence of ‘asymmetric information’ – situations in which one party to a transaction has more information than another: a problem rife in insurance and second-hand car markets.8 But unless such inequalities of information are regarded as inherent, they will be overcome by computer-generated big data. Provided this is freely available, all persons will have near-perfect forecasting ability about any decision they need to make.

Everyone then says, ‘Oh, I always knew there was something wrong there . . .’ These examples upend the central verity of modern economics, that people always have rational expectations. They often make choices which they ought to know will leave them worse off. Advertisers were exploiting this propensity long before economists started to notice it. In their book, Phishing for Phools (2015), Nobel Laureates George Akerlof (b.1940) and Robert Shiller (b.1946) show, with many examples both amusing and appalling, that misperception and deception are rampant in market economies. ‘Phishing’ is a ‘fraud on the internet in order to glean personal information from individuals’ to get them to do things in the interest of the ‘phisherman’ rather than the ‘phools’. The two authors divide ‘phools’ into two classes – those too emotional to make sensible choices, and those victimised by misleading information.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta analysis, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, Pareto efficiency, postindustrial economy, price stability, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, special economic zone, spectrum auction, Steven Pinker, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

See for example, Alberto Alesina, Guido Cozzi, and Noemi Mantovan, “The Evolution of Ideology, Fairness and Redistribution,” Economic Journal, vol. 122(565), 2012: 1244–1261; Stefano Della Vigna and Ethan Kaplan, “The Fox News Effect: Media Bias and Voting,” Quarterly Journal of Economics, vol. 122(3), 2007: 1187–1234; and David Yanagizawa-Drott, “Propaganda and Conflict: Theory and Evidence from the Rwandan Genocide,” Quarterly Journal of Economics, vol. 129(4), November 2014. 15. George Akerlof and Rachel Kranton, “Economics and Identity,” Quarterly Journal of Economics, vol. 115(3), 2000: 715–753; George Akerlof and Rachel Kranton, “Identity and the Economics of Organizations,” Journal of Economic Perspectives, vol. 19(1), 2005: 9–32. 16. Martin Gilens and Benjamin I. Page, “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens,” Perspective on Politics, vol. 12(3), September 2014: 564–581. 17. Arlie Russell Hochschild’s Strangers in Their Own Land: Anger and Mourning on the American Right (New Press, New York, 2016) masterfully describes the ideational world of poor, white conservatives in Louisiana. 18.

For example, the partisan-politics literature in macroeconomics endows political parties with explicit ideologies, typically represented as different preference weights on inflation versus unemployment.13 These differences in preferences are typically imposed from outside the model, with little explanation. More recently there has been some work, both at the macro and micro levels, that looks at how ideologies are shaped and develop. These studies examine the formation of political preferences through exposure to societal outcomes, media, or early childhood experiences.14 The work of George Akerlof and Rachel Kranton on the economics of identity is particularly relevant here.15 Akerlof and Kranton consider models where individuals associate themselves with specific social categories and their desired behavior derives from the attributes of those categories. Workers, for example, may acquire identities that moderate the incentive compatibility constraint vis-à-vis their employers, leading them to behave in greater conformity with the objectives of their firms.


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

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

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

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

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


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, plutocrats, Plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

CHAPTER 6 A CULTURE OF SELFISHNESS “Stock-based compensation plans are often nothing more than legalized front-running, insider trading, and stock-watering all wrapped up in one package.”1 ALBERT MEYER, Founder, Bastiat Capital “If a worker’s rewards are based on only some of her tasks, that is where she will concentrate her effort. For example, a CEO whose compensation depends on the current stock price will try to run up the current stock price, but will ignore the long-term consequences.”2 GEORGE AKERLOF and RACHEL E. KRANTON, Identity Economics, 2010 “If the absolute value of every top earner’s take-home pay were to fall by half, the same executives would end up in the same jobs as before.”3 ROBERT H. FRANK, Cornell University “Management has become obsessed with share price. By focusing on short-term moves in stock prices, managers are eroding the long-term value of their franchises.”4 JESSE EISINGER, New York Times, June 28, 2012 There are two secrets about shareholder capitalism: First, shareholder capitalism presumes that firms maximize profits.

The timing was too perfect to be possible were the rules being followed.”67 Such perfect market timing is extremely unlikely to be random, of course; it reflects backdating, or the equally pernicious insider practice of pricing options on days when adverse corporate performance information is being released to the public. Such practices are apparently legal in most instances.68 Even worse, the prospect of giant rewards from options incentivizes fraud in a US business community already struggling mightily with ethical issues. Drawing on the sociologist Max Weber’s work on the theory of the firm as a collective that reacts rationally to prevailing systems, Nobel Laureate behavioral economist George A. Akerlof and Rachel E. Kranton explained it this way: “The more a CEO’s compensation is based on stock options, for example, the greater is the incentive to maximize the price at which to cash in. There are at least two ways to do this: one is by increasing the firm’s true value; another is by creatively managing the firm’s books. Recent evidence shows that executives have understood and embraced the second possibility.”69 Yet boards seem unfazed, even routinely writing employment contracts enabling CEOs to receive millions when defrauding their firms.

To secure success in the long run, these organizations have to bind the human resources to the firm and motivate employees to invest in firm-specific human capital…. A core element of successful companies in many environments is firm-specific human capital. Firms may build on this strength by committing to their employees in the long run. This approach traditionally formed one of the backbones of many European economies such as the German one.”72 The work of American researchers like McInnes and George Akerlof provide a theoretical foundation for the relational work model in the family capitalism countries featuring close collaboration. As early as 1982, Akerlof had concluded that exceptional worksite performance hinges on a complicated matrix of one’s own wages and those of colleagues, plus willingness of employers to treat employees as insiders. In their 2010 book, Identity Economics, exploring this new field, Akerlof and coauthor Rachel Kranton wrote that “… a firm operates well when employees identify with it and when their norms advance its goals.


pages: 580 words: 168,476

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

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

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

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

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


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

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

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

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

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


pages: 339 words: 95,988

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

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

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

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

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


pages: 453 words: 111,010

Licence to be Bad by Jonathan Aldred

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, availability heuristic, Ayatollah Khomeini, Benoit Mandelbrot, Berlin Wall, Black Swan, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, clean water, cognitive dissonance, corporate governance, correlation does not imply causation, cuban missile crisis, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Engelbart, Douglas Engelbart, Edward Snowden, Fall of the Berlin Wall, falling living standards, feminist movement, framing effect, Frederick Winslow Taylor, From Mathematics to the Technologies of Life and Death, full employment, George Akerlof, glass ceiling, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jeff Bezos, John Nash: game theory, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, meta analysis, meta-analysis, Mont Pelerin Society, mutually assured destruction, Myron Scholes, Nash equilibrium, Norbert Wiener, nudge unit, obamacare, offshore financial centre, Pareto efficiency, Paul Samuelson, plutocrats, Plutocrats, positional goods, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Skype, Social Responsibility of Business Is to Increase Its Profits, spectrum auction, The Nature of the Firm, The Wealth of Nations by Adam Smith, transaction costs, trickle-down economics, Vilfredo Pareto, wealth creators, zero-sum game

Moving from the individual perspective to the whole economy, the point stands. Attempts to trace the source of economic growth find that most of it is due neither to increases in labour productivity nor to investment. Coming from different theoretical perspectives, Nobel laureate economists Robert Solow and Herbert Simon reached the same conclusion: most growth ultimately stems from the economic consequences of advances in knowledge. George Akerlof, another Nobel economist, emphasizes that ‘our marginal products are not ours alone … [they] are due almost entirely to the cumulative process of learning that has taken us from stone-age poverty to twenty-first century affluence’.16 Were it not for ingrained hero myths, this might seem too obvious to state. And yet the traditional economic theory of the determination of wages and salaries assumes that a person’s ‘marginal product’ – their extra contribution to economic output – can be neatly isolated and identified.

As one apocryphal worker described life in a Soviet factory, ‘They pretend to pay us and we pretend to work.’ To be clear, this is not a Marxist or Communist argument about the hidden power of downtrodden workers: Soviet production was hopelessly inefficient largely because it failed to recognize this power. Among modern economists the argument has been pioneered not by Marxists but by two Nobel laureate economists and a subsequent Chair of the US Federal Reserve: George Akerlof, Joseph Stiglitz and Janet Yellen have shown how profits can rise if a firm pays more than the bare minimum to prevent workers from seeking employment elsewhere. If instead the firm pays a substantially higher ‘efficiency wage’, this motivates workers to give their best, maximizing efficiency and productivity. They do so because they feel valued and respected by their employer – and also want to keep their job because they know they would probably earn less elsewhere.

The theory being tested almost always takes this kind of optimizing behaviour as the norm, the starting point, even if exceptions are later admitted. It shapes the questions asked of the data, and how the answers derived from the data are interpreted. Throughout this book we have seen how economic theories and their transformation into formal mathematics shape what we see – and what we don’t. At least two Nobel laureate economists have noted the problem. In Paul Krugman’s words, ‘we just don’t see what we can’t formalize’.12 Similarly, George Akerlof argues that economic analysis is ignored unless it is written up in a research paper, and that can only happen if the analysis is mathematical: ‘What I am worried about most of all, is what we don’t see … the analysis that is never seen, that never becomes a paper … And it can’t become a paper, because that’s not what a paper in economics is all about … we know such vacuums exist.’13 To be fair, some economists have been more radical.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

"Robert Solow", Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Berlin Wall, book scanning, Bretton Woods, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, premature optimization, price stability, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Shiller, short selling, Silicon Valley, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

Support for and trust in the EU has declined along with the reduced share of trade with EU partners. 424 10.1. Euro-area growth marches to the drum of world trade growth. 439 list of figures xi ACK NOW LEDGME NTS Willy Kiekens, formerly an IMF Executive Director, suggested in a phone conversation soon after I left the IMF that I write a book explaining the euro crisis. He set me off on an amazing journey. My greatest debt is to George Akerlof. He understood what I wanted to write long before I did. Through many lunches over five years, he gave me an opportunity to talk about my findings and ideas. These ideas crystalized at a particularly long lunch in Georgetown in late 2016, when he prodded me on potential titles for the book and then came up with one himself: “EuroTragedy: A Drama in Nine Acts.” My other mentor during these past years was André Szász.

However, in late April, he peremptorily announced a one-​for-​one conversion, evidently hoping to gain favor in the East German elections scheduled for May.75 As a commentator later remarked, “Chancellor Kohl barreled over all objections on the ground that the political reality of German unification would allow nothing less.”76 Kohl’s autonomy had worked out well when on November 28, 1989, correctly sensing the political mood, he announced the ten-​point unification plan. But Kohl also chose to scorn economics. Ostmarks were converted to D-​marks at midnight on June 30, 1990, and, as a meticulously documented and damning scholarly indictment in early 1991 concluded, “One of the worst and sharpest depressions in European history had begun.”77 Two of the authors of that analysis were George Akerlof (who later received the Nobel Prize for Economics) and Janet Yellen (who became chairman of the Fed). They explained the unfolding disaster. At the unreasonably 80   e u r o t r a g e d y generous conversion rate, East German wages had become far higher than justified by labor productivity (which was around 30 percent that of West German workers). Thus, saddled with extraordinarily high production costs and inferior product quality, East German enterprises struggled to operate profitably.

This view that Germany needed serious long-​term medicine was made popular by the Economist in June 1999, when it described Germany as “the sick man of Europe.”142 The phrase caught on, and some wondered if Germany was “too sick to be cured.”143 True, German authorities had their homework to do. The East German economy had long-​term problems. Despite improvement in productivity, the high initial wages set by the 1:1 conversion of the Ostmark to the D-​mark continued to undermine the competitiveness of East German firms, exactly as Professors George Akerlof and Janet Yellen had predicted (see c­ hapter 2). Hans-​Werner Sinn, President of the Munich-​based Ifo Institute for Economic Research and a prominent voice in public debate, wrote that unemployment and business insolvencies in eastern Germany were still rising, and that the “flourishing landscapes,” which Chancellor Helmut Kohl had breezily promised, were nowhere to be seen.144 The east remained dependent on “costly subsidies,” requiring a transfer each year of between 4 and 5 percent of West German GDP to the east.145 The overall tax burden had increased to finance the subsidies to eastern Germany. schröder asserts the german national interest 147 West German companies, however, were in relatively good shape.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bernie Sanders, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

In 2004, she was named president of the San Francisco Fed. Though Yellen voted only every third year, she was still in the game, her sights set on a higher prize. Though Yellen had developed a reputation as a whiz in economic forecasting, she remained oblivious as the housing market in her region imploded on multiple fronts—even more amazing considering the mental firepower at her own breakfast table. Her husband is George A. Akerlof, corecipient of the 2001 Nobel Prize for Economics. (Actually, it’s the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.) Both are quiet, modest academics, their economic and political philosophies closely aligned. “Not only did our personalities mesh perfectly,” Akerlof wrote about their marriage after he won the Nobel Prize, “but we have also always been in all but perfect agreement about macroeconomics.”

“It’s no secret that companies have been gorging themselves on share buybacks and mergers and acquisitions, non-productive but highly lucrative endeavors. When combined, the results are magnificent—costs are cut, profits juiced and bonus season becomes the most wonderful time of the year.” It could all be laid at the feet of the Fed, which has essentially become the fourth branch of the U.S. government. The Fed’s balance sheet stood at $4.5 trillion. I wondered what Yellen’s husband, George Akerlof, who had railed against the deficit racked up by the Bush administration, thought about the outrageous balance sheet and Yellen’s obvious role in exacerbating income inequality. Bizarrely, Bernanke’s renunciation of his GOP affiliation was lauded as brave when his self-congratulatory memoir, The Courage to Act, was released in 2015. But how exactly is income inequality the fault of any political party when the Fed is in charge?

She described herself as: Clay Chandler, “Blinder, Yellen Named to Fed Board,” Washington Post, April 23, 1994, www.washingtonpost.com/pb/archive/business/1994/04/23/blinder-yellen-named-by-clinton-to-fed-board/86e0e452-6f71-45b5-a02b-b44ea9c9016a/?outputType=accessibility&nid=menu_nav_accessibility forscreenreader. “Who would be prepared to believe”: Binyamin Appelbaum, “The Gorilla and the Maginot Line,” New York Times, April 25, 2013. Her husband is George A. Akerlof: Josh Boak, “A Marriage of Equals: Janet Yellen’s Husband Also a Renowned Economist,” Associated Press, San Jose Mercury News, March 18, 2014. “Not only did our personalities mesh”: Marilyn W. Thompson and Jonathan Spicer, “A Fed Love Story: Janet Yellen Meets Her Match,” Reuters.com, September 29, 2013, www.reuters.com/article/us-usa-fed-yellen-idUSBRE98S07N20130929. A public disclosure statement: Victoria McGrane and Eric Morath, “Fed’s Yellen, Husband Worth up to $13.2 Million in 2012,” Wall Street Journal, August 27, 2013.


pages: 322 words: 77,341

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

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

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

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


pages: 430 words: 109,064

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

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

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

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

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


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People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, battle of ideas, Berlin Wall, Bernie Madoff, Bernie Sanders, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, central bank independence, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, deglobalization, deindustrialization, disintermediation, diversified portfolio, Donald Trump, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, global supply chain, greed is good, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta analysis, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Jobs, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population

And this lowered private investment bodes poorly for future growth.50 There is a further effect that has already been noted: innovation that should be directed at creating more efficient ways of producing better products is instead directed at better ways of creating and maintaining market power and exploiting consumers. While our financial firms have excelled in the latter arena, they are not alone, as Nobel Prize winners George Akerlof and Robert Shiller demonstrate forcefully in their 2015 book Phishing for Phools: The Economics of Manipulation and Deception.51 We’ve described, for instance, how our cigarette, pharmaceutical, and food companies have profited from producing products that are addictive, and not only not needed, but are also actually harmful. We used to think that high profits were a sign of the successful working of the American economy, a better product, a better service.

My thinking about climate change has been influenced by Nicholas Stern and John Roome, and my understanding of the legal implications of the deprivation of the rights of children, by Julia Olson and Philip Gregory. I’ve had invaluable conversations with John Attanasio on chapter 8, on reforms in our political system, especially the legal challenges in reducing the influence of money in our politics. Thanks are also due to Martin Wolff, Rana Foroohar, Edmund Phelps, George Soros, George Akerlof, Janet Yellen, Adair Turner, Michael Spence, Andrew Sheng, Kaushik Basu, Winnie Byanyima, and Peter Bofinger (the latter six who together with Rob Johnson, Rodrik, Quah, Medhora, and Pangestu are among the members of the Commission on Global Economic Transformation, sponsored by INET, which I cochair with Spence). In thinking about how to respond to the 2008 global financial crisis, strong intellectual bonds were formed, including with Elizabeth Warren and Damon Silvers (who served on the Congressional Oversight Panel of the Troubled Asset Relief Program), and with the members of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, appointed by the President of the General Assembly of the United Nations that I chaired in 2009.

Markets are only efficient in the absence of distortionary asymmetries in information, whether those were natural or created by the market. Big Data is increasing these asymmetries, and thereby potentially making resource allocations less efficient. 19.Jennifer Valentino-DeVries, Jeremy Singer-Vine, and Ashkan Soltani, “Websites Vary Prices, Deals Based on Users’ Information,” Wall Street Journal, Dec. 24, 2012. 20.To use the colorful language of Nobel Prize winners George Akerlof and Robert Shiller, to “phish for phools.” See Akerlof and Shiller, Phishing for Phools. 21.See Tüfekçi’s TED talk, “We’re Building a Dystopia Just to Make People Click on Ads,” Oct. 27, 2017. 22.Others joined in the suit against Myriad, including the University of Pennsylvania and researchers at Columbia, NYU, Emory, and Yale. The American Civil Liberties Union and the Public Patent Foundation provided legal representation for the plaintiffs.


pages: 461 words: 128,421

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

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

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

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

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


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A Little History of Economics by Niall Kishtainy

"Robert Solow", Alvin Roth, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, central bank independence, clean water, Corn Laws, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Eugene Fama: efficient market hypothesis, first-price auction, floating exchange rates, follow your passion, full employment, George Akerlof, greed is good, Hyman Minsky, inflation targeting, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, loss aversion, market clearing, market design, means of production, moral hazard, Nash equilibrium, new economy, Occupy movement, Pareto efficiency, Paul Samuelson, prisoner's dilemma, RAND corporation, rent-seeking, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, Vickrey auction, Vilfredo Pareto, washing machines reduced drudgery, wealth creators, Winter of Discontent

To Sen, economics is about the varied things that the poorest people desperately need to live happy and fulfilled lives. Money for food is important, but so is knowing how to read, being healthy and having the opportunity to participate in the running of society. Real human development is about the growth of freedom itself. CHAPTER 33 Knowing Me, Knowing You At a glittering banquet in Stockholm to celebrate his receipt of the Nobel Prize, the American economist George Akerlof (b. 1940) explained his economic thinking to the guests, who included the king and queen of Sweden: ‘Bring a sad old nag to market. Put a live eel down her throat. She will be frisky.’ Sellers of nags (worn-out old horses) use all sorts of tricks to make their horses look lively. These can have bad consequences, though: ‘On one side of the market are the tricksters. The other side avoids the tricksters.

They completely ignored the risks of free-market policies that let money flow in and out of countries without any restrictions when the lenders didn’t have good information about who they were lending to. He likened the policy to putting a Ferrari engine into an old banger, and then setting off without bothering about the state of the tyres or the skill of the driver. Information economics is also relevant to the big economic challenges facing advanced economies. Since the Great Depression of the 1930s, economists have been puzzling over what causes unemployment. George Akerlof had been wondering about it since the age of 11 when his father lost his job. (He reasoned that when one father lost his job and so stopped spending, another one would be put out of a job, and so on – the resulting chain reaction turning into a downwards economic spiral. Without knowing it, the schoolboy had discovered one of Keynes’s main principles of economics.) The postwar economics that was based on the work of Keynes said that wages tended not to fall easily during recessions and by staying high discouraged firms from taking on more workers.


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

"Robert Solow", affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, business cycle, buy and hold, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, 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, fixed income, 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, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, Malacca Straits, market bubble, microcredit, money market fund, 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, Sam Peltzman, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, 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, zero-sum game

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

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

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


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

Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, business cycle, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, 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, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low cost airline, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, 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, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, 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, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise

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

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

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


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

"Robert Solow", Ada Lovelace, Albert Einstein, Arthur Eddington, assortative mating, business cycle, Claude Shannon: information theory, David Ricardo: comparative advantage, Douglas Hofstadter, Everything should be made as simple as possible, frictionless, frictionless market, George Akerlof, Gödel, Escher, Bach, income inequality, income per capita, industrial cluster, information asymmetry, invention of the telegraph, invisible hand, Isaac Newton, James Watt: steam engine, Jane Jacobs, job satisfaction, John von Neumann, Joi Ito, New Economic Geography, Norbert Wiener, p-value, Paul Samuelson, phenotype, price mechanism, Richard Florida, Ronald Coase, Rubik’s Cube, Silicon Valley, Simon Kuznets, Skype, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, working-age population

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

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


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

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

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

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

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


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

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

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

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


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

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

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

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

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


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WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

4chan, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, blockchain, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, corporate governance, corporate raider, creative destruction, crowdsourcing, Danny Hillis, data acquisition, deskilling, DevOps, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Filter Bubble, Firefox, Flash crash, full employment, future of work, George Akerlof, gig economy, glass ceiling, Google Glasses, Gordon Gekko, gravity well, greed is good, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Kelly, Khan Academy, Kickstarter, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, move fast and break things, Network effects, new economy, Nicholas Carr, obamacare, Oculus Rift, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, strong AI, TaskRabbit, telepresence, the built environment, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

Why not dip into outright fraud, selling those customers complicated financial instruments that were designed to fail? And when they do fail, why not ask the taxpayers to bail you out, because government regulators—drawn heavily from your own ranks—believe you are so systematically important to the world economy that you become untouchable? Government—or perhaps more accurately, the lack of it—has become deeply complicit in the problem. Economists George Akerlof and Paul Romer fingered the nexus between corporate malfeasance and political power in their 1994 paper “Looting: The Economic Underworld of Bankruptcy for Profit.” “Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations,” they wrote.

Alternative jobs may be even worse, with less flexibility and even lower pay. Uber has many advantages over its drivers in deciding on what price to set. They can see, as drivers cannot, just how much consumer demand there is, and where the price needs to be to meet the company’s needs. Drivers must show up to work with much less perfect knowledge of that demand and the potential income they can derive from it. Michael Spence, George Akerlof, and Joseph Stiglitz received the Nobel Memorial Prize in Economics in 2001 precisely for their analysis in the 1970s of the ways that the efficient market hypothesis, so central to much economic thinking, breaks down in the face of asymmetric information. Algorithmically derived knowledge is a new source of asymmetric market power. Hal Varian noted this problem in 1995, writing in a paper called “Economic Mechanism Design for Computerized Agents” that “to function effectively, a computerized agent has to know a lot about its owner’s preferences: e.g., his maximum willingness-to-pay for a good.

Retrieved April 2, 2017, http://piketty. pse.ens.fr/files/capital21c/en/media/Time%20-%20Capital%20in%20the %20Twenty-First%20Century.pdf. 247 “‘sustainable prosperity’”: Lazonick, “Stock Buybacks,” 2. 247 more of the compensation moved to stock: Foroohar, Makers and Takers, 280. 247 options had to be disclosed, but not valued: Hal Varian, “Economic Scene,” New York Times, April 8, 2004, retrieved April 2, 2017, http://people.ischool.berkeley. edu/~hal/people/hal/NYTimes/2004-04-08.html. 248 “profit extracted through harm to others”: Umair Haque, “The Value Every Business Needs to Create Now,” Harvard Business Review, July 31, 2009, https://hbr.org/2009/07/the-value-every-business-needs. 248 disinformation firms used by the tobacco industry: Naomi Oreskes and Erik Conway, Merchants of Doubt (New York: Bloomsbury Press, 2011). 249 “left holding the bag”: George Akerlof and Paul Romer, “Looting: The Economic Underworld of Bankruptcy for Profit,” Brookings Papers on Economic Activity 2 (1993), http://pages.stern.nyu. edu/~promer/Looting.pdf. 250 “The customer is the foundation of a business”: Peter F. Drucker, The Practice of Management (New York: Routledge, 2007), 31–32. 251 “a dumb idea”: Francesco Guerrera, “Welch Condemns Share Price Focus,” Financial Times, March 12, 2009, https://www.ft.com/content/294ff1f2-0f27-11de-ba10-0000779fd2ac. 252 “now serves mainly itself”: Rana Foroohar, “American Capitalisms’s Great Crisis,” Time, May 11, 2016, http://time.com/4327419/american-capitalisms-great-crisis/.


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

"Robert Solow", airport security, availability heuristic, Bayesian statistics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, business cycle, buy and hold, 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, global pandemic, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), 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, Laplace demon, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, Pierre-Simon Laplace, 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 Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

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

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

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


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Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, bitcoin, blockchain, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, lone genius, low cost airline, low cost carrier, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta analysis, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Network effects, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Sam Altman, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, William Langewiesche, Y Combinator

Some participants, for example, may not reveal their preferences openly, in order to strengthen their negotiating positions and force a better deal. This may sound like a sensible strategy for an individual, but if it is widespread, it hurts everyone by making it difficult for others to process the information being shared. Moreover, if market participants have to assume that others are not transparent, they must factor this into their decision-making. In his classic example of information asymmetry, George Akerlof cites the market for used cars. Because it’s difficult to inspect the condition of every component of a car without disassembling it, buyers cannot really ascertain if a car they are considering purchasing is a “peach” or a “lemon” at the time of the transaction. As every used car in the market could potentially be a lemon, buyers are less inclined to pay extra for a purported peach, while sellers who actually have a car in great condition must absorb the market’s informational inefficiencies, and in most cases they either decide not to sell their cars or to sell them for less than they feel they’re worth.

CHAPTER 3: MARKETS AND MONEY market volatility plummeted: Robert Jensen, “The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector,” Quarterly Journal of Economics 122, no. 3 (August 2007), 879–924, https://academic.oup.com/qje/article-abstract/122/3/879/1879540/The-Digital-Provide-Information-Technology-Market. “The market is essentially an ordering mechanism”: Friedrich August von Hayek, “Coping with Ignorance,” Ludwig von Mises Memorial Lecture, Hillsdale College, Hillsdale, MI, July 1978. the market for used cars: George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (August 1970), 488–500, http://qje.oxfordjournals.org/content/84/3/488.short. fewer peaches are offered for sale: Information asymmetries can also cause sellers to lose out when they undervalue their goods and services and a more informed buyer takes advantage of it. For example, a seller may offer an initial service at a loss to a buyer, imagining that the transaction will lead to repeat sales, not knowing that the buyer never intends to come back—or would only do so for the same low price.


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The Tyranny of Metrics by Jerry Z. Muller

Affordable Care Act / Obamacare, Atul Gawande, Cass Sunstein, Checklist Manifesto, Chelsea Manning, collapse of Lehman Brothers, corporate governance, Credit Default Swap, crowdsourcing, delayed gratification, deskilling, Edward Snowden, Erik Brynjolfsson, Frederick Winslow Taylor, George Akerlof, Hyman Minsky, intangible asset, Jean Tirole, job satisfaction, joint-stock company, joint-stock limited liability company, Moneyball by Michael Lewis explains big data, performance metric, price mechanism, RAND corporation, school choice, Second Machine Age, selection bias, Steven Levy, total factor productivity, transaction costs, WikiLeaks

For a review of the relevant literature with a focus on behavioral economics, which concludes that “behavioral economics clearly shows that the universal application of pay-for-performance as practiced today is not warranted by scientific facts,” see Antoinette Weibel, Meike Wiemann, and Margit Osterloh, “A Behavioral Economics Perspective on the Overjustification Effect: Crowding-In and Crowding-Out of Intrinsic Motivation,” in Marylène Gagné (ed.), The Oxford Handbook of Work Engagement, Motivation, and Self-Determination Theory (New York, 2014). 9. Pittman, Boggiano, and Ruble, “Intrinsic and Extrinsic Motivational Orientations.” 10. Bénabout and Tirole, “Intrinsic and Extrinsic Motivation,” p. 504. 11. Bruno S. Frey and Margit Osterloh, “Motivate People with Prizes,” Nature 465, no. 17 (June 2010), p. 871. 12. George Akerlof, “Labor Contracts as a Partial Gift Exchange,” Quarterly Journal of Economics 97, no. 4 (1982), 543–69. 13. Bruno S. Frey and Reto Jegen, “Motivation Crowding Theory,” Journal of Economic Surveys 15, no. 5 (2001), pp. 589–611; and Robert Gibbons, “Incentives in Organizations,” Journal of Economic Perspectives 12, no. 4 (Fall 1998), pp. 115–32, esp. p. 129. 14. Gibbons, “Incentives in Organizations.” 15.

Ravitch, The Death and Life of the Great American School System, p. 161; Stewart, The Management Myth, p. 54. 2. Holmström and Milgrom, “Multitask Principal-Agent Analyses.” 3. Merton, “Unanticipated Consequences and Kindred Sociological Ideas: A Personal Gloss,” p. 296. 4. Morieux and Tollman, Six Simple Rules, pp. 6–16. 5. Lilford and Pronovost, “Using Hospital Mortality Rates to Judge Hospital Performance.” 6. Berwick, “The Toxicity of Pay for Performance.” 7. On this topic, see George A. Akerlof and Rachel E. Kranton, Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being (Princeton, 2010), chap. 5, “Identity and the Economics of Organizations.” 8. Berwick, “The Toxicity of Pay for Performance.” 9. Edmund Phelps, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change (Princeton, 2013), p. 269. 10. Similarly, Scott, Seeing Like a State, p. 313. 11.


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

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

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

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


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

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

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

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


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Machine, Platform, Crowd: Harnessing Our Digital Future by Andrew McAfee, Erik Brynjolfsson

"Robert Solow", 3D printing, additive manufacturing, AI winter, Airbnb, airline deregulation, airport security, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, backtesting, barriers to entry, bitcoin, blockchain, British Empire, business cycle, business process, carbon footprint, Cass Sunstein, centralized clearinghouse, Chris Urmson, cloud computing, cognitive bias, commoditize, complexity theory, computer age, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, Dean Kamen, discovery of DNA, disintermediation, disruptive innovation, distributed ledger, double helix, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ethereum, ethereum blockchain, everywhere but in the productivity statistics, family office, fiat currency, financial innovation, George Akerlof, global supply chain, Hernando de Soto, hive mind, information asymmetry, Internet of things, inventory management, iterative process, Jean Tirole, Jeff Bezos, jimmy wales, John Markoff, joint-stock company, Joseph Schumpeter, Kickstarter, law of one price, longitudinal study, Lyft, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Marc Andreessen, Mark Zuckerberg, meta analysis, meta-analysis, Mitch Kapor, moral hazard, multi-sided market, Myron Scholes, natural language processing, Network effects, new economy, Norbert Wiener, Oculus Rift, PageRank, pattern recognition, peer-to-peer lending, performance metric, plutocrats, Plutocrats, precision agriculture, prediction markets, pre–internet, price stability, principal–agent problem, Ray Kurzweil, Renaissance Technologies, Richard Stallman, ride hailing / ride sharing, risk tolerance, Ronald Coase, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Pinker, supply-chain management, TaskRabbit, Ted Nelson, The Market for Lemons, The Nature of the Firm, Thomas Davenport, Thomas L Friedman, too big to fail, transaction costs, transportation-network company, traveling salesman, Travis Kalanick, two-sided market, Uber and Lyft, Uber for X, uber lyft, ubercab, Watson beat the top human players on Jeopardy!, winner-take-all economy, yield management, zero day

Changes in Taxi Ridership and Revenue in Los Angeles 2009–2014,” Policy Brief, July 2015, table 1, p. 3, http://www.irle.ucla.edu/publications/documents/Taxi-Policy-Brief.pdf. 201 Yellow Cab Cooperative, filed for bankruptcy: Tom Corrigan, “San Francisco’s Biggest Taxi Operator Seeks Bankruptcy Protection,” Wall Street Journal, January 24, 2016, https://www.wsj.com/articles/san-franciscos-biggest-taxi-operator-seeks-bankruptcy-protection-1453677177. 201 Less than three years later: Simon Van Zuylen-Wood, “The Struggles of New York City’s Taxi King,” Bloomberg BusinessWeek, August 27, 2015, https://www.bloomberg.com/features/2015-taxi-medallion-king. 202 Lawmakers in France: “Uber Fined in France over UberPop,” BBC News, June 9, 2016, http://www.bbc.com/news/business-36491926. 202 In June 2015 the Economist: “Why Fintech Won’t Kill Banks,” Economist, June 17, 2015, http://www.economist.com/blogs/economist-explains/2015/06/economist-explains-12. 202 “a future as a sort of financial utility”: Ibid. 203 $45 billion: Juro Osawa, Gillian Wong, and Rick Carew, “Xiaomi Becomes World’s Most Valuable Tech Startup,” Wall Street Journal, last modified December 29, 2014, https://www.wsj.com/articles/xiaomi-becomes-worlds-most-valuable-tech-startup-1419843430. 203 Xiaomi had sold 61 million smartphones: Eva Dou, “China’s Xiaomi under Pressure to Prove Value to Investors,” Wall Street Journal, January 10, 2016, https://www.wsj.com/articles/chinas-xiaomi-under-pressure-to-prove-value-to-investors-1452454204. 203 typically selling for $149 in 2015: Eva Dou, “Xiaomi Ends 2015 as China’s Smartphone King,” Wall Street Journal, February 1, 2016, http://blogs.wsj.com/digits/2016/02/01/xiaomi-ends-2015-as-chinas-smartphone-king. 203 less than 5% of revenue: Kevin Kelleher, “Once a Darling, Xiaomi Is Facing Tough Questions about Its Future,” Time, March 21, 2016, http://time.com/4265943/xiaomi-slowdown. 203 Xiaomi’s sales had dropped by almost 40%: David Gilbert, “How Xiaomi Lost $40bn: Where It All Went Wrong for the ‘Apple of the East,’ ” International Business Times, August 18, 2016, http://www.ibtimes.co.uk/how-xiaomi-lost-40bn-where-it-all-went-wrong-apple-east-1576781. 203 closer to $3.6 billion: Ibid. 204 Total unit sales in 2016: James Titcomb, “Samsung Mobile Phone Sales Fall to Lowest Level in Five Years,” Telegraph, January 24, 2017, http://www.telegraph.co.uk/technology/2017/01/24/samsung-mobile-phone-sales-fall-lowest-level-five-years. 204 Apple captured 91% of global smartphone profits: Philip Elmer-DeWitt, “How Apple Sucks the Profit Out of Mobile Phones,” Fortune, February 14, 2016, http://fortune.com/2016/02/14/apple-mobile-profit-2015. 204 analyst Tim Long of BMO Capital Markets estimated: Mikey Campbell, “Apple Captures More than 103% of Smartphone Profits in Q3 despite Shrinking Shipments,” November 3, 2016, http://appleinsider.com/articles/16/11/03/apple-captures-more-than-103-of-smartphone-profits-in-q3-despite-shrinking-shipments. 204 $22 billion in profits: Joel Rosenblatt and Jack Clark, “Google’s Android Generates $31 Billion Revenue, Oracle Says,” Bloomberg, January 21, 2016, https://www.bloomberg.com/news/articles/2016-01-21/google-s-android-generates-31-billion-revenue-oracle-says-ijor8hvt. 207 “The Market for ‘Lemons’ ”: George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (1970): 488–500, https://doi.org/10.2307/1879431. 207 “did not publish papers”: George A. Akerlof, “Writing the ‘The Market for “Lemons”’: A Personal and Interpretive Essay,” Nobelprize.org, November 14, 2003, http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2001/akerlof-article.html. 207 “if this paper were correct”: Ibid. 207 50 million rides per month: Eric Newcomer, “Lyft Is Gaining on Uber as It Spends Big for Growth,” Bloomberg, last modified April 14, 2016, https://www.bloomberg.com/news/articles/2016-04-14/lyft-is-gaining-on-uber-as-it-spends-big-for-growth. 208 In 2013, California passed regulations: Tomio Geron, “California Becomes First State to Regulate Ridesharing Services Lyft, Sidecar, UberX,” Forbes, September 19, 2013, http://www.forbes.com/sites/tomiogeron/2013/09/19/california-becomes-first-state-to-regulate-ridesharing-services-lyft-sidecar-uberx/#6b22c10967fe. 208 by August 2016, BlaBlaCar still did not require them: BlaBlaCar, “Frequently Asked Questions: Is It Safe for Me to Enter My Govt.

So, rather than take the chance of being ripped off, they won’t do business at all. This is a shame, because at least some of the passed-up deals actually would have been advantageous for both parties. Knowledge differentials, unfortunately, kept these transactions from happening. The idea that such “information asymmetries” are harmful not just for the less informed party but also for markets overall was formalized by economist George Akerlof in his classic 1970 paper “The Market for ‘Lemons.’ ” Akerlof showed that the used-car market could suffer greatly because of the existence of “lemons”‡—apparently fine cars that, in fact, had bad mechanical problems. Sellers know which cars are lemons but most buyers don’t, and this information asymmetry will keep the used-car market small and inefficient unless it’s addressed by, for example, having dealers offer money-back guarantees to customers who feel that they’ve been cheated.


Social Capital and Civil Society by Francis Fukuyama

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

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


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

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

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

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


pages: 385 words: 111,807

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

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, corporate raider, creative destruction, 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, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, 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, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Nelson Mandela, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

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

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


pages: 515 words: 132,295

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

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

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

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


pages: 511 words: 132,682

Competition Overdose: How Free Market Mythology Transformed Us From Citizen Kings to Market Servants by Maurice E. Stucke, Ariel Ezrachi

affirmative action, Airbnb, Albert Einstein, Andrei Shleifer, Bernie Sanders, Boeing 737 MAX, Cass Sunstein, choice architecture, cloud computing, commoditize, corporate governance, Corrections Corporation of America, Credit Default Swap, crony capitalism, delayed gratification, Donald Trump, en.wikipedia.org, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Google Chrome, greed is good, hedonic treadmill, income inequality, income per capita, information asymmetry, invisible hand, job satisfaction, labor-force participation, late fees, loss aversion, low skilled workers, Lyft, mandatory minimum, Mark Zuckerberg, market fundamentalism, mass incarceration, Menlo Park, meta analysis, meta-analysis, Milgram experiment, mortgage debt, Network effects, out of africa, payday loans, Ponzi scheme, precariat, price anchoring, price discrimination, profit maximization, profit motive, race to the bottom, Richard Thaler, ride hailing / ride sharing, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Shoshana Zuboff, Silicon Valley, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Stanford prison experiment, Stephen Hawking, The Chicago School, The Market for Lemons, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Davenport, Thorstein Veblen, Tim Cook: Apple, too big to fail, transaction costs, Uber and Lyft, uber lyft, ultimatum game, Vanguard fund, winner-take-all economy

More competition may not yield greater quality when (i) firms have difficulty explaining the quality improvement to the consumer, (ii) rivals can confuse consumers with similar claims, (iii) consumers cannot readily identify the better quality products, and (iv) as a result, the honest sellers’ sales do not increase. In those instances, the cost in improving quality outweighs the likely gain. Competition instead favors the more crooked dealers. In many markets, one side knows more than the other. We know more about our health, diet, etc. than our life insurers. Used car salespeople know more about their cars’ condition than we do. This imbalance in information, as the Nobel laureate economist George Akerlof described, can create a “market for lemons.”77 It explains why competition in markets with imperfect information flow can actually be a disincentive to sellers to invest in quality. Akerlof showed how a lemon problem may affect the used car market. Suppose driving to and from work you pass the used car lot. Then you see the British racing-green Jaguar that captured your imagination over a decade ago.

,” accessed April 12, 2019, https://ec.europa.eu/food/safety/official_controls/food_fraud/horse_meat/q-ans_en. 76.Jim Reed and Adam Eley, “How Safe Is Air Quality on Commercial Planes?,” BBC News, June 8, 2015, https://www.bbc.co.uk/news/health-32786537; “Air Quality on Planes: Aerotoxic Syndrome,” Economist, February 7, 2013, https://www.economist.com/gulliver/2013/02/07/aerotoxic-syndrome; Association of Flight Attendants-CWA, “Issues: Aircraft Air Quality—Protecting Against Contaminants,” accessed April 12, 2019, http://www.afacwa.org/aircraft_air_quality. 77.George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (August 1970): 488–500, https://doi.org/10.2307/1879431. 78.Healthline, “Experts Agree: Sugar Might Be as Addictive as Cocaine,” accessed April 12, 2018, https://www.healthline.com/health/food-nutrition/experts-is-sugar-addictive-drug#1. 79.Nell Boeschenstein, “How the Food Industry Manipulates Taste Buds with ‘Salt Sugar Fat,’” NPR, February 26, 2013, https://www.npr.org/sections/thesalt/2013/02/26/172969363/how-the-food-industry-manipulates-taste-buds-with-salt-sugar-fat. 80.Boeschenstein, “How the Food Industry Manipulates Taste Buds.”

In the presence of such consumers it is no longer clear that firms necessarily have an incentive to compete by offering better deals. Rather, they can focus on exploiting biased consumers who are very likely to purchase from them regardless of price and quality.” Steffen Huck, Jidong Zhou, and Charlotte Duke, Consumer Behavioural Biases in Competition: A Survey (London, Office of Fair Trading, May 2011), ¶ 6.2, https://ssrn.com/abstract=1944446. 6.George A. Akerlof and Robert J. Shiller, Phishing for Phools: The Economics of Manipulation and Deception (Princeton, NJ: Princeton University Press, 2015), xii. 7.Huck et al., “Consumer Behavioural Biases in Competition,” ¶¶ 3.31, 3.37, 3.43; Matthew Bennett et al., “What Does Behavioral Economics Mean for Competition Policy?,” Competition Policy International 6, no. 1 (Spring 2010): 111, 118, https://www.competitionpolicyinternational.com/what-does-behavioral-economics-mean-for-competition-policy/; Eliana Garcés, “The Impact of Behavioral Economics on Consumer and Competition Policies,” Competition Policy International 6, no. 1 (Spring 2010): 145, 150, https://www.competitionpolicyinternational.com/the-impact-of-behavioral-economics-on-consumer-and-competition-policies/; Max Huffman, “Marrying Neo-Chicago with Behavioral Antitrust,” Antitrust Law Journal 78, no. 1 (Spring 2012): 105, 134, https://ssrn.com/abstract=2079329 (“consciously parallel behavioral exploitation is the nearly industry-wide policy of unbundling charges for checked bags in airline travel”). 8.Anthony Giorgianni, “Earn More on Your Savings Account at an Online Bank,” Consumer Reports, February 16, 2018, https://www.consumerreports.org/banking/earn-more-on-savings-account-at-online-bank/ (noting how online banks in 2018, for example, were in an “arms race” to get us to save more). 9.


pages: 487 words: 151,810

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

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

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

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

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


pages: 463 words: 105,197

Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Eric Posner, E. Weyl

3D printing, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, anti-communist, augmented reality, basic income, Berlin Wall, Bernie Sanders, Branko Milanovic, business process, buy and hold, carbon footprint, Cass Sunstein, Clayton Christensen, cloud computing, collective bargaining, commoditize, Corn Laws, corporate governance, crowdsourcing, cryptocurrency, Donald Trump, Elon Musk, endowment effect, Erik Brynjolfsson, Ethereum, feminist movement, financial deregulation, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, guest worker program, hydraulic fracturing, Hyperloop, illegal immigration, immigration reform, income inequality, income per capita, index fund, informal economy, information asymmetry, invisible hand, Jane Jacobs, Jaron Lanier, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, labor-force participation, laissez-faire capitalism, Landlord’s Game, liberal capitalism, low skilled workers, Lyft, market bubble, market design, market friction, market fundamentalism, mass immigration, negative equity, Network effects, obamacare, offshore financial centre, open borders, Pareto efficiency, passive investing, patent troll, Paul Samuelson, performance metric, plutocrats, Plutocrats, pre–internet, random walk, randomized controlled trial, Ray Kurzweil, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Rory Sutherland, Second Machine Age, second-price auction, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, special economic zone, spectrum auction, speech recognition, statistical model, stem cell, telepresence, Thales and the olive presses, Thales of Miletus, The Death and Life of Great American Cities, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, trickle-down economics, Uber and Lyft, uber lyft, universal basic income, urban planning, Vanguard fund, women in the workforce, Zipcar

This is how George, Jevons, and Walras used the term, but contemporary usage in economics breaks the problem into many components. We highlighted one emphasized by Myerson and Satterthwaite, but other economists have given other reasons why assets are not passed on to their best use. As we will see, a COST alleviates all these problems simultaneously. One such problem is what economists call “signaling” or “adverse selection,” concepts for which economists George Akerlof and A. Michael Spence were awarded the Nobel Prize.51 The possessor of an asset, such as a used car, often knows the quality of the asset better than a potential purchaser. The possessor may thus demand a high price for the car not only because she guesses the buyer may be willing to pay it, but also because a high price signals she is reluctant to part with it, a ploy to convince the buyer the car must be valuable.

For further details, see Eric A. Posner & E. Glen Weyl, Property Is Another Name for Monopoly, 9 Journal of Legal Analysis 51 (2017). 49. Note that this would create a highly liquid market in home refinancings. 50. A team of researchers led by Nikhil Naik is already using image analysis to conduct automated property assessments for real estate, so this idea is not as farfetched as it may at first sound. 51. George A. Akerlof, The Market for “Lemons”: Quality, Uncertainty and the Market Mechanism, 84 Quarterly Journal of Economics 488 (1970); Michael Spence, Job Market Signaling, 87 Quarterly Journal of Economics 355 (1973). 52. Richard Thaler, Toward a Positive Theory of Consumer Choice, 1 Journal of Economics, Behavior, and Organizations 39 (1980). 53. John A. List, Neoclassical Theory versus Prospect Theory: Evidence from the Marketplace, 72 Econometrica 615 (2004); Coren L.


pages: 137 words: 36,231

Information: A Very Short Introduction by Luciano Floridi

agricultural Revolution, Albert Einstein, bioinformatics, carbon footprint, Claude Shannon: information theory, conceptual framework, double helix, Douglas Engelbart, Douglas Engelbart, George Akerlof, Gordon Gekko, industrial robot, information asymmetry, intangible asset, Internet of things, invention of writing, John Nash: game theory, John von Neumann, Laplace demon, moral hazard, Nash equilibrium, Nelson Mandela, Norbert Wiener, Pareto efficiency, phenotype, Pierre-Simon Laplace, prisoner's dilemma, RAND corporation, RFID, Thomas Bayes, Turing machine, Vilfredo Pareto

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


pages: 466 words: 127,728

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

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, business cycle, buy and hold, 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, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, 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 market fund, 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, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

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

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


pages: 387 words: 110,820

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

barriers to entry, Berlin Wall, big-box store, business cycle, cognitive dissonance, computer age, creative destruction, 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, 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, Monkeys Reject Unequal Pay, Pearl River Delta, 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, zero-sum game

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

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


pages: 517 words: 147,591

Small Wars, Big Data: The Information Revolution in Modern Conflict by Eli Berman, Joseph H. Felter, Jacob N. Shapiro, Vestal Mcintyre

basic income, call centre, centre right, clean water, crowdsourcing, demand response, drone strike, experimental economics, failed state, George Akerlof, Google Earth, HESCO bastion, income inequality, income per capita, information asymmetry, Internet of things, iterative process, land reform, mandatory minimum, minimum wage unemployment, moral hazard, natural language processing, RAND corporation, randomized controlled trial, Ronald Reagan, school vouchers, statistical model, the scientific method, trade route, unemployed young men, WikiLeaks, World Values Survey

There is a deep strategic analogy between governments opposing insurgency and police attempting to win over citizens who live in neighborhoods with a heavy gang presence. In particular, tips from civilians allow police to arrest gang members and reduce the gang’s ability to control territory. Indeed, when we first laid out the idea of asymmetric conflict as a three-player game, we used as a starting point a model of criminal gangs proposed in a 1994 article by Nobel Prize winner George Akerlof and former chair of the Federal Reserve Janet Yellen.34 The article described the incentives faced by gangs and the citizens in areas where they operated. The authors argued that citizens must observe some share of gang activities, since operations such as extortion, prostitution, and selling drugs require visibility to customers. Gangs, meanwhile, may do favors for citizens, provide them protection, and often include their children and neighbors among their ranks.

., “What Happens in the Field Stays in the Field: Exploring Whether Professionals Play Minimax in Laboratory Experiments” (NBER Working Paper 15609, 2010). 2. The model is laid out in detail in Eli Berman, Jacob N. Shapiro, and Joseph H. Felter, “Can Hearts and Minds Be Bought? The Economics of Counterinsurgency in Iraq,” Journal of Political Economy 119, no. 4 (2011): 766–819. It was inspired by a model describing why communities endure, and even support, criminal gangs: George Akerlof and Janet L. Yellen, “Gang Behavior, Law Enforcement, and Community Values,” in Values and Public Policy, ed. Henry J. Aaron, Thomas E. Mann, and Timothy Taylor (Washington, DC: Brookings Institution, 1994). 3. A typical market has supply increasing in price and demand declining in price so that there is only one equilibrium price. We call that a unique equilibrium as only one set of choices is the best possible response.


pages: 147 words: 45,890

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

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

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


pages: 263 words: 75,610

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

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

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


pages: 491 words: 77,650

Humans as a Service: The Promise and Perils of Work in the Gig Economy by Jeremias Prassl

3D printing, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, Andrei Shleifer, autonomous vehicles, barriers to entry, call centre, cashless society, Clayton Christensen, collaborative consumption, collaborative economy, collective bargaining, creative destruction, crowdsourcing, disruptive innovation, Donald Trump, Erik Brynjolfsson, full employment, future of work, George Akerlof, gig economy, global supply chain, hiring and firing, income inequality, information asymmetry, invisible hand, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kickstarter, low skilled workers, Lyft, Mahatma Gandhi, Mark Zuckerberg, market friction, means of production, moral hazard, Network effects, new economy, obamacare, pattern recognition, platform as a service, Productivity paradox, race to the bottom, regulatory arbitrage, remote working, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Rosa Parks, Second Machine Age, secular stagnation, self-driving car, shareholder value, sharing economy, Silicon Valley, Silicon Valley ideology, Simon Singh, software as a service, Steve Jobs, TaskRabbit, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, transaction costs, transportation-network company, Travis Kalanick, two tier labour market, two-sided market, Uber and Lyft, Uber for X, uber lyft, union organizing, working-age population

Following an update in the spring of 2017, the relevant description can now be found in clause 3: The Services comprise mobile applications and related services (each, an ‘Application’), which enable users to arrange and schedule transportation, logistics and/or delivery services and/or to purchase certain goods, including with third party providers of such services and goods under agreement with Uber or certain of Uber’s affiliates (‘Third Party Providers’). 10. George Akerlof, ‘The market for “lemons”: qualitative uncertainty and the market mechanism’ (1970) 84(3) Quarterly Journal of Economics 488. 11. Tom Slee, What’s Yours Is Mine: Against the Sharing Economy (O/R Books 2015). 12. Ibid., 100–1. 13. Ibid. This is confirmed by internal Uber documents, which suggest that, in 2014, fewer than 3 per cent of drivers were ‘at risk of being deactivated’ as a result of a rating below 4.6 stars (out of 5): James Cook, ‘Uber’s internal charts show how its driver-rating system actually works’, Business Insider UK (11 February 2015), http://uk.businessinsider.com/leaked-charts-show-how-ubers- driver-rating-system-works-2015–2, archived at https://perma.cc/5UPM-SWFN.


Adam Smith: Father of Economics by Jesse Norman

"Robert Solow", active measures, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

Contours of the World Economy 1–2030 AD, Oxford University Press 2007; there is a very vigorous debate on all sides of this issue. On progress and inequality—and the dynamic ebb and flow between them—see Angus Deaton, The Great Escape: Health, Wealth, and the Origins of Inequality, Princeton University Press 2013 GDP disparity between West and East Germany: CIA World Factbook, 1990 Incentives within capitalism encouraging rip-offs and exploitation: see George A. Akerlof and Robert J. Shiller, Phishing for Phools: The Economics of Manipulation and Deception, Princeton University Press 2015 ‘“Free Trade” is an accepted maxim of tedious orthodoxy’: Walter Bagehot, ‘Adam Smith and our Modern Economy’, reprinted in Economic Studies, ed. R. H. Hutton, Longman, Green 1895 Hamiltonian arguments for managed trade: cf. John Stuart Mill, Principles of Political Economy, John W.

Sen, ‘Adam Smith and the Contemporary World’, Erasmus Journal for Philosophy and Economics, 3.1, Spring 2010 Productivity differences: Robert Gibbons and Rebecca Henderson, ‘What Do Managers Do? Exploring Persistent Performance Differences among Seemingly Similar Enterprises’, Working Paper, Harvard Business School, August 2012 Identity and economics: overall, on identity as non-pecuniary source of motivation, see George A. Akerlof and Rachel E. Kranton, ‘Identity and the Economics of Organizations’, Journal of Economic Perspectives, 19.1, 2005, and their Identity Economics, Princeton University Press 2010. For the importance of ‘mission’ (and its implications for theories of agency), especially in non-profits, educational organizations and public-sector bureaucracies, see Timothy Besley and Maitreesh Ghatak, ‘Competition and Incentives with Motivated Agents’, American Economic Review, 95.3, 2005.


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

"Robert Solow", Bonfire of the Vanities, Bretton Woods, business cycle, clean water, collective bargaining, computerized trading, corporate raider, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, Kenneth Arrow, knowledge economy, life extension, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

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


pages: 312 words: 83,998

Testosterone Rex: Myths of Sex, Science, and Society by Cordelia Fine

assortative mating, Cass Sunstein, credit crunch, Donald Trump, Downton Abbey, Drosophila, epigenetics, experimental economics, gender pay gap, George Akerlof, glass ceiling, helicopter parent, longitudinal study, meta analysis, meta-analysis, phenotype, publication bias, risk tolerance

Their research protocol is also in perfect keeping with Cass Sunstein’s argument (first met in Chapter 5) that the consequences of a decision for one’s self-concept and reputation are vital ingredients in the recipe from which preferences emerge. This aspect of the decision-making context is something that economists, in particular, have not been especially interested in. It was only at the turn of the twenty-first century, in a groundbreaking economics article written by Nobel Prize–winning economist George Akerlof and fellow economist Rachel Kranton, that the concept that social identity and norms have a motivating effect on behavior was formally introduced to economists.34 “What people care about, and how much they care about it, depends in part on their identity,”35 they observe. These “identities and norms derive from the social setting… . [S]ocial context matters.”36 To a social psychologist, this is an almost comically belated revelation: a little bit as if only recently a landmark social psychology article introduced colleagues to the concept of money, and its remarkable influence on people’s preferences and behavior.


pages: 306 words: 85,836

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

Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, global pandemic, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, Sam Peltzman, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, US Airways Flight 1549

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


Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life by Alan B. Krueger

accounting loophole / creative accounting, Affordable Care Act / Obamacare, Airbnb, autonomous vehicles, bank run, Berlin Wall, bitcoin, Bob Geldof, butterfly effect, buy and hold, creative destruction, crowdsourcing, disintermediation, diversified portfolio, Donald Trump, endogenous growth, George Akerlof, gig economy, income inequality, index fund, invisible hand, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kickstarter, Live Aid, Mark Zuckerberg, Moneyball by Michael Lewis explains big data, moral hazard, Network effects, obamacare, offshore financial centre, Paul Samuelson, personalized medicine, pre–internet, price discrimination, profit maximization, random walk, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, Saturday Night Live, Skype, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, winner-take-all economy, women in the workforce, Y Combinator, zero-sum game

Over the last century, the duration of copyright protection has increased markedly in the United States and many other countries. The 1998 Copyright Term Extension Act—also known as the Sonny Bono Act, after the then-congressman and former member of Sonny and Cher—extended copyright protection for new works from the life of the author plus fifty years to the life of the author plus seventy years. A distinguished group of economists, including George Akerlof, Kenneth Arrow, and Milton Friedman, wrote an amicus brief to the Supreme Court arguing that this twenty-year extension, coming long after the death of an author or composer, would have virtually no impact on the economic incentive for creative output. “Because the additional compensation occurs many decades in the future, its present value is small, very likely an improvement of less than 1 percent,” the economists wrote.27 They further warned that extending protection raises costs for consumers and reduces “the set of building-block materials freely available for new works [and therefore] raises the cost of producing new works and reduces the number created.”

Avery Avapol, “Steven Tyler Demands Trump Stop Playing Aerosmith at Rallies,” The Hill, Aug. 22, 2018. 25. Steven Tyler (@IamStevenT), “This is not about Dems vs. Repub,” Twitter, Aug. 22, 2018, 2:20 p.m., https://twitter.com/​iamstevent/​status/​1032376949358788608?lang=en. 26. Kory Grow, “The Last Word: Lars Ulrich on Metallica’s Darkest Times, Making His Own Rules,” Rolling Stone, Nov. 7, 2016. 27. George A. Akerlof et al., “The Copyright Term Extension Act of 1998: An Economic Analysis,” AEI-Brookings Joint Center for Regulatory Studies, Brief 02-1, 2002. 28. Megan MacGarvie, John McKeon, and Jeremy Watson, “It Was Fifty Years Ago Today: Recording Copyright Term and the Supply of Music,” working paper, 2017. 29. International Federation of the Phonographic Industry, “Fixing the Value Gap,” IFPI Global Music Report 2018. 30.


pages: 204 words: 54,395

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

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

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


Not Working by Blanchflower, David G.

active measures, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, Boris Johnson, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clapham omnibus, collective bargaining, correlation does not imply causation, credit crunch, declining real wages, deindustrialization, Donald Trump, estate planning, Fall of the Berlin Wall, full employment, George Akerlof, gig economy, Gini coefficient, Growth in a Time of Debt, illegal immigration, income inequality, indoor plumbing, inflation targeting, job satisfaction, John Bercow, Kenneth Rogoff, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, mass incarceration, meta analysis, meta-analysis, moral hazard, Nate Silver, negative equity, new economy, Northern Rock, obamacare, oil shock, open borders, Own Your Own Home, p-value, Panamax, pension reform, plutocrats, Plutocrats, post-materialism, price stability, prisoner's dilemma, quantitative easing, rent control, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, selection bias, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Thorstein Veblen, trade liberalization, universal basic income, University of East Anglia, urban planning, working poor, working-age population, yield curve

In his 2003 presidential address to the American Economic Association, Bob Lucas denied the possibility of a Great Recession, arguing that “macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades” (2003, 1). It hadn’t. The view was that stabilization of output, even if possible, should not be a macroeconomic priority because the gains are trivially small. Future Fed chair Janet Yellen and George Akerlof (2006) countered by arguing there is a solid case for stabilization policy, which can produce non-negligible gains in welfare. John Rapley has it right: “We should have read the warning signs. If history teaches us anything it’s that whenever economists feel certain they’ve found the holy grail of endless peace and prosperity, the end of the present regime is nigh. … No sooner do we persuade ourselves that the priesthood has finally broken the old curse than it comes back to haunt us all: pride always goes before a fall” (2017, 399).

John Cochrane, “Russ Roberts on Economic Humility,” Grumpy Economist, March 3, 2017, http://johnhcochrane.blogspot.com/2017/03/russ-roberts-on-economic-humility.html. 40. Robert Shiller, “Richard Thaler Is a Controversial Nobel Prize Winner—but a Deserving One,” Guardian, October 11, 2017. Six percent of all Nobels have been awarded, says Shiller, to people who can be classified as behavioral economists including Richard Thaler (2017), Bob Shiller (2013), George Akerlof (2001), Robert Fogel (1993), Daniel Kahneman (2002), and Elinor Ostrom (2009). 41. Stephen Nickell, “Household Debt, House Prices and Consumption Growth” (Speech given at Bloomberg in London, September 14, 2004). 42. Charles Bean, speech given at the Colchester Town Partnership Annual Dinner, Moot Hall, Colchester, November 25, 2004, https://www.bankofengland.co.uk/-/media/boe/files/speech/2004/colechester-town-partnership-annual-dinner. 43.


pages: 470 words: 148,730

Good Economics for Hard Times: Better Answers to Our Biggest Problems by Abhijit V. Banerjee, Esther Duflo

"Robert Solow", 3D printing, affirmative action, Affordable Care Act / Obamacare, Airbnb, basic income, Bernie Sanders, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, charter city, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, endowment effect, energy transition, Erik Brynjolfsson, experimental economics, experimental subject, facts on the ground, fear of failure, financial innovation, George Akerlof, high net worth, immigration reform, income inequality, Indoor air pollution, industrial cluster, industrial robot, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Jean Tirole, Jeff Bezos, job automation, Joseph Schumpeter, labor-force participation, land reform, loss aversion, low skilled workers, manufacturing employment, Mark Zuckerberg, mass immigration, Network effects, new economy, New Urbanism, non-tariff barriers, obamacare, offshore financial centre, open economy, Paul Samuelson, place-making, price stability, profit maximization, purchasing power parity, race to the bottom, RAND corporation, randomized controlled trial, Richard Thaler, ride hailing / ride sharing, Robert Gordon, Ronald Reagan, school choice, Second Machine Age, secular stagnation, self-driving car, shareholder value, short selling, Silicon Valley, smart meter, social graph, spinning jenny, Steve Jobs, technology bubble, The Chicago School, The Future of Employment, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, trickle-down economics, universal basic income, urban sprawl, very high income, War on Poverty, women in the workforce, working-age population, Y2K

Knowing that, anyone who can get a recommendation would rather wait to get it (maybe some connection to a prospective employer will emerge; maybe a friend will start a business), and only those who know no one will ever recommend them (perhaps because they are actually not good workers) will go around knocking at doors to find a job. But then the employer would be right in refusing to talk to them. The market in this situation is unraveling. In 1970, George Akerlof, another future Nobel laureate, but then just a fresh PhD, wrote a paper, “The Market for ‘Lemons,’” in which he argued that the market for used cars might just shut down because people have an incentive to sell off their worst cars. That sets off the kind of self-confirming reasoning we saw in the case of newcomers to the labor market; the more suspicious buyers become of the old cars being sold, the less they will want to pay for them.50 The problem is the less they want to pay, the more the owners of good used cars will want to hold on to them (or sell their cars to friends who know and trust them).

Stiglitz, “Equilibrium Unemployment as a Worker Discipline Device,” American Economic Review 74, no. 3 (June 1984): 433–44. 45 Emily Breza, Supreet Kaur, and Yogita Shamdasani, “The Morale Effects of Pay Inequality,” Quarterly Journal of Economics 133, no. 2 (2018): 611–63. 46 Dustmann, Schönberg, and Stuhler, “Labor Supply Shocks, Native Wages, and the Adjustment of Local Employment.” 47 Patricia Cortés and Jessica Pan, “Foreign Nurse Importation and Native Nurse Displacement,” Journal of Health Economics 37 (2017): 164–80. 48 Kaivan Munshi, “Networks in the Modern Economy: Mexican Migrants in the U.S. Labor Market,” Quarterly Journal of Economics 118, no. 2 (2003): 549–99. 49 Lori Beaman, “Social Networks and the Dynamics of Labor Market Outcomes: Evidence from Refugees Resettled in the U.S.,” Review of Economic Studies 79, no. 1 (January 2012): 128–61. 50 George Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (1970): 488–500. 51 Referees and editors apparently found Akerlof’s paper difficult to understand. Essentially, the kind of circular reasoning that explains the unraveling requires a proper mathematical exposition to make sure it is watertight, and in 1970 this particular style of mathematical argumentation was unfamiliar to most economists.


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Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

Proponents of these so-called ‘dynamic stochastic general equilibrium’ models argued that, unlike an older generation of models, they were properly ‘micro-founded’ on optimising behaviour at the level of individual households and firms. To the book’s diagnosis of how this came about, I would add a failure to use correct micro-foundations that took into account the asymmetric information revolution initiated by George Akerlof, Michael Spence and Joseph Stiglitz, and the research of Angus Deaton and Christopher Carroll on how households behave when facing uncertainty and liquidity constraints.2 The global financial crisis has highlighted the mistake made by most of the macroeconomics profession and central banks in not incorporating asset prices, including property prices, credit and household balance sheets more generally in their models and their understanding.


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

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, 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, fixed income, 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, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

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


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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

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

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

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


pages: 261 words: 103,244

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

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

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


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

accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, barriers to entry, blood diamonds, clean water, colonial rule, congestion charging, crossover SUV, Donald Davies, European colonialism, failed state, feminist movement, George Akerlof, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, mass immigration, megacity, oil rush, prediction markets, random walk, Scramble for Africa, selection bias, Silicon Valley, South China Sea, unemployed young men

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


pages: 222 words: 70,132

Move Fast and Break Things: How Facebook, Google, and Amazon Cornered Culture and Undermined Democracy by Jonathan Taplin

1960s counterculture, affirmative action, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, American Legislative Exchange Council, Apple's 1984 Super Bowl advert, back-to-the-land, barriers to entry, basic income, battle of ideas, big data - Walmart - Pop Tarts, bitcoin, Brewster Kahle, Buckminster Fuller, Burning Man, Clayton Christensen, commoditize, creative destruction, crony capitalism, crowdsourcing, data is the new oil, David Brooks, David Graeber, don't be evil, Donald Trump, Douglas Engelbart, Douglas Engelbart, Dynabook, Edward Snowden, Elon Musk, equal pay for equal work, Erik Brynjolfsson, future of journalism, future of work, George Akerlof, George Gilder, Google bus, Hacker Ethic, Howard Rheingold, income inequality, informal economy, information asymmetry, information retrieval, Internet Archive, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Joseph Schumpeter, Kevin Kelly, Kickstarter, labor-force participation, life extension, Marc Andreessen, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Mother of all demos, move fast and break things, move fast and break things, natural language processing, Network effects, new economy, Norbert Wiener, offshore financial centre, packet switching, Paul Graham, paypal mafia, Peter Thiel, plutocrats, Plutocrats, pre–internet, Ray Kurzweil, recommendation engine, rent-seeking, revision control, Robert Bork, Robert Gordon, Robert Metcalfe, Ronald Reagan, Ross Ulbricht, Sam Altman, Sand Hill Road, secular stagnation, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, smart grid, Snapchat, software is eating the world, Steve Jobs, Stewart Brand, technoutopianism, The Chicago School, The Market for Lemons, The Rise and Fall of American Growth, Tim Cook: Apple, trade route, transfer pricing, Travis Kalanick, trickle-down economics, Tyler Cowen: Great Stagnation, universal basic income, unpaid internship, We wanted flying cars, instead we got 140 characters, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator

I’m not interested in nostalgia but rather in figuring out what changed. Perhaps Henry Jenkins is right: the neorealism that was so much a part of the American New Wave in the 1970s has drifted into TV. But TV has also spawned an age of reality shows in which Kim Kardashian and Donald Trump can overwhelm any cultural innovation that might exist. 8. In 1970 the Nobel Prize–winning economist George Akerlof published a paper that may help us understand the effect that the commoditization of media by Facebook, YouTube, and Google is having on our culture. The paper was called “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Akerlof says that when you buy a used car you assume the worst—it’s a lemon—in your negotiation stance. Thus the seller of a really good used car always loses out.


Termites of the State: Why Complexity Leads to Inequality by Vito Tanzi

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Andrei Shleifer, Andrew Keen, Asian financial crisis, asset allocation, barriers to entry, basic income, bitcoin, Black Swan, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, clean water, crony capitalism, David Graeber, David Ricardo: comparative advantage, deindustrialization, Donald Trump, Double Irish / Dutch Sandwich, experimental economics, financial repression, full employment, George Akerlof, Gini coefficient, Gunnar Myrdal, high net worth, hiring and firing, illegal immigration, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labor-force participation, libertarian paternalism, Long Term Capital Management, market fundamentalism, means of production, moral hazard, Naomi Klein, New Urbanism, obamacare, offshore financial centre, open economy, Pareto efficiency, Paul Samuelson, price stability, principal–agent problem, profit maximization, pushing on a string, quantitative easing, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, Tyler Cowen: Great Stagnation, universal basic income, unorthodox policies, urban planning, very high income, Vilfredo Pareto, War on Poverty, Washington Consensus, women in the workforce

To believe that the private market, without regulations and controls, will naturally and always promote the public interest and the general welfare in today’s world, as some economists continue to argue, amounts to closing one’s eyes to much reality and to much daily evidence. 116 Termites of the State Consider the rise of the financial sector, of the private health sector, and of several other sectors that share broadly similar characteristics. Taken together, these sectors now account for a large and growing share of the total market transactions and of the total spending of most individuals. Therefore, the problem is now no longer limited to occasional “lemons” bought from used-car dealers, in the example made famous by George Akerlof in his classic 1970 article on asymmetry in transactions. The problem has become more general. Ironically, in the automobile industry, it has moved from the sale of used cars, with defects unknown to buyers, to the sale of new cars, with defects also hidden from unwary buyers or even from car dealers, but probably known to the car producers. In principle, for the reasons mentioned earlier, these problems in market transactions might lead to demands for, and might justify, a larger government role, one aimed at better protecting less sophisticated individuals from potential abuses, for example, the unsophisticated individuals who bought new houses with mortgages obtained from unscrupulous agents during the period that led to the financial crisis; individuals who are charged astronomical fees for simple surgical procedures; or those who buy new cars with serious or even dangerous defects.


pages: 1,205 words: 308,891

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

Airbnb, Akira Okazaki, big-box store, Black Swan, book scanning, British Empire, business cycle, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, clean water, Columbian Exchange, conceptual framework, correlation does not imply causation, Costa Concordia, creative destruction, crony capitalism, dark matter, Dava Sobel, David Graeber, David Ricardo: comparative advantage, deindustrialization, demographic transition, Deng Xiaoping, Donald Trump, double entry bookkeeping, en.wikipedia.org, epigenetics, Erik Brynjolfsson, experimental economics, Ferguson, Missouri, fundamental attribution error, Georg Cantor, George Akerlof, George Gilder, germ theory of disease, Gini coefficient, God and Mammon, greed is good, Gunnar Myrdal, Hans Rosling, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, immigration reform, income inequality, interchangeable parts, invention of agriculture, invention of writing, invisible hand, Isaac Newton, Islamic Golden Age, James Watt: steam engine, Jane Jacobs, John Harrison: Longitude, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labor-force participation, lake wobegon effect, land reform, liberation theology, lone genius, Lyft, Mahatma Gandhi, Mark Zuckerberg, market fundamentalism, means of production, Naomi Klein, new economy, North Sea oil, Occupy movement, open economy, out of africa, Pareto efficiency, Paul Samuelson, Pax Mongolica, Peace of Westphalia, peak oil, Peter Singer: altruism, Philip Mirowski, pink-collar, plutocrats, Plutocrats, positional goods, profit maximization, profit motive, purchasing power parity, race to the bottom, refrigerator car, rent control, rent-seeking, Republic of Letters, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scientific racism, Scramble for Africa, Second Machine Age, secular stagnation, Simon Kuznets, Social Responsibility of Business Is to Increase Its Profits, spinning jenny, stakhanovite, Steve Jobs, The Chicago School, The Market for Lemons, the rule of 72, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, total factor productivity, Toyota Production System, transaction costs, transatlantic slave trade, Tyler Cowen: Great Stagnation, uber lyft, union organizing, very high income, wage slave, Washington Consensus, working poor, Yogi Berra

Sancho, as representative of the modern world, complains about the lack of calculation, but to no effect. The comic point of the book is that the Don is invulnerable to reason, calculation, cool rhetoric, conversation, not to speak of nicely-calculated less or more. (Yet in modern economic life the role of identity and impulse needs to be acknowledged, as the social psychologist Jonathan Haidt, the management theorist James March, the economic historian John Nye, and the economists George Akerlof and Robert Shiller have all affirmed. Not many business decisions could be made without identity and impulse.11) Austen laughs at thoughtless aristocratic gestures and Christian pseudo-martyrdoms. In Austen’s novels, strategic thinking is the means, and if the end is wisely chosen (as it is at the last by the major and developing characters), all is well. Strategic thinking balanced by other virtues is the ticket to emotional maturity and to a good marriage.

If trading were in fact a scene mainly of adulterated flour and over-dear shoes, a matter of making upland wives think your stuff was good when it was rotten, a theater of hypocrisy ruled only by lying and plotting, then no one of faith or justice or indeed of common prudence would venture to take part in it. The self-selection would drive out all faithful people, by a mechanism the economists call, following George Akerlof, the “lemons” effect. If the only automobiles that come be traded, Akerlof observed, are those that work badly and therefore are lemons fit only to be sold off to suckers (an auto that has been in a serious crash, for example, though “repaired”), then everyone will come to suspect that any automobile put up for sale is likely to be a lemon.16 The medieval historian James Davis makes the same point: “If unremitting suspicion [which he finds especially in literary and religious comments on petty traders] reflected the opinion of all medieval market users then exchange would have been very difficult, . . . requiring constant (and costly) surveillance.”17 If only deceitful Scottish tradesmen, or English knaves and men admired out of opinion rather than for who they really are, can succeed in the secondhand market for horses, then everyone will come to suspect that any horse put up for sale is likely to be rotten, impure, over-dear, and dissembling.


pages: 586 words: 159,901

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

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, 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, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, plutocrats, Plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

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


pages: 503 words: 131,064

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

airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, 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, longitudinal study, mass incarceration, 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, zero-sum game

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

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


pages: 523 words: 111,615

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

"Robert Solow", accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, business cycle, 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, different worldview, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

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



pages: 256 words: 60,620

Think Twice: Harnessing the Power of Counterintuition by Michael J. Mauboussin

affirmative action, asset allocation, Atul Gawande, availability heuristic, Benoit Mandelbrot, Bernie Madoff, Black Swan, butter production in bangladesh, Cass Sunstein, choice architecture, Clayton Christensen, cognitive dissonance, collateralized debt obligation, Daniel Kahneman / Amos Tversky, deliberate practice, disruptive innovation, Edward Thorp, experimental economics, financial innovation, framing effect, fundamental attribution error, Geoffrey West, Santa Fe Institute, George Akerlof, hindsight bias, hiring and firing, information asymmetry, libertarian paternalism, Long Term Capital Management, loose coupling, loss aversion, mandelbrot fractal, Menlo Park, meta analysis, meta-analysis, money market fund, Murray Gell-Mann, Netflix Prize, pattern recognition, Philip Mirowski, placebo effect, Ponzi scheme, prediction markets, presumed consent, Richard Thaler, Robert Shiller, Robert Shiller, statistical model, Steven Pinker, The Wisdom of Crowds, ultimatum game

Sapolsky, Why Zebras Don’t Get Ulcers: An Updated Guide to Stress, Stress-Related Disease, and Coping (New York: W.H. Freeman and Company, 1994); and Samuel M. McClure, David I Laibson, George Loewsenstein, and Jonathan D. Cohen, “Separate Neural Systems Value Immediate and Delayed Monetary Rewards,” Science 306 (October 15, 2004), 503–507. 28. Jerome Groopman tells a similar story. See Groopman, How Doctors Think, 225–233. 29. George A. Akerlof and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Princeton, NJ: Princeton University Press, 2009), 36–37; and Whitney Tilson and Glenn Tongue, More Mortgage Meltdown: 6 Ways to Profit in These Bad Times (New York: John Wiley & Sons, 2009), 29–47. 30. Alan Greenspan, “Testimony to the Committee of Government Oversight and Reform,” October 23, 2008. 31.


pages: 261 words: 81,802

The Trouble With Billionaires by Linda McQuaig

"Robert Solow", battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, British Empire, Build a better mousetrap, carried interest, collateralized debt obligation, computer age, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Douglas Engelbart, Douglas Engelbart, employer provided health coverage, financial deregulation, fixed income, full employment, George Akerlof, Gini coefficient, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invention of the wheel, invisible hand, Isaac Newton, Jacquard loom, Joseph-Marie Jacquard, laissez-faire capitalism, land tenure, lateral thinking, Mark Zuckerberg, market bubble, Martin Wolf, mega-rich, minimum wage unemployment, Mont Pelerin Society, Naomi Klein, neoliberal agenda, Northern Rock, offshore financial centre, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, pre–internet, price mechanism, purchasing power parity, RAND corporation, rent-seeking, rising living standards, road to serfdom, Ronald Reagan, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, trickle-down economics, Vanguard fund, very high income, wealth creators, women in the workforce

Instead, Solow attributed the majority of the growth – about 88 per cent – to ‘technical ‌change in the broadest sense’.10 Herbert A. Simon, another Nobel Prize-winning economist, referred to the huge store of knowledge from the past as ‘social capital’, and argued that access to it was our main source of wealth, responsible for about 90 ‌per cent of national income.11 Still another Nobel laureate, George Akerlof, points to the economic significance of this technological inheritance in noting that ‘our marginal products are not ours alone…[but] are due almost entirely to the cumulative process of learning that has taken us from stone age ‌poverty to twenty-first century affluence’.12 Indeed, it’s hard to figure out the rationale for the mammoth discrepancies in today’s incomes when so much of what any of us are able to accomplish is due to all the learning and knowledge accumulated in the centuries preceding us.


pages: 510 words: 120,048

Who Owns the Future? by Jaron Lanier

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, commoditize, computer age, crowdsourcing, David Brooks, David Graeber, delayed gratification, digital Maoism, Douglas Engelbart, en.wikipedia.org, Everything should be made as simple as possible, 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, information asymmetry, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Markoff, Kevin Kelly, Khan Academy, Kickstarter, Kodak vs Instagram, life extension, Long Term Capital Management, Marc Andreessen, Mark Zuckerberg, meta analysis, meta-analysis, Metcalfe’s law, moral hazard, mutually assured destruction, Network effects, new economy, Norbert Wiener, obamacare, packet switching, Panopticon Jeremy Bentham, Peter Thiel, place-making, plutocrats, Plutocrats, Ponzi scheme, post-oil, pre–internet, race to the bottom, Ray Kurzweil, rent-seeking, reversible computing, Richard Feynman, Ronald Reagan, scientific worldview, 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, zero-sum game

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: 478 words: 126,416

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

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, buy and hold, 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, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, 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, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, 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, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

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


pages: 1,535 words: 337,071

Networks, Crowds, and Markets: Reasoning About a Highly Connected World by David Easley, Jon Kleinberg

Albert Einstein, AltaVista, clean water, conceptual framework, Daniel Kahneman / Amos Tversky, Douglas Hofstadter, Erdős number, experimental subject, first-price auction, fudge factor, George Akerlof, Gerard Salton, Gerard Salton, Gödel, Escher, Bach, incomplete markets, information asymmetry, information retrieval, John Nash: game theory, Kenneth Arrow, longitudinal study, market clearing, market microstructure, moral hazard, Nash equilibrium, Network effects, Pareto efficiency, Paul Erdős, planetary scale, prediction markets, price anchoring, price mechanism, prisoner's dilemma, random walk, recommendation engine, Richard Thaler, Ronald Coase, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, Simon Singh, slashdot, social web, Steve Jobs, stochastic process, Ted Nelson, The Market for Lemons, The Wisdom of Crowds, trade route, transaction costs, ultimatum game, Vannevar Bush, Vickrey auction, Vilfredo Pareto, Yogi Berra, zero-sum game

THE MARKET FOR LEMONS 719 22.6 The Market for Lemons At the beginning of the chapter, we started with a simple scenario involving horse-racing and then showed how the resulting principles extended to much larger and more complex systems such as the stock market. For considering the role of asymmetric information, we’ll follow a similar strategy, first developing the case of the used-car market as a simple, stylized example, and then showing how the same principles apply to a range of more complex and fundamental markets. In focusing first on used cars, we’re following the rhetorical lead of the economist George Akerlof, who published a foundational paper on asymmetric information [10] for which he shared the 2001 Nobel Prize in Economics. His leading example in the paper was the market for used cars — or, as he called it, the “market for lemons.” (A used car that is particularly bad is called a lemon.) The idea behind this phrase is old, probably as old as trading itself, but Akerlof was the first to clearly articulate the underlying principle and its implications for how markets work — or, in some cases, how they fail to work.

Thus, the overall system of warranties might be crucial for breaking down information asymmetries that could otherwise cause the market to fail. Signaling in the Labor Market. This idea of signaling applies to many settings other than just the used-car market. Perhaps its most important application is to the labor market, in which education can serve as signal; Michael Spence developed this idea and shared the 2001 Nobel Prize in Economics (with George Akerlof and Joseph Stiglitz) for his work on this topic [373]. Spence’s idea is easy to understand in the context of our earlier labor market example, with productive and unproductive workers which firms cannot initially distinguish from each other. Suppose that it is easier for productive workers to obtain education than it is for unproductive workers. (Perhaps productive workers also perform better in school, and they can obtain a degree with less effort.)

Social Networks, 27(3):187–203, 2005. [7] Lada A. Adamic, Rajan M. Lukose, Amit R. Puniyani, and Bernardo A. Huberman. Search in power-law networks. Physical Review E, 64:046135, 2001. [8] U.S. Environmental Protection Agency. Clean air markets. http://www.epa.gov/airmarkt/. [9] Ravindra K. Ahuja, Thomas L. Magnanti, and James B. Orlin. Network Flows: Theory, Algorithms, and Applications. Prentice Hall, 1993. [10] George Akerlof. The market for ’lemons’: Quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84:488–500, 1970. [11] Réka Albert and Albert-László Barabási. Statistical mechanics of complex networks. Reviews of Modern Physics, 74:47–97, 2002. 799 800 BIBLIOGRAPHY [12] Armen A. Alchian. Uncertainty, evolution, and economic theory. Journal of Political Economy, 58:211–221, 1950


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

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

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


pages: 336 words: 90,749

How to Fix Copyright by William Patry

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

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


pages: 401 words: 93,256

Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life by Rory Sutherland

3D printing, Alfred Russel Wallace, barriers to entry, basic income, Black Swan, butterfly effect, California gold rush, call centre, Captain Sullenberger Hudson, Cass Sunstein, cognitive dissonance, Daniel Kahneman / Amos Tversky, Dava Sobel, delayed gratification, Donald Trump, double helix, Downton Abbey, Elon Musk, Firefox, George Akerlof, gig economy, Google Chrome, Google X / Alphabet X, Grace Hopper, Hyperloop, Ignaz Semmelweis: hand washing, IKEA effect, information asymmetry, James Dyson, John Harrison: Longitude, loss aversion, low cost airline, Mason jar, Murray Gell-Mann, Peter Thiel, placebo effect, race to the bottom, Richard Feynman, Richard Thaler, Rory Sutherland, shareholder value, Silicon Valley, social intelligence, Steve Jobs, supply-chain management, the map is not the territory, The Market for Lemons, The Wealth of Nations by Adam Smith, ultimatum game, universal basic income, Upton Sinclair, US Airways Flight 1549, Veblen good

So no one did make a better board, and the whole category more or less died as a result. It may correct itself if better boards arise, or if a shrewd company such as Samsung cannily attaches its name to the best. Noticeably, brands such as Juul and Vype are starting to emerge in the similarly haphazard vaping market. In many ways, expensive advertising and brands arise as a solution to a problem identified by George Akerlof in his 1970 paper ‘The Market for Lemons’ in the Quarterly Journal of Economics. The problem is known as ‘information asymmetry’, whereby the seller knows more about what he is selling than the buyer knows about what he is buying. This lesson was learned the hard way in Eastern Bloc countries under communism; brands were considered un-Marxist, so bread was simply labelled ‘bread’. Customers had no idea who had made it or whom to blame if it arrived full of maggots, and couldn’t avoid that make in future if it did, because all bread packaging looked the same.


pages: 375 words: 88,306

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

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

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


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Kickstarter, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, Plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

King, The End of Alchemy: Money, banking and the future of the global economy, Little, Brown, London, 2016. 13.Sherman McCoy, the protagonist in Wolfe’s Bonfire of the Vanities, is a Wall Street trader whose life goes horribly wrong just when it seemed to be going so well: he was a self-styled Master of the Universe. 14.For a discussion of the effects of dysfunctional belief systems, see R. Hausmann, ‘Through the Venezuelan looking glass’, Project Syndicate, August 2016, available at: https://www.project-syndicate.org/commentary/venezuela-destructive-belief-systems-by-ricardo-hausmann-2016-08 15.The classic article on asymmetric information is George Akerlof, ‘The market for lemons: Quality, uncertainty and the market mechanism’, Quarterly Journal of Economics, 84:3 (1970), pp. 488–500. 16.See, for example, E. Passari and H. Rey, Financial Flows and the International Monetary System, National Bureau of Economic Research Working Paper No. 21172, Cambridge, MA, May 2015. 17.The pre-2000 figures come from M. Obstfeld and A.M. Taylor, Global Capital Markets: Integration, crisis, and growth, Cambridge University Press, New York, 2004.


Basic Income: A Radical Proposal for a Free Society and a Sane Economy by Philippe van Parijs, Yannick Vanderborght

"Robert Solow", Airbnb, Albert Einstein, basic income, Berlin Wall, Bertrand Russell: In Praise of Idleness, centre right, collective bargaining, cryptocurrency, David Graeber, declining real wages, diversified portfolio, Edward Snowden, eurozone crisis, Fall of the Berlin Wall, feminist movement, full employment, future of work, George Akerlof, illegal immigration, income per capita, informal economy, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kickstarter, Marshall McLuhan, means of production, minimum wage unemployment, open borders, Paul Samuelson, pension reform, precariat, price mechanism, profit motive, purchasing power parity, quantitative easing, race to the bottom, road to serfdom, Second Machine Age, secular stagnation, selection bias, sharing economy, sovereign wealth fund, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, universal basic income, urban planning, urban renewal, War on Poverty, working poor

Akee, Randall, Emilia Simeonova, William E. Copeland, Adrian Angold, and E. Jane Costello. 2013. “Young Adult Obesity and HouseÂ�hold Income: Effects of Unconditional Cash Transfers.” American Economic Journal: Applied Economics 5(2): 1–28. Akerlof, George A. 1982. “Â�Labor Contracts as Partial Gift Exchange.” In George A. Akerlof, ed., An Economic Theorist’s Book of Tales, 145–174. Cambridge: Cambridge University Press, 1984. Akerlof, George A., and Janet L. Yellen. 1986. “Introduction.” In George A. Akerlof and Janet L. Yellen, eds., Efficiency Wage Models of the Â�Labor Market, 1–22. Cambridge: Cambridge University Press. Alaluf, Mateo. 2014. L’allocation universelle. Nouveau label de précarité. Mons: Couleur Livres. Albeda, Wim. 1984. De Crisis van de Werkloosheid en de Verzorgingsstaat. Analyse en Perspectief.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Black Swan, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, joint-stock company, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

Morris’s The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, James Grant’s Mr Market Miscalculates: The Bubble Years and Beyond, Charles Gasparino’s The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System, Barry Rithholtz’s Bailout Nation: How GREED and EASY MONEY Corrupted Wall Street And Shook the World Economy, and Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina vanden Heuvel and the Editors of the Nation. Some of the books are by academics. One of the first was Richard Posner’s The Failure of Capitalism. Robert J. Shiller produced The Subprime Solution and George A. Akerlof together with Shiller wrote Animal Spirits; some of the chapters in this book focus on the crisis. Simon Johnson and James Kwak authored 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. Raghuram G. Rajan wrote Fault Lines: How Hidden Fractures Still Threaten the World Economy, Joseph Stiglitz produced Freefall: America, Free Markets, and the Sinking of the World Economy and Nassim Nicholas Taleb brought out The Theory of Black Swan Events, a critique of the prevailing consensus in academic finance about market efficiency.

More and more economic theorists are moving away from unswerving reliance on the assumption that market participants are uniformly intelligent, informed, and independent in thought, introducing such concepts as asymmetric information (different knowledge available to different participants), cognitive dissonance (unconscious suppression of information that fails to fit a priori views), herd behavior, procrastination that results in failure to act in timely fashion, and so on. Those interested should consult the work especially of George Akerlof and Richard Thaler. For relevant studies, see Frederic S. Miskin, ‘Asymmetric Information and Financial Crises: a Historical Perspective’, in R. Glenn Hubbard, ed., Financial Markets and Financial Crises (Chicago: University of Chicago Press, 1991), pp. 69–108; and Thomas Lux, ‘Herd Behavior, Bubbles and Crashes’, Economic Journal, vol. 105 (July 1995), pp. 881–96. 11. Gustav LeBon, The Crowd: a Study of the Popular Mind (London: T.


pages: 297 words: 103,910

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

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

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


pages: 353 words: 98,267

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

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

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


pages: 356 words: 103,944

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

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

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


pages: 370 words: 94,968

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

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

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


pages: 807 words: 154,435

Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

"Robert Solow", Airbus A320, Albert Einstein, Albert Michelson, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Benoit Mandelbrot, bitcoin, Black Swan, Bonfire of the Vanities, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, easy for humans, difficult for computers, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Hans Rosling, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, Moneyball by Michael Lewis explains big data, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, oil shock, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Pierre-Simon Laplace, popular electronics, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, World Values Survey, Yom Kippur War, zero-sum game

Even those without any formal training in economics understand that prices are set by the interplay between supply and demand. If goods remain unsold, then a fall in the price should stimulate demand and clear the market. But in some markets things don’t seem to work that way. One reason is that sellers may know far more about the quality of the goods they are selling than do the buyers, and buyers recognise that fact. In 1970, George Akerlof showed that in the presence of this ‘asymmetric information’ it may be difficult to find any price at which trade occurs. 5 Potential buyers of second-hand cars do not know whether a particular vehicle is of high or low quality. They are perhaps willing to pay a particular price for a car of average quality. But the only sellers who would accept such an offer are those who own cars of lower than average quality – ‘lemons’. 6 Realising that, potential buyers lower their offer price.


pages: 202 words: 58,823

pages: 411 words: 80,925

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

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

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


pages: 561 words: 87,892

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

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, 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, fixed income, Francis Fukuyama: the end of history, full employment, G4S, 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, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, 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 inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

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


pages: 350 words: 103,270

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

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

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


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

When I later spoke to Bernanke about Faust’s role, he told me, “Yes, Jon’s office was just across the hall from mine.” Concerning forward guidance, Faust was the Fed’s brain. Faust is a member in good standing of the Keynesian-monetarist academic coterie. He received his Ph.D. in 1988 from the University of California, Berkeley. Janet Yellen was a professor at Berkeley before she became a senior Fed official. Faust’s thesis adviser, the Nobel Prize–winning economist George Akerlof, is married to Yellen. Faust worked at the Fed in various capacities from 1981 to 2006, ultimately becoming assistant director in the international finance division. Suffice to say, Faust was no stranger to the Fed, Bernanke, or Yellen when he got a call to advise the board in 2012. On January 20, 2015, not long after he left the Fed, Jon and I had dinner at The National, a popular New York steakhouse, in a private dining room on the second floor.


pages: 597 words: 172,130

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

"Robert Solow", Ayatollah Khomeini, bank run, banking crisis, Berlin Wall, Bernie Sanders, break the buck, Bretton Woods, business climate, business cycle, capital controls, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency peg, eurozone crisis, financial innovation, Flash crash, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, market bubble, market design, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, Paul Samuelson, price stability, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, savings glut, Socratic dialogue, sovereign wealth fund, The Great Moderation, too big to fail, union organizing, WikiLeaks, yield curve, Yom Kippur War

They are invariably more impressed by the CNBC camera crew set up outside and the intense-looking, earpiece-wearing security guards than the central bankers themselves. The 110 attendees, including a handful of journalists, are chosen by the Kansas City Fed president, with the guest list constrained by the size of the Jackson Lake Lodge’s fur-trapper-modernist ballroom. This is surely the only conference of its type to which a Nobel laureate such as Berkeley economist George Akerlof would find himself invited only as the spouse of San Francisco Fed president Janet Yellen, not on his own account. Inevitably, small talk at the kickoff dinner devolves to analyzing who is and isn’t in attendance that year. New York Times columnist Paul Krugman, himself a Nobel laureate and once a regular attendee, concluded that he was blackballed from the conference for criticizing Greenspan too harshly.


pages: 289 words: 113,211

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

"Robert Solow", affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, Black Swan, Black-Scholes formula, Bonfire of the Vanities, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial innovation, fixed income, frictionless, frictionless market, George Akerlof, implied volatility, index arbitrage, intangible asset, Jeff Bezos, John Meriwether, 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, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Shiller, rolodex, Saturday Night Live, selection bias, 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, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

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: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

It plays a bigger part in macroeconomics, which deals with the economy as a whole, but at best as a redistributor of the wealth created by companies and an investor in the ‘enabling' conditions companies need - infrastructure, education, skills and so on. The marginal theory has fostered the idea that collectively produced value derives from individual contributions. Yet, as the American economist George Akerlof, who shared the Nobel Prize in Economics in 2001, said: ‘Our marginal products are not ours alone'71 - they are the fruits of a cumulative process of learning and investment. Collective value creation entails a risk-taking public sector - and yet the usual relationship between risks and rewards, as taught in economics classes, does not seem to apply. So the crucial question is not just about accounting for government value but also rewarding it: how should rewards from investment be divided between the public and private sectors?


pages: 354 words: 118,970

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

Affordable Care Act / Obamacare, Airbnb, airline deregulation, Albert Einstein, augmented reality, basic income, Bernie Sanders, Black-Scholes formula, buy and hold, capital controls, computerized trading, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, mass immigration, means of production, Metcalfe’s law, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, new economy, Norman Mailer, obamacare, Paul Samuelson, Peter Thiel, price mechanism, principal–agent problem, profit maximization, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, The Nature of the Firm, the payments system, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

Reuther Library at Wayne State University in Detroit; the Tamiment Library and Robert F. Wagner Labor Archives at New York University; the Columbia Center for Oral History in New York; and the Anderson University and Church of God Archives at Anderson University in Indiana. A few of the many people I consulted about the book were particularly generous with their advice, either along the way or in response to an early draft of the manuscript that I had given them: George Akerlof, Roy Bahat, Richard Bookstaber, Jeffrey Frank, Rakesh Khurana, Frank Levy, and Elisabeth Sifton. My agent, Amanda Urban, and her husband, Ken Auletta, suggested that I make Reid Hoffman one of the profile subjects in the book and introduced me to him. My editor at Farrar, Straus and Giroux, Alexander Star, did a superb job of helping me sharpen and clarify my arguments and tell the book’s stories more engagingly.


pages: 492 words: 118,882

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

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

Putting it all together "Economic theorists, like French chefs in regard to food, have developed stylized models whose ingredients are limited by some unwritten rules. Just as traditional French cooking does not use seaweed or raw fish, so neoclassical models do not make assumptions derived from psychology, anthropology, or sociology. I disagree with any rules that limit the nature of the ingredients in economic models", George Akerlof, An Economic Theorist’s Book of Tales (1984) It would seem that we have drifted from the topic of the Blockchain whilst endeavouring to grasp the basics of complexity economics. But actually, we were just setting the stage to the final point to be made in this book. The Blockchain is not a panacea. It is a tool and like any good tool, it is versatile and works better when it is part of a tool kit.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"Robert Solow", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Asian financial crisis, banking crisis, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, Plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Ronald Reagan, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

Back then—and until recently—there was little interest among the American economics profession in the subject. And so, I owe a great deal to my thesis supervisors, two of the great economists of the twentieth century, Robert Solow (whose own dissertation was on the subject) and Paul Samuelson, for encouraging me in this line of research, as well as for their great insights.4 And an especial thanks to my first co-author, George Akerlof, who shared the 2001 Nobel Prize with me. At Cambridge, we often discussed the determinants of the distribution of income, and I benefited enormously from conversations with Frank Hahn, James Meade, Nicholas Kaldor, James Mirrlees, Partha Dasgupta, David Champernowne, and Michael Farrell. It was there that I tutored and then began my collaboration with Anthony Atkinson, the leading scholar on inequality in the past half century.


pages: 374 words: 97,288

The End of Ownership: Personal Property in the Digital Economy by Aaron Perzanowski, Jason Schultz

3D printing, Airbnb, anti-communist, barriers to entry, bitcoin, blockchain, carbon footprint, cloud computing, conceptual framework, crowdsourcing, cryptocurrency, Donald Trump, Edward Snowden, en.wikipedia.org, endowment effect, Firefox, George Akerlof, Hush-A-Phone, information asymmetry, intangible asset, Internet Archive, Internet of things, Isaac Newton, loss aversion, Marc Andreessen, means of production, minimum wage unemployment, new economy, peer-to-peer, price discrimination, Richard Thaler, ride hailing / ride sharing, rolodex, self-driving car, sharing economy, Silicon Valley, software as a service, software patent, software studies, speech recognition, Steve Jobs, subscription business, telemarketer, The Market for Lemons, transaction costs, winner-take-all economy

Mike Masnick, “Supreme Court Chief Justice Admits He Doesn’t Read Online EULAs or Other ‘Fine Print,’” Techdirt, October 22, 2010, https://www.techdirt.com/articles/20101021/02145811519.shtml, accessed July 7, 2015. 8. Mike Masnick, “Proof That (Almost) No One Reads End User License Agreements,” Techdirt, February 23, 2005, https://www.techdirt.com/articles/20050223/1745244.shtml, accessed July 7, 2015. 9. George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (August 1970): 488–500, http://www.jstor.org/stable/1879431, accessed July 7, 2015. 10. Services like Carfax have addressed this problem by making information about specific vehicles more readily available. Steven Mufson and Michael A. Fletcher, “Carfax Figures Indicate an ‘Alarming Number’ of Recalled Cars Are Sold without Being Fixed,” Washington Post, April 4, 2014, https://www.washingtonpost.com/business/economy/carfax-figures-indicate-an-alarming-number-of-recalled-cars-are-sold-without-being-fixed/2014/04/03/093e9464-bb47-11e3-9c3c-311301e2167d_story.html, accessed March 13, 2016. 11.


pages: 484 words: 136,735

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

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

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