The latest example of Luther's Juicing the Mitchell...

...and not a moment too soon!

Line of the Day: China

China has no fewer than 428 think tanks involved in policy formulation—a number second only to the United States.

That's from a bit on China's foreign policy in the Boston Globe.

Math in Sports

Here's a bit from Bill Simmons' new writing project (the piece is not by him). It feels familiar. Some thoughts:

1. I've never understood sabermetrics to be about "solving" sports. It's a tool to gain an edge on some margin by which you generate for yourself an information advantage. Sports and management decisions are not solvable; find an edge, exploit it.

2. Sabermetrics developed with baseball; it's evolution into basketball and football seems to overlook the nature of separability in the baseball production function (and the lack thereof in the production functions for basketball and football). I'm not sure that this is completely intractable but it's a hurdle, and not an insignificant one. "Finding the right metrics" in basketball and football doesn't get at the root issue.

3. Since we're here-- here's the trailer for Moneyball. Jonah Hill playing Paul DePodesta (I understand he's a composite of individuals, but nonetheless) has to be one of the most surprising movie castings in recent memory, though the more I consider it, I think it may work out well. And is it mandatory that Kevin Costner be cast in any and all movies concerning baseball?

Blockquoting Whom?

Can you guess which Nobel Laureate recently penned...errr typed...these words?

The trick, always, is not to take your equilibrium stories too seriously, to understand that they’re aids to insight, not Truths; given that, I don’t believe that there’s anything wrong with using equilibrium analysis.

If the hint didn't give it away, follow the link or check below the fold.

+/-

Paul Krugman

Q & A

Here's a Q & A I did concerning the gambling work I've been doing and will be doing.

A few betting market notes...

Here's a fantastic story-- in 2003, a Mr. Nick Newlife put £1,520 at 66-to-1 odds that Roger Federer would win seven Wimbledon titles. (He currently stands at 6.) Unfortunately, in 2009, our bettor passed away...yet made the appropriate arrangements for his bet to be claimed should it pay off. Should Federer get his seventh, Oxfam benefits to the tune of £101,840.

Also-- here's a brief summary of our latest work on MLB betting markets.

On Hayek's Proposal

My colleague Nick Snow asks, "What's so funny about peace, love, and a free market in money?" He uncovers this 1977 WSJ article, where Hayek presents his Denationalisation of Money proposal to a wider audience.

I have written critically on Hayek's proposal. Nicolas Cachanosky provides a summary of my paper.

Before asking whether there is something funny about a free market in money, a distinction should be made between inside and outside money. Under free banking, private banks provide inside money (banknotes and demand deposits) redeemable for the prevailing outside money (gold and/or silver, historically). Under central banking, private banks provide inside money (demand deposits) redeemable for the prevailing outside money (Federal Reserve notes).

After making this distinction, it is possible to see what is so funny about Hayek’s proposal. He wants private issuers to provide outside money. He wants the monetary system to work without the very constraint that made episodes of free banking successful: a contractual obligation to redeem notes for some scarce commodity. That, I believe, is laughable.

The Future Monetary System of Zimbabwe

I blogged recently about Zimbabwe's now defunct 100-trillion-dollar note. Currently, citizens of Zimbabwe are free to use US Dollars and South African Rand for their transactions. Since inflationary finance and seigniorage are often key political tools in developing countries, one should not be surprised if Zim notes make a return in the near future. New Zimbabwe reports:

Finance minister Tendai Biti says the country needs at least six months import cover and a sustainable track-record of economic growth, inflation stability and above 60 percent capacity utilisation in industry before the Zim dollar can be brought back into circulation.

However central bank chief, Dr Gideon Gono said the country should consider adopting a gold-backed currency.“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.

Whether Zimbabwe will adopt a commodity-backed system remains to be seen. I think it is highly unlikely. But it is encouraging to see that option on the table.

Blockquoting X

X = Hal Varian:

But where to get ideas, that's the question. Most graduate students are convinced that the way you get ideas is to read journal articles. But in my experience journals really aren't a very good source of original ideas. You can get lots of things from journal articles--technique, insight, even truth. But most of the time you will only get someone else's ideas. True, they may leave a few loose ends lying around that you can pick up on, but the reason they are loose is probably that the author thought about them a while and couldn't figure out what to do with them or decided they were too tedious to bother with--which means that it is likely that you will find yourself in the same situation.

My suggestion is rather different: I think that you should look for your ideas outside the academic journals--in newspapers, in magazines, in conversations, and in TV and radio programs. When you read the newspaper, look for the articles about economics...and then look at the ones that aren't about economics, because lots of the time they end up being about economics too. Magazines are usually better than newspapers because they go into issues in more depth. On the other hand, a shallower analysis may be more stimulating: there's nothing like a fallacious argument to stimulate research.

Emily Skarbek on Reason TV

Blockquoting X

X = John Taylor, as quoted in this WSJ article on Zimbabwe's now-defunct 100-trillion-dollar note:

No self-respecting monetary economist goes around without a 100-trillion-dollar note.

Being a trillionaire ain't what it used to be.

[HT: Dan Smith]

Blockquoting X

X = J. Bradford Delong:

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

I am pleasantly surprised that he feels this way.

What I've Been Writing

In my latest working paper, I consider the debate between Friedman and Hayek in the 1970s and 1980s following the publication of Hayek's Denationalisation of Money. Here's the abstract:

Hayek (1976, 1978, 1984, 1990) is often credited with the resurgence of interest in alternative monetary systems. His own proposal, however, received sharp criticism from Friedman (1984), Fischer (1986), and others at the outset and never gained much support among academic economists or the wider population. According to Friedman, Hayek erred in believing that the mere admission of competing private currencies will spontaneously generate a more stable monetary system. In Friedman’s view, network effects, to use the modern term, discourage an alternative system from emerging in general and prevent Hayek’s system from functioning as desired in particular. I offer new evidence provided by recent events in Somalia as support for Friedman’s initial doubts.

As some of you will no doubt recognize, this builds on my earlier work with Larry White.

Did Intrade Forsee Bin Laden's Capture?

Intrade might have foreseen the capture of Saddam Hussein, but it doesn't look like that was the case this time:

And the prediction market doesn't appear to be waiting around for a long-form death certificate to close the deal.

Round Two

Title IX Shenanigans

Hey, it's my first "The War on Duh" post!

The title: Schools distort figures to meet Title IX

The shocking truth: "Many Division I schools are distorting the number of students participating in sports so they can comply with Title IX..."

The fantastic quote: "Among the tactics is to pad rosters of women's teams with unqualified players or even men. The [NYT] found schools counted athletes who no longer wanted to compete or never played for that team, listing male practice players as women..."

Who would have guessed?!

Hedge Fund Managers and Sports

I'm not convinced that the causality is there, but here's a nonetheless intriguing bit from Business Week (which, by the way, is orders of magnitude better than when I started getting it a few years ago) about the poor performance of hedge funds when their managers purchase sports teams.

Buchanan and Wagner (1977)

[HT: Josh Hall]

Aid is a success! No, it’s a failure! Wait, it depends.

Aid evaluation is all the rage. But how is successful evaluation possible if we don’t know the benchmark? Some aid advocates argue that aid can end world poverty while some critics of aid are more modest stating that aid can not increase growth but may ease human suffering. In a recent debate in the Cato Journal, Peter Leeson and David Skarbek argue, in their article 'What Can Aid D0?', that foreign aid is both a success and a failure:

“Foreign aid’s advocates claim aid has been successful. Aid’s critics claim aid has failed. We explain why both camps are correct. Aid can, and in a few cases has, increased a particular output by devoting more resources to its production. In this sense, aid has occasionally had limited success. However, aid cannot, and has not, contributed to the solution of economic problems and therefore economic growth. In this much more important sense, aid has failed” (page 392).

They go on to argue that, on its best day, aid can provide more ‘stuff’ but not find the solutions to the economic problem of poverty:

“So, what can aid do? Like other forms of central planning, aid can increase X by devoting additional resources to X’s production… If planners pick a specific outcome, such as more immunizations, aid can provide additional resources to produce immunizations. All of the “success stories” that aid’s advocates highlight are of this nature (page 394)…Solving the economic problem determines whether a country’s economy develops. It is strange, then, that professional economists have had trouble distinguishing the positive relationship between inputs and outputs from solving the economic problem when it comes to evaluating foreign aid” (page 391).

In a critique, Gustav Ranis claims that “. . . Skarbek and Leeson are ready to throw the baby out with the bath water,” but that different forms of aid, such as grants for projects, can be more effective than past aid. However, Leeson and Skarbek remind us in a follow up piece of the important distinction between positive versus normative analysis:

“The thrust of our original paper, which asked the simple question, “What can aid do?”, was that no foreign aid initiative can solve the economic problem societies must solve to climb from poverty. That problem requires identifying the resource allocation that maximizes resources’ value to society. “Grants for projects” don’t help us identify this. They’re an example of what aid can do—increase a predetermined output by devoting more resources to its production—not what aid must do to make poor countries rich, which is to solve the economic problem stated above. Whether developed countries should use aid to increase a predetermined output by devoting more resources to its production is a normative question. Our original argument analyzed a positive one” (pages 1-2).

So the next time a shouting match breaks out between those who claim aid is successful and those saying aid is a failure, perhaps we need to first agree on what aid can achieve and evaluate aid in this context.

HERE IS WHERE YOU PLACE THE HIDDEN TEXT.

Depression Era Housing Prices

Caplan at EconLog asks why housing prices held their ground for the most part during the Great Depression. Obviously, no one can say why prices are what they are, but my suspicion is that the mortgages played a role somehow. In fact, early mortgages were made interest deductible because it was primarily a business expense, and mortgages did not become a major homeowner vehicle until after the Great Depression began. From the NYT:

It was not until the 1920's and the spread of the automobile that home mortgages outnumbered farm mortgages. In the 1930's, the mortgage industry got a huge assist from the feds — not from the tax deduction, but from agencies like the Federal Housing Administration, which insured 30-year loans, and, over time, the newly created Federal National Mortgage Association, or Fannie Mae. Before then, the corner bank would issue a mortgage and wait for the homeowner to pay them back; now savings and loans could replenish their capital by selling their mortgages to Fannie Mae — meaning they could turn around and issue a new mortgage to someone else.

So in part, the stability of housing prices might have been partly due to FHA induced demand for housing stock, relative to other assets and consumption possibilities.

I'll leave it to my Austrian co-bloggers to decide if this fits into a Austrian/Recalculation story of explaining the prolonging of the Depression by changing the relative prices of capital, or if this aided as a form of liquidity the Fed failed to provide.