Past Issues

The digital revolution, along with the growth of the companies known collectively as Big Tech, is transforming the global economy and giving rise to novel policy challenges. This paper analyzes the microeconomic foundations of this change, particularly how the natures of competition and oligopolistic equilibria are changing as a result of the large returns to scale and the global connectivity made possible by these new technologies. We then discuss how these changes fit into the existing regulatory landscape and argue that, for certain kinds of large digital-platform firms, existing antitrust laws may not be adequate. We conclude by considering more radical reform, such as requiring certain platform firms to be organized as nonprofits or public utilities.
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The coherence of mainstream macroeconomics is threatened by inconsistency between the core theoretical model and the empirically grounded models used for policy advice. The field has evolved in response to policy demands in the wake of the 2008 financial crisis. But this evolution has been constrained by the emphasis of the core theoretical approach on a particular representation of microfoundations. Yet the notion of internal consistency by which this microfoundations project is justified is challenged by a broader philosophical notion of consistency. The long-running expression of opposition in mainstream macroeconomics between logical and empirical coherence (or between rigor and realism) accordingly requires further examination of how real economic systems are understood and how knowledge about them is to be built and assessed. If mainstream macroeconomics is to continue to deviate from the core model by virtue of open-system ontology, then in order to ensure coherence, the characteristics of that system need to be articulated, and their implications for methodology worked out.​​ Click here to read the paper.

In this paper, we argue for building a research agenda to analyze economic knowledge as an economic good and explore the socioeconomic institutions that can be relied upon to produce, distribute, and use economic knowledge in an efficient manner. In our opinion, the benefits of such an approach, as well as the value of its future contributions to the understanding of the foundations of the economic dynamic, are obvious. Click here to read the paper.

When newly arrived immigrants first glance into an American supermarket, shock may well be their first reaction. So writes Roya Hakakian, author and poet, in her new book A Beginner’s Guide to America for the Immigrant and the Curious (2021), which walks the reader through the immigrants’ first moments on American soil to the final ceremony of hard-earned naturalization. In those early days after the immigrant first arrives, the tiniest details can register at great magnitudes, from the head-spinning varieties of cereal to highway signs. According to Hakakian, these are the things that make the newly arrived so keenly aware of the contrasts between their lives before and after immigration. She draws a portrait that showcases America as a land of abundance, while unpacking the meanings behind the plenty. Click here to read the paper.

Trade has been a means to development by generating jobs, spurring economic growth, and reducing poverty. However, the gains from trade have shown to be less than equally distributed, hurting at times some localities and segments of countries’ populations. The COVID-19 pandemic has also shown that global value chains (GVCs) are susceptible to serious disruptions. The climate crisis has raised attention on carbon emissions from the transportation of merchandise exports and imports. If trade is to remain a driving force for growth, job creation, and poverty reduction and part of countries’ effort to set a new path towards green, resilient and inclusive development, understanding how the gains from trade are distributed and how the impacts of trade can be better managed is of critical importance. This paper reviews the evidence bearing on these concerns and considers policy responses that could enable trade, and particularly GVCs, to contribute more to a green, resilient, and inclusive recovery for developing countries. What is needed is the combination of old policies like trade facilitation, business environment, and skills with new and green policies including a new treatment of carbon, emphasis on diversification, social-protection measures, and improvements in the international trade order. Click here to read the paper.

This paper studies the 1991 reforms, as the beginning of the transition towards a market economy from the socialist policies in the first four decades of the Indian republic. Tracking the major reforms in the three decades since 1991, I argue that economic control and statist policies are the norm and that reforms enhancing economic freedom are the outliers. After an excellent start by the Rao-Singh team in 1991, and a gaining of momentum during the Vajpayee government (1999-2004), India’s liberalization and reform process has slowed down considerably in the last decade. The slowdown in the reform process, ad hoc regulation, as well as disastrous policies like demonetization, have become the new trend in Indian economic policy. Simultaneously, India’s high rates of growth post-liberalization have also slowed down, especially in the last five years, a trend that was visible before the pandemic. The reason is that Indian policymakers pursued socialism for the first four decades after independence and never fully committed to the pursuit of economic freedom after the initial set of reforms in the 1990s and early 2000s. The main lesson from the history of India’s reforms is that the problem is systemic and structural and requires a deeper commitment to markets to fix its upside-down state-market relationship. Click here to read the paper.

We develop a formal model to study the consequences for firms of adopting environmental and social governance (ESG) constraints. In the presence of information asymmetries, we find that a firm may reduce earnings variability by binding itself to ESG rules, thereby lowering the interest rates that creditors charge and raising expected profits. The gains are likely to be far greater when ESG constraints not only reassure creditors but also limit the ability of self-serving managers to work against the interests of shareholders. For most parameter values, though, we find that adherence to ESG lowers returns and increases risk.

The predictions of our model contrast with those of two influential studies by Morgan Stanley. In the first, Morgan Stanley (2015) claims that ESG systematically raises investors’ returns. In the more recent, it claims that ESG reduces investors’ downside risk (Morgan Stanley 2019). We summarize our earlier critique (Robb and Sattell 2016) showing that the results of the first Morgan Stanley study cannot be replicated, and we go on to show that the results of the second study arise from two errors: (1) Morgan Stanley uses the default benchmark (S&P 500 Total Return Index) supplied by Morningstar Direct rather than the benchmark appropriate to each fund, and (2) the conclusions drawn from median returns are an artifact of microfunds, many with less than $10 million under management. Upon correcting these errors, we arrive at the opposite conclusion, one consistent with the literature: ESG investors sacrifice a small amount of return for any amount of risk.

A great deal remains to be done to determine whether ESG is effective or ineffective in addressing social concerns. Our contribution here is to propose a versatile, tractable model that can start to address vital questions in a more rigorous framework than we find in the literature. In particular, we show how ESG might raise social welfare by multiples of the private costs and how our model can quantify the trade-off. Click here to read the paper.

Income inequality has increased dramatically in the United States since the 1970s. However, we argue in this paper that many common perceptions about causes and consequences of rising inequality are misleading or even false. Using first-hand empirical analyses and meta- analyses of previously published work, we present and demystify three key facts about the rise in US inequality that have been given too little attention in recent debates. First, inequality has risen throughout the distribution. Post-tax and transfer income levels have grown in the middle and bottom of the distribution, not the top alone – the top 1% does not take all. Second, the trend in intergenerational social mobility has remained largely stable over the last four decades. The relative gap in mobility opportunities between children from poor and rich families has barely changed – the "Great Gatsby curve," which predicts a general negative relationship between income inequality and intergenerational mobility, does not apply to the US. Third, changes in the return to human capital caused by shifts in the supply and demand for educated and skilled labor have played a crucial role in the rise in income inequality since the 1970s – rising corporate concentration and employer market power (monopsony) do not appear to be a key culprit. Click here to read the paper.

The paper provides a rational market explanation for the gender gap and why it is growing wider. A prisoner's dilemma characterizes the interaction between two institutions: the market and the family. Click here to read the paper. 

The award-winning opera singer asks, why can’t the world mimic the stage? Her profession, begun 450 years ago, depicts women as strong, capable leaders who are applauded for being loud and audacious—and pays women equally or higher than men. Click here to read the paper. 

U.S. manufacturing employment has declined from a peak of nearly twenty million in 1979 to less than thirteen million in 2018. The U.S. trade deficit has increased by $600 billion, about 3 percent of U.S. GDP, since 1980. The first question analyzed in this paper is how much of the decline in U.S. manufacturing jobs since 1980 can be attributed to the increase in the U.S. trade deficit? Economists and analysts agree that the changes in the trade balance of a country reflect changes in the relationship between its domestic saving and its investment and fiscal deficit. The conventional view is that the U.S. international investment position evolved from the world’s largest creditor in 1980 to the world’s largest debtor in 1990 because of the increase in U.S. profligacy, including the surge in the U.S. fiscal deficit because of the two supply-side-inspired tax cuts during the Reagan presidency and the increase in defense expenditures. The competing view is that the saving in many of the major U.S. trading partners has been large relative to the domestic investment spending, and that some of the excess savings have flowed to the United States, which has led to a higher price for the U.S. dollar and a larger U.S. trade deficit. It is difficult to identify a country that believes its trade and current account surpluses are too large. The U.S. trade balance is the mirror of the trade balances of all other countries as a group. The United States developed a trade deficit because China, Germany, the Netherlands, Singapore, and numerous other countries developed trade surpluses that at times were larger than 5 percent of their GDPs.
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Donald Trump’s international economic policies aim to preserve America’s primacy in the face of China’s surging economic development. Trump’s policies are based on a zero-sum vision in which China’s economic gains are America’s losses. The resulting U.S. policies—in the areas of international trade, corporate taxation, technology competition, sanctions, and energy supplies—threaten to undermine the global economy with no realistic prospect of preserving America’s economic and technological dominance.
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I ask whether President Donald Trump's tariffs are fit for purpose: that is, whether they are appropriately designed to advance his goals. My answer is negative.
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This paper summarizes and extends the analysis in Barro and Furman (2018) of the 2017 tax law, which dramatically reduced the corporate income tax rate. Barro and Furman find that the tax law as written would increase the annual growth rate of gross domestic product over the next decade by 0.02 to 0.04 percentage points. Extending these results, the effect of the tax law on national income would likely be even smaller, or perhaps negative, due to increased payments to foreigners needed to finance the larger budget deficit and increased investment and due to increased capital depreciation. It concludes with a proposal for genuine tax reform by expanding and making expensing permanent, disallowing interest deductions and raising rates that would increase economic growth by substantially more than making the current system permanent. Such reform also would make the tax code more stable, simpler and more efficient.
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The models that the economics profession considers acceptable, particularly their assumptions regarding the precision with which we can know the future, create insuperable obstacles to formulating a rational response to the disdain for experts that President Donald Trump nourishes and exploits. This becomes clear from a critical discussion of the use of prevailing models to analyze the consequences of the 2017 tax overhaul. The profession would benefit from a novel approach, applied here to understanding stock-price movements, that recognizes that economists—like everyone else—face unforeseeable change about the future. Acknowledging the inherent limits of what we can know about the future would go a long way toward restoring public trust in what economists’ knowledge can actually contribute to policymaking.
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I place the environmental policies of the Trump administration in a historical perspective. They represent a return to the intellectual framework of the 19th century and a neglect of important developments in economics in the 20th century.
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The poet asks whether the grammar of a language may reveal potencies and weaknesses in allowing the Self to appear. The appearance of the subject in English poetry, where the grammar identifies the person by number and point of view (I, you, and he/she/it), is contrasted with Persian poems. More than formal linguistic issues may be at stake.
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Experimental demonstration of systematic errors and biases in human choice behavior might seem to undermine the conceptual basis of the individualistic approach to welfare analysis, in which people’s interests are inferred from the choices that they are observed to make. This essay argues that one need not give up on individualistic welfare analysis, and discusses two ways in which empirical studies can seek to infer people’s true interests, while recognizing that people do not always choose the outcome that is best for them under all circumstances.
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This note examines some issues involved in an attempt to go beyond the assumption, long-made by most economists, that people’s preferences are simply to be treated as “given” and that the principle of consumer sovereignty entails a refusal to consider some (or some people’s) revealed preferences as more authoritative than others. The most important break with that assumption has been the development of behavioral economics, which shows that people may not always know what they really want, and that economists have to develop a more critical approach, distinguishing people’s true preferences from those that are merely apparent. While this approach, a version of which is proposed by Michael Woodford, might very well be needed to explain various otherwise mysterious ways in which actual societies defy economists’ predictions based on the assumption of purely rational behavior, it also involves a danger of replacing an empirical investigation of human choice with a normative account of what people should chose--or might chose under some sort of “ideal conditions” that reduce the diversity of human preferences to merely erroneous deviations from what reason and human nature demand. To solve this conundrum, economics might need to incorporate a more robust theory of human choice, perhaps along the lines proposed by Robert Shiller and Edmund Phelps. Such a theory would bring economics closer to other social sciences, such as history, psychology, and maybe even ethics and aesthetics.
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Corporatism is an anti-capitalist ideology with wide-ranging ramifications. Its origin can be traced as a reaction to the flood of changes that swept through Europe and the New World during the 16th century. Corporatism developed both as a political as well as economic doctrine. Though its origin is associated with the Counter Reformation, its reach extends far beyond the theological or religious convictions of that time. Although Max Weber associated the spirit of capitalism with the Protestant ethic, we believe this is inaccurate; capitalism existed before the Protestant Reformation and developed in Italy and Spain among other nations. The capitalist revolution was halted in some places and replaced by corporatism. A strong anti-capitalist ideology originated in the Council of Trent and during the Counter Reformation, and it resulted in deleterious consequences of populism and economic stagnation to the present day.
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This essay argues that more systematic consideration of market failures has the potential to change how we think about management and managerial failures. While economists disagree about the incidence of market failures and effectiveness of governmental attempts at remediation—cf. Harvard versus Chicago—they generally coincide in ignoring management failures. Conversely, management scholars tend to focus on management failures rather than market failures—as do those with higher education in management. This disconnect is unfortunate because it is at the intersection of market and management failures that “better” management is likely to matter most. One implication: “curricular social responsibility” involving more attention to market failures may be the educational equivalent of corporate social responsibility in the commercial world.
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COMMENTS ON PAPER

By Richard Schmalensee
By Sidney G. Winter

Modern life invaded societies in the 19th century: First in Britain and America, later in Germany and France. Increasing numbers were driven not just by a work ethic or a desire to accumulate: They were dreamers, tinkerers, and adventurers on a journey, exercising their imagination, creativity, and curiosity. The result was not simply a “take-off” into sustained growth; the economy was turned into a vast imaginarium in which people conceived new products, uses, and approaches, as well as methods of production. This indigenous innovation, coming from the grassroots up, was the foundation of modern life: The satisfaction of “succeeding” at what one is doing, the satisfactions one has from “flourishing,” and the thrill of the unknown. These “soft” rewards of work are important, as are material rewards. By now, however, “soft” rewards seem to have fallen off and growth has slowed. Have modern values narrowed to a trickle or has big business choked off the dynamism of old?
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COMMENT ON PAPER

By Carl Christian von Weizsäcker

Impact investing and socially responsible investing have attracted a great deal of attention from individual and institutional investors yet very little from scholars. This paper sketches some of the unmet empirical and theoretical challenges.
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Over the last decade, impact investing has become an increasingly-discussed topic in the realms of both business and public policy. Impact investors are motived by a desire to advance social or environmental goals and an intuition that pursuing two goals at once - investment returns and social or environmental returns - is more effective than keeping them separate. This article reviews the recent history of impact investing, addresses some of the issues confounding the nascent field, and offers a few definitions that might bring more rigor and clarity to what remains, as yet, a simultaneously confusing and promising investment strategy.
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In the process of admissions to selective colleges and universities, both the institutions and the applicants are trying to maximize. Applicants want to get into the “best” college and colleges want the “best” applicants. This paper argues that in this context, as in many others, maximizing is a fool’s errand, partly because no one knows what the best college (or student) is, and partly because differences among applicants are smaller than the error in the instruments used to assess them. Moreover, it is a fool’s errand with grave consequences, since it puts enormous pressure on students throughout their pre-college education and induces them to do what will impress rather than what they are actually passionate about. I propose, instead, a system in which all applicants who cross an acceptability threshold are entered into a lottery, with the winners (admitted students) chosen at random from that pool. Such a system might produce better, more engaged college students because they will be freer to pursue their passions and develop their intellects in high school. It might also teach students about the role of luck in many of life’s outcomes, making them more empathic when they encounter people who may be just as deserving as they are, but less lucky. Finally, I suggest that maximizing in general may be a fool’s errand, and that satisficing may produce better decisions, and greater satisfaction.
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COMMENT ON PAPER

By Emanuele Gerratana

This study was inspired by Piketty’s excellent and important book. It arose from the desire to explore the missing aspects of what claims to be a comprehensive analysis of capitalism. By comparison the author of this paper felt important aspects were lacking. The capitalist sys- tem has numerous inherent traits and innate tendencies, out of which the paper takes a clos- er look at three. 1. One basic feature is dynamism, innovation, and creative destruction. No picture of capitalism can be full if this basic aspect is ignored. 2. Capitalism inevitably brings about a high degree of inequality; this must be eased by reforms, but cannot be entirely over- come. 3. The basic characteristics of capitalism – private ownership and the dominance of market coordination – give rise to strong incentive mechanisms that encourage both owners and enterprise executives to innovate and cooperate effectively. One of the main incentives is competition, especially oligopolistic competition. There are strong mutual effects among these three important tendencies. It is impossible to understand well Piketty’s main subject, the distribution of income and wealth, if it is divorced from the other two tendencies. The study ends with the author’s own value judgements on both the favourable and the harmful, unjust attributes of the capitalist system.
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COMMENT ON PAPER

By Philippe Aghion

Myths about welfare states and their effects on economic development abound. In this paper, we rebut three central, related myths: that the current American welfare state is unusually small, that the United States has always been a welfare state laggard, and that the welfare state undermines productivity and economic growth. Very reasonable changes in measurement reveal that all three beliefs are untrue. The American welfare state appears relatively small only by restricting the comparison to rich nations, ignoring employer-provided health insurance, pensions, and public education, and measuring size relative to GDP, rather than on a real per capita basis. The inclusion of public education turns the United States from a laggard to a leader in welfare state development. Including public education and public health as well as cash benefits suggests that welfare state programs as a whole enhance the productivity of capitalism and spur economic development.
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COMMENT ON PAPER

By Gösta Esping-Andersen

International monetary relationships have been under strain in recent years. This is largely because adjustment mechanisms are asymmetric; the IMF has no means of putting pressure on countries with large current account surpluses to adjust. But such countries' accompanying capital account outflows have often had disappointing returns.   So, we propose a method to impose symmetric constraints on the net capital flows both of deficit and surplus countries.
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COMMENT ON PAPER

By Harold James

If the criteria for an institution’s success are diffusion and longevity, then central banking has been hugely successful. But if the criterion is the degree to which it has achieved its goals, then the evaluation has to be more nuanced. Historically, those goals have included a changing mix of financial and monetary stability. Attaining monetary and financial stability simultaneously has proved elusive across regimes. Edging closer towards that goal calls for incorporating systematically long-duration and disruptive financial booms and busts – financial cycles – in policy frameworks. For monetary policy, this means leaning more deliberately against booms and easing less aggressively and persistently during busts. What is ultimately at stake is the credibility of central banking – its ability to retain trust and legitimacy.
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COMMENTS ON PAPER

By Axel A. Weber
By Marco Pagano

This survey reviews how recent political economy literature helps to explain variation in governance, competition, funding composition, and access to credit. Evolution in political institutions can account for financial evolution, and, unlike time-invariant legal institutions or cultural traits, is critical to understanding rapid changes in financial structure, such as the Great Reversal in the early 20th century. Future research should model the sources and consequences of financial instability, and predict how major redistributive shocks will shape regulatory choices and financial governance.
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COMMENT ON PAPER

By Julian R. Franks

There cannot be a complete prescription for a good society and any set of values that are projected as a blueprint for a society will require revision, amendment and compromise, as well as limitations and extensions in their application to social and political reality. Limits to both the speed and the scope of social change must be justified in light of the large number of values, including many tacit values, that are operational or necessary for the functioning of any society. This paper explores, in particular, the tradeoff between the four values of individual freedom, consent of the governed, free markets, and economic development as well as tradeoffs between equality and justice. The limits of philosophy are drawn when such conceptual analysis seeks to arrive at resolutions of the conflict among plural values. The recurrent thesis has been that the priority among values held at the time and under the circumstances of decision-making, as well as the empirical facts available to decision-makers, provide the reasons for a decision among conflicting values.
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Much of the modern perception of the role of economic production in human life - whether on the Left or on the Right of the political spectrum – views it as an inferior, instrumental activity oriented toward self-preservation, self-interest, or profit, and thus as essentially distinct from the truly human action concerned with moral values, justice, and various forms of self-fulfillment. This widely shared worldview is rooted, on the one hand, in the Aristotelian tradition that sees labor as a badge of slavery, and freedom as lying in the domain of politics and pure (not technical) knowledge, and, on the other hand, in the aristocratic mediaeval Christian outlook, which – partly under Aristotle’s influence – sees nature as always already adapted (by divine design) to serving human bodily needs, and the purpose of life as directed toward higher, spiritual reality. Marx, although he attacked the Aristotelian distinction between “action” and “production,” also envisaged the undistorted production process in essentially collectivist Aristotelian terms. 

As against this, liberal thinkers, above all Locke, have developed an elaborate alternative to the Aristotelian worldview, reinterpreting the production process as a moral activity par excellence consisting in a gradual transformation of the alien nature into a genuinely human environment reflecting human design and providing the basis of human autonomy. Adam Smith completed Locke’s thought by explaining how production is essentially a form of cooperation among free individuals whose self-interested labor serves the best interest of all. The greatest “culture war” in history is to re-establish the moral significance of economic activity in the consciousness of modern political and cultural elites.
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This paper is divided into two parts. The first part traces the genesis of the modern interpretation of individual selfhood back to the Protestant Reformation. By privatizing, deregulating, and decentralizing religion, Luther prepared the way for what would eventually become the modern notion of the market. Educated in the Calvinist atmosphere of Scotland, Adam Smith translates Calvin’s notion of divine providence and the fortunate fall into the notion of the invisible hand and machinations of the market through which pursuit of personal ends serve the good of the whole.

The second part of the paper presents an analysis of the dynamics of individual decision through a consideration of theories of emergent complex adaptive systems. In this model, individuals function as something like nodes in intersecting social, cultural, technological and natural webs. The economy as a whole is a complex network that functions as a self-regulating, non-equilibrium system in which individuals must be understood as integral members of all-encompassing wholes. In this way, complexity theory counterbalances the excessive individualism of much recent economic theory. The Protestant interpretation of the individual subject informs the understanding of individual choice and decision that lies at the heart of contemporary capitalism.
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As business leaders worry about the decline of American competitiveness, business schools are responding by changing their curriculums. But are the topics and approaches taught in today's business schools part of the solution or part of the problem? In this paper, I explore the possibility that four trends in current MBA curriculums - theory creep, mission creep, doing well by doing good, and the quest for enlightenment - are teaching students to be uncompetitive in today's global markets. If this hypothesis is true, I argue that business school curriculums should be re-centered around the tough choices needed to compete - and to win.
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COMMENT ON PAPER

By Derek Bok

Why is it that the wealthiest people are not the most materialistic; that the most successful businesses are not the most profit-oriented; and that the happiest people do not directly pursue happiness? Using a diverse range of examples, from the Messenger spacecraft to French architecture, this essay explains why complex goals are best achieved when they are pursued indirectly; this is the concept of obliquity.
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COMMENT ON PAPER

By George Wu

For capital markets to function, political institutions must support capitalism in general and the capitalism of financial markets in particular. Yet the shape, support, and extent of capital markets are often contested in the polity. Powerful elements - from politicians to mass popular movements - have reason to change, co-opt, and remove value from capital markets. And the competing capital markets' players themselves have reason to seek rules that favor their own capital channels over those of others. How these contests are settled deeply affects the form, extent, and effectiveness of capital markets. And investigation of the primary political economy forces shaping capital markets can lead us to better understand economic, political, and legal institutions overall. Much important work has been done in recent decades on the vitality of institutions. Less well emphasized, however, is that widely-shared, deeply-held preferences, often arising from the interests and opinions that prevail at any given time, can sometimes sweep away prior institutions, establish new ones, or, less dramatically but more often, sharply alter or replace them. At crucial times, preferences can trump institutions, and how the two interact is well-illustrated by the political economy of capital markets. Since North's [1990] famous essay, academic work has focused on the importance of institutions for economic development. Here, I emphasize the channels by which immediate preferences can trump institutional structure in determining the shape and extent of capital markets.
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COMMENT ON PAPER

By Dennis Mueller

This essay offers an alternative way to look at macroeconomics. The current standard approach uses aggregate supply and aggregate demand (AS-AD). I call the alternative approach patterns of sustainable specialization and trade (PSST). The PSST approach combines many old and new strands in economics. It suggests that the economy is a highly complex system that is constantly adapting to new circumstances, especially opportunities created by technological innovation. We can view employment fluctuations as a reflection of the difficulty that markets sometimes have in making the necessary adjustments, so that for a period of time some workers have extremely low marginal revenue product and as a result become unemployed.
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COMMENT ON PAPER

By Peter Howitt

Art and money have always been inseparable. During the past several decades, however, this relationship has been transformed by a new form of capitalism - finance capitalism, which has been made possible by the networking of new information, media and communication technologies. This is a genuinely novel phenomenon whose global impact has become undeniable. In previous forms of capitalism (agriculture, industrial and consumer), people made money by buying and selling labor and material goods; in finance capitalism, by contrast, wealth is created through the circulation of signs backed only by other signs. The structure and development of financial markets mirror each other. As art becomes a progressively abstract play of nonreferential signs, abstract financial instruments increasingly create an autonomous sphere of circulation whose end is nothing other than the endless proliferation of monetary and financial signs. When the art of finance becomes the finance of art, art is no longer merely a commodity to be bought and sold, but becomes the currency of exchange fabricated for hedge funds and private equity funds, where it is traded like any other financial asset.
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COMMENT ON PAPER

By Noah Horowitz

The ideology of how economic activity is organized in capitalist economies is sharp and simple - markets. However, in reality, economic activities in capitalist economies are organized in a variety of different ways, market organization prominent among them but not totally dominating. The basic argument of this paper is that capitalist economies should be understood as mixed economies.
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COMMENT ON PAPER

By Rogers Hollingsworth

This article discusses the impact of national policies and institutions on the strategies that companies adopt when they are faced with disruptive changes in their external environment. The article focuses on the man-made fibres industry in the U.S., Western Europe and Japan between 1980 and 2010 and describes the different ways in which the leading fibre manufacturers in those regions responded to the shift in textile, clothing and later fibre production to low-cost countries, principally in Asia. These companies had to decide whether they could continue to compete profitably in the man-made fibres industry, and, if not, what non-fibre businesses they should invest in. In countries such as the U.S. and the UK, where capital markets are powerful and companies are under pressure to enhance shareholder value, virtually all the former leaders have withdrawn from the industry and a set of new entrants, including private equity firms, have taken their place. In Japan, by contrast, leading companies such as Toray and Teijin remain committed to man-made fibres, although they have also diversified in other directions. Despite the increasing role of Anglo-American investors in Japan, Japanese companies see themselves as responsible to a broad range of stakeholders, not just to shareholders; the continuity of the enterprise and of employment is given a higher priority than in the U.S. or the UK. In Continental Europe, the restructuring of the man-made fibres industry has involved numerous divestments and demergers, and this partly reflects the growing influence of Anglo-American investors, but in some of these countries the stakeholder view of the enterprise continues to carry considerable weight. Lenzing in Austria, which is now the largest European man-made fibre manufacturer, is an example of a company which has combined commercial success with a strong sense of responsibility to the region where its main factory is based. In reviewing these different strategies the article shows how Japanese-style "long-termism" can be a source of strength in certain industries such as carbon fibre, but has the disadvantage of allowing companies to persist for too long with low-return businesses which might do a better under different owners. Some further movement towards the Anglo-American model is likely in Japan and in Continental Europe, but these countries have a different view of what companies are for, and this will continue to affect how their companies respond to industrial change.
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COMMENT ON PAPER

By John Sutton

An economic system called corporatism arose in the late 19th century, promoted by Anti-Cartesian French intellectuals dismayed with the "disenchantment of the world" Weber attributed to capitalism, and by a Roman Catholic church equally dismayed with both liberalism and socialism. Corporatism recognizes the innate inequality of human beings and their need for secure places in a legitimate hierarchy and thus puts the police power of the state behind officially sanctioned Corporations, elite-controlled industrial group cartels empowered to set wages, prices, employment, and quotas, to regulate entry, and to limit imports. Corporatism was to end the class struggle by guaranteeing workers their accustomed jobs and incomes and by delegating traditional authority through a principle of subsidiarity. We argue that countries that adopted corporatism most fully - those with Roman Catholic majorities or French-educated elites - experienced substantial financial development reversals and retain legacy Corporatist institutions that continue to retard financial development and growth.
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COMMENT ON PAPER

By Mark Blyth

The constitutional structures and traditions that promote corporatism are the main obstacles to economic dynamism and inclusion in societies. Corporatism is the cause of Argentina's "reversal of development" from the 1930s to the present. If the normative and imperative rules in Constitutions change both incentives and culture, some questions arise: how should we design Constitutional rules that promote economic dynamism? At the same time, is a bad political economy, as occurs in a corporatist economy, promoted by government officials because it allows their perpetuation in government? A corporatist economy could be the basis of a perverse political culture where utility-maximizing leaders will embark on destructive economic policies to enhance their own personal power unless they are appropriately constrained. The Argentine Constitutional economy has both poor incentives and a poor Constitutional culture, which prevent the development of both dynamism and inclusion. Strategic political considerations push rulers into bad economic policies. At the same time, a strong corporate culture favours the resulting mix of authoritarianism, stagnation and social exclusion.
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COMMENT ON PAPER

By Mark Blyth

The powerful downswing in economic activity in the past two years is not the first powerful downswing experienced in the western world since the Great Depression of the 1930s. The long slump that took hold in the U.S. and western continental Europe from the early 1970s into the 1980s had a profound impact. It was disturbing in part because – as in the Great Depression of the 1930s – there was at first little insight into its causes.
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COMMENT ON PAPER

By Andrew J. Oswald

Financial crises follow a pattern that consists of changes in asset prices, real exchange rates, investment and employment. One noteworthy feature of this pattern is the "jobless recoveries" that often follow such crises. This was the experience of Finland and Sweden in the aftermath of their financial crises in the early 1990s and currently appears to be the case in the United States and many other countries. The behavior of unemployment during the crises mirrors that of investment, which is consistent with models of the natural rate of unemployment that make labor demand depend on investment in physical capital, new workers and customers. The implication is that the natural rate of unemployment falls during the investment boom that precedes a crisis and rises in its aftermath.
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COMMENT ON PAPER

By Andrew J. Oswald

Price discrimination is an extremely common type of pricing strategy engaged in by virtually every business with some discretionary pricing power. The issue of whether price discrimination reduces or increases social welfare has been considered by economists since at least 192'3 At that time, it was demonstrated that, under certain (restrictive) conditions, price discrimination will reduce social welfare. Subsequent research has shown that price discrimination can increase social welfare, and that a necessary (but not a sufficient) condition for welfare to rise is that total output with discrimination exceeds the no-discrimination level.

First, we present evidence about international drug price differentials. Drug prices in the top 5 countries are almost five times as high as they are in the bottom five countries. Certain features of the drug price distribution are surprising. For example, according to our drug price index, the price of drugs in Mexico (which has the second-highest drug prices) is 24% higher than it is in the U.S. (which ranks sixth out of 38 countries). There is a highly significant positive correlation between per capita income and the drug price index: on average, the price of drugs is lower in low-income countries. However, there are large deviations from the regression line. Countries (particularly low-income countries) with similar levels of income pay vastly different prices for drugs.

Next, we examine income-related price differentials in the U.S. When price is defined as the amount paid by the patient, there is an inverted-U-shaped relationship between income and price. People in the lowest income category pay 25% less than high income people (16% less if cases when the patient paid nothing are excluded), but people in the middle income category (whose income is 125-200% of the poverty line) pay 6% more than high income people (whose income exceeds 400% of the poverty line).

We perform an empirical investigation of whether the necessary condition for price discrimination to increase welfare - that it increase total output - is satisfied in the case of international pharmaceutical prices, by analyzing the relationship across drugs between total output growth and growth in international price dispersion. Drugs that had larger increases in international price dispersion had larger increases in total utilization, controlling for the growth in the mean price of the drug and the drug's vintage. Numerous studies have shown that increased prescription drug use results in improved health outcomes, or the converse: reductions in drug use result in worse health outcomes, such as higher risk of hospitalization and death.

In addition to increasing the output of existing products, the ability to engage in price discrimination is likely to increase the number of new products. Contrary to the assumptions of some theoretical models, some markets that would not be served under uniform pricing will be served under price discrimination. This would be the case whenever there are fixed production costs, and the pharmaceutical industry has much higher fixed costs (especially R&D expense) as a percentage of sales than most other industries. Studies have shown that the amount of pharmaceutical R&D investment is influenced by factors (other than the ability to price discriminate) that determine the expected profitability of investment. Studies have also provided evidence that the development and use of new drugs has resulted in significant increases in longevity and health, and that overall, new drugs have been highly cost-effective.
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COMMENT ON PAPER

By Richard L. Schmalensee

Throughout its history, the United States has been the beneficiary of a worldwide immigration of entrepreneurial talent. This article surveys finance, one of the many sectors in which immigrants made a conspicuous impact. Part I demonstrates the dominant role of immigrants in forming public financial policies from 1775 to 1817. Part II surveys 12 merchant and investment banking firms founded during the nineteenth century by individual immigrants or family groups, and traces their histories until 1914. Part III suggests, from this small sample, a series of hypotheses and tentative conclusions about their experiences and influence. Part IV compares the financial environment of the nineteenth century with that of the late twentieth and early twenty-first centuries. The article ends with a supporting appendix that describes 19 additional immigrants or immigrant families and their firms.
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COMMENT ON PAPER

By Harold James

The lesson drawn from the crash of 1929 was the need for regulatory reform. In the United States, regulations were enacted to reduce the vulnerability of investors, lenders, banks, companies, and workers to unanticipated swings in financial markets. The lesson drawn from the recent spectacle – by some governments at any rate – was the need for intervention of a different sort. Recently envisioned legislation in the U.S. would supplement the capitalist system with new programs for health care, climate control and energy conservation. Yet the recent experience – the "speculative excesses" and the ensuing collapse – reveal a perverse financial sector and a dysfunctional business sector that are not well treated by enlarged regulation or enlarged public expenditure. In the felicitous term of President Sarkozy, the need is to refound capitalist systems in ways that will make them well-functioning again. This need is acute in the United States, where the perversion and deterioration of capitalist mechanisms appear to have left the economy with less dynamism as well as less business activity. It is profound in Europe, where capitalist mechanisms have long been hamstrung by Italian corporatism, French statism, German socialism, Scandinavian welfarism and the rest. 

Over the past decade I have maintained that countries would still benefit from the innovative activity of original thinkers, visionary entrepreneurs, canny investors, pioneering managers and devoted employees that – starting in the 19th century and in some countries ending in the 20th – drew an ever widening share of people in an ever-growing number of nations into engaging jobs, exciting explorations and remarkable commercial advances. I will try to explain, leaving for the last section the issues of instability and their resolution.
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The crash of 2008 exposed deep failures at the core of macroeconomic policymaking and macroeconomic thinking in the United States. The crisis's rapid spread from its epicenter on Wall Street to nearly the entire world underscored the interconnectedness of the global economy. The American purveyors of the ancien régime hope that a few superficial fixes will get us back on our way. This is not to be. Sustained and widespread future prosperity will require basic reforms in global macroeconomic governance and in macroeconomic science. Such reforms are never easy, as they require new ways of thinking. Yet business as usual could prove calamitous. This essay describes the reform path.
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The paper makes use of an Imperfect Knowledge Economics (IKE) approach to examine the rationale and scope of state intervention in asset markets. IKE recognizes that policy officials and market participants must cope with ever-imperfect knowledge of the causal mechanism driving market outcomes. In our IKE-based model of asset markets, price swings arise from participants' diverse interpretations of the effects of fundamentals on outcomes. Under IKE, the market is an imperfect mechanism for setting values. However, the paper argues that, within a range of prices, the market's allocation is superior to the allocation that would result if the state actively intervened into the price-setting mechanism. During periods of non-excessive prices, swings play an indispensible role in helping society to allocate scarce capital and the state should confine its intervention to setting the rules of the game, that is, ensuring transparency and eliminating other market failures. However, price swings can sometimes move far from levels consistent with most perceptions of longer-term fundamental values. If they do, the IKE approach calls for active intervention to dampen excessive movements. The paper proposes the use of official guidance ranges and discusses problems with their estimation. It also proposes an array of other excess countering measures and concludes with ideas on how regulators can better measure and manage systemic risk in the financial system.
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COMMENT ON PAPER

By Jeffrey D. Sachs

This is a theoretical paper in which we attempt to present an economic and sociological theory of entrepreneurship. We start from Schumpeter's idea in Theory of Economic Development that the economy can be conceptualized as a combination and innovations as new combinations. Schumpeter also spoke of resistance to entrepreneurship. By linking the ideas of combination and resistance, we are in a position to suggest a theory of capitalist entrepreneurship. An existing combination, we propose, can be understood as a social formation with its own cohesion and resistance – what may be called an economic order. Actors know how to act; and profit is low and even in these orders. Entrepreneurship, in contrast, breaks them up by creating new ways of doing things and, in doing so, produces entrepreneurial profit. This profit inspires imitators until a new order for how to do things has been established; and profit has become low and even once more. Entrepreneurship is defined as the act of creating a new combination that ends one economic order and clears the way for a new one. The implications of this approach for a number of topics related to entrepreneurship are also discussed.
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COMMENT ON PAPER

By Mark Granovetter

Driven by industrial innovation, in the last half of the 20th century the population of the United States attained, on average, a very high standard of living. Yet, in the first decade of the 21st century, large numbers of Americans are economically insecure. In this paper, I summarize the findings of my research into the ways in which over the past three decades the transformation of the dominant business model that prevails in the information and communication technology industries has contributed to the rise of economic insecurity in the United States. I describe how the Old Economy business model (OEBM) that was in place in the immediate post-World War II decades gave way to the New Economy business model (NEBM) that is now ubiquitous in U.S. high-tech industry. Under OEBM, an employee could hold the realistic expectation of a career with one company. Under NEBM, career employment depends much more on interfirm labor mobility, which in and of itself makes continuous employment less certain. Nevertheless, in the ICT industries, NEBM has been an engine of economic growth so that a strong demand for high-tech labor can potentially offset a lack of employment security with one company. Since the early 199'0s, however, this demand for high-tech labor has tended to be a demand for qualified lower-wage labor, which has meant that ICT companies have favored the employment of younger workers over older workers and of workers in developing nations over workers in the United States. At the same time, acting as both a motive for employing lower-wage labor and as a rationale for laying off experienced workers has been the adherence of U.S. corporate executives to the ideology that their companies should be run to “maximize shareholder value." The most important manifestation of the influence of this ideology on corporate resource allocation is the extent to which U.S. companies repurchase their own stock to support their stock prices. I conclude this essay by arguing that neither the ideology of maximizing shareholder value nor the practice of stock repurchases has any economic merit. Indeed both must bear the blame for contributing to the rise of economic insecurity in the United States.
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COMMENT ON PAPER

By Margaret M. Blair

Freud supposedly said that Nietzsche knew himself better than anyone who ever lived or is likely to live in the future. If the story is true, it's one of the best compliments of all time. Yet Nietzsche's psychological theories remain largely unknown to psychologists, philosophers and certainly to economists. These theories, taken together, constitute a profound attack on the foundations of neoclassical models in which individuals maximize the discounted flow of gratification they expect to receive. Scattered through Nietzsche's writings, we can find an alternative description of intertemporal choice motivated by overcoming obstacles. A principal objective of this paper is to show how Nietzsche's theory of overcoming can explain a great deal of observable behavior and solve important problems in economics.
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COMMENT ON PAPER

By James J. Heckman

RESPONSE BY AUTHOR

To James J. Heckman

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COMMENT ON PAPER

By Edmund S. Phelps

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COMMENT ON PAPER

By Edmund S. Phelps

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COMMENT ON PAPER

By Edmund S. Phelps

The 2008 U.S. financial upheaval raises important questions about the sources of household consumption and debt growth, along with their macroeconomic effects. We argue that spending and financial preferences evolve as social norms interact with both cultural trends and institutional changes in household finance. We identify historical forces that raised consumption and debt over the past quarter century and interpret these events with Hyman Minsky's financial cycle framework. Strong consumption helped moderate recessions and boost growth since the mid 1980s. But unprecedented household debt has now culminated in a financial crisis that threatens to cause a deep recession.
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COMMENTS ON PAPER

By George A. Akerlof
By Doug Korty (from Volume 3, Issue 3)

This essay examines the economics of patronage in the production of knowledge and its influence upon the historical formation of key elements in the ethos and organizational structure of publicly funded 'open science.' The emergence during the late sixteenth and early seventeenth centuries of the idea and practice of 'open science' was a distinctive and vital organizational aspect of the Scientific Revolution. It represented a break from the previously dominant ethos of secrecy in the pursuit of Nature's Secrets, to a new set of norms, incentives, and organizational structures that reinforced scientific researchers' commitments to rapid disclosure of new knowledge. The rise of 'cooperative rivalries' in the revelation of new knowledge, is seen as a functional response to heightened asymmetric information problems posed for the Renaissance system of court-patronage of the arts and sciences; pre-existing informational asymmetries had been exacerbated by the claims of mathematicians and the increasing practical reliance upon new mathematical techniques in a variety of 'contexts of application.' Reputational competition among Europe's noble patrons motivated much of their efforts to attract to their courts the most prestigious natural philosophers, was no less crucial in the workings of that system than was the concern among their would-be clients to raise their peer-based reputational status. In late Renaissance Europe, the feudal legacy of fragmented political authority had resulted in relations between noble patrons and their savantclients that resembled the situation modern economists describe as `common agency contracting in substitutes' - competition among incompletely informed principals for the dedicated services of multiple agents. These conditions tended to result in contract terms (especially with regard to autonomy and financial support) that left agent client members of the nascent scientific communities better positioned to retain larger information rents on their specialized knowledge. This encouraged entry into their emerging disciplines, and enabled them collectively to develop a stronger degree of professional autonomy for their programs of inquiry within the increasingly specialized and formal scientific academies (such the Académie royale des Sciences and the Royal Society) that had attracted the patronage of rival absolutist States of Western Europe during the latter part of the seventeenth century. The institutionalization of 'open science' that took place within those settings is shown to have continuities with the use by scientists of the earlier humanist academies, and with the logic of regal patronage, rather than being driven by the material requirements of new observational and experimental techniques.
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COMMENT ON PAPER

By Kenneth J. Arrow

Family firms are very prominent in many parts of the world, including in many of the most dynamic emerging markets. They are often thought to be associated with poor corporate and political governance. This article examines the debate about their durability and efficiency, using material drawn from the long experience of continental Europe and sketches out an ideal type of the family, in which there is a historical experience of entrepreneurship, a brand, and a network built around family enterprise. It then tests various common explanations for the prevalence of family firms, including Roman law versus common law traditions, tax incentives, share voting privileges, and inheritance law; and finds that each applies only in a quite particular historical epoch. Finally, the article suggests that family businesses offer advantages that are most apparent at times of shocks and discontinuities, and that they are thus a response to uneven development.
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COMMENT ON PAPER

By Randall Morck

In this work we discuss the impact of the new ICT techno-economic paradigm upon the vertical and horizontal boundaries of the firm and ask whether the change in the sources of competitive advantage has resulted in changes in the size of distribution of firms and also in the degree of concentration of industries. Drawing both on firm-level and national statistical data we assess the evolution of the overall balances between the activities which are integrated within organizations and those which occur through market interactions.

While the new paradigm entails revolutionary changes in the domain of technology, the modification in industrial structures has been somewhat more incremental. Certainly, the vertical and horizontal boundaries of firms have changed and together one is observing a turnover in the club of biggest world firms, accounting also for a shift in the relative importance of industrial sectors. Nonetheless, we do not observe any abrupt fading away of the Chandlerian multidivisional corporation in favour of smaller less-integrated firms.
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COMMENTS ON PAPER

By William Lazonick
By Richard N. Langlois (from Volume 3, Issue 2)

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COMMENT ON PAPER

By Jean-Laurent Rosenthal

Economists have a great deal of influence on the legislative and judicial branches of government. This is good. But, the dominance of economics in Washington has led to the undervaluation of other social sciences. This paper explores the limitations of a traditional economics approach, the benefits of the consideration of behavioral decision research and behavioral economics, and an analysis of how this pattern affected decision making in three distinct episodes.
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COMMENT ON PAPER

By Jonathan Baron

Corrupt politicians, and poor government more generally, are commonly viewed as a primary barrier to economic progress. The roots to these problems run deep in many political systems across the developing world, and attempts at reform have rarely found much success. To combat this impasse, we suggest a radical new approach to local politics that, instead of proposing reforms to the electoral process, focuses on the political actors that might enter into this process. Specifically, we suggest that private firms be allowed to compete in elections to hold public office. That is, a corporate entity (e.g., Ernst and Young), rather than an individual representative of the firm, would be permitted to contest a local election. We argue that this is feasible: sufficient economic incentives could be put in place to induce firms to run for office, particularly if company office-holders prove to be competent in revenue collection. More importantly, we claim that there are many channels through which company politics should improve government, from breaking up entrenched old boys' networks to leveraging a company's existing organizational expertise. Private firms have realized efficiency and performance gains in areas such as infrastructure and many bureaucratic functions; we argue that the private sector can also attain results in politics, the most public of all realms.
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COMMENT ON PAPER

By Niall Ferguson

Over the course of the nineteenth and twentieth centuries, the United States evolved from a colonial backwater to become the pre-eminent economic and technological power of the world. The foundation of this evolution was the systematic exploitation and application of technology to economic problems: initially agriculture, transportation, communication and the manufacture of goods, and then later health care, information technology, and virtually every aspect of modern life.

From the beginning of the republic, the patent system has played a key role in this evolution. It provided economic rewards as an incentive to invention, creating a somewhat protected economic environment in which innovators can nurture and develop their creations into commercially viable products. Based in the Constitution itself, and codified in roughly its modern form in 1836, the patent system was an essential aspect of the legal framework in which inventions from Edison's light bulb and the Wright brothers' airplane to the cell phone and Prozac were developed. 

In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it.

Examples of dysfunctional patent behavior have become staples of the business and popular press. They range from the amusing and economically irrelevant, to not-so-funny cases that seriously threaten important technologies in important industries:

• Patents on inventions that are trivially obvious, such as the "Method for Swinging on a Swing," "invented" by a five-year-old, and "User Operated Amusement Apparatus for Kicking the User's Buttocks" ("invented" by a supposed grown-up);
• Patents in areas new to patenting, but covering purported discoveries familiar to practitioners and academics alike, such as Amazon.com's attempt to prevent Barnesandnoble.com from allowing customers to buy books with a single mouse-click, and a bright MBA student's patents on an option-pricing formula published in the academic finance literature two decades earlier;
• Patents that have become weapons for firms to harass competitors, such as the decade-long effort by Rambus, a semiconductor designer, to control computer memory technology by making sure that a long string of patents, all derived from a single 1990 patent application, incorporated important features of an industry-wide standard developed through a voluntary industry standard-setting association.

To major recent policy studies by the Federal Trade Commission (U.S. Federal Trade Commission, 2003) and the Board on Science, Technology and Economic Policy of the National Research Council (Merrill, Levin and Myers, 2004, cited hereinafter as "STEP Report") have recommended significant changes to address these issues. In this paper, we provide an overview of the issues and discuss possible changes to address the widely perceived shortcomings of the current system.
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COMMENT ON PAPER

By Lee Branstetter

During the Second Industrial Revolution of the late nineteenth and early twentieth centuries, Midwestern cities were important centers of innovation. Cleveland, the focus of this study, led in the development of a number of key industries, including electric light and power, steel, petroleum, chemicals, and automobiles, and was a hotbed of high-tech startups, much like Silicon Valley today. In an era when production and invention were increasingly capital-intensive, technologically creative individuals and firms required greater access to funds than ever before. This paper explores how Cleveland's leading inventors and technologically innovative firms obtained financing. We find that formal financial institutions, such as banks and securities markets, were of only limited significance. Instead our research highlights the vital role played by a small number of successful local enterprises that both exemplified the wealth-creation possibilities of the new technologies and served as hubs of overlapping networks of inventors and financiers. We conclude by suggesting that such nodal firms have spawned important clusters of innovative enterprises in other places and times as well.
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COMMENT ON PAPER

By Steven Klepper

This lecture interprets the great tectonic shifts in the global economy that I have witnessed since I began studying economics in the 1950s. There are three stories of gaining ground ("catching up") on the world's lead economy and one of losing ground. This experience can help us to get right our international macroeconomics: Progress and prosperity in a country are mainly driven by envisaged openings for innovation or imitation of new things, not human capital formation or tax cuts. The experience also help us get right the political economy of economic performance: Dynamism is not required for episodes of high growth: Any economy can grow fast up to its potential and enjoy temporary prosperity in the effort. Yet it cannot pull up to the productivity level nor sustain the prosperity of the lead economy without having the latter's dynamism. Dynamism requires that innovation be ample, aimed in good directions and finding managers and consumers open to novelty. Some dissenters deny the premise, claiming that the Continent could not have its "glorious years" of rapid growth and high activity without commensurate dynamism: the two are yoked together. They view that rapid growth in Germany, France and Italy as the fruit of economies that in the '40s got back their dynamism back when Ludwig Erhard unshackled them from the corporatist institutions erected in the interwar years and that lost their dynamism in the '70s when interest groups reacquired their stranglehold on economic change. I take a simpler view. The glorious years were the result not of a brief rebirth of dynamism but rather the fortunate result of one-time opportunities to pluck at low cost the technologies and commercial successes developed in the U.S. and elsewhere overseas. My view need not suppose that the Continent has had much dynamism at any time since corporatist ideas took root in the late 1920s – only enough to imitate or adapt overseas advances, plus long enough study of them. For the moment, such advances may be still be so new that such a modicum of dynamism is not yet sufficient to spark imitation.
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COMMENT ON PAPER

By Axel Leijonhufvud

From David Ricardo making a fortune buying British government bonds on the eve of the Battle of Waterloo to Warren Buffett selling insurance to the California earthquake authority, the wisest investors have earned extraordinary returns by investing in the unknown and the unknowable (UU). But they have done so on a reasoned, sensible basis. This essay explains some of the central principles that such investors employ. It starts by discussing "ignorance," a widespread situation in the real world of investing, where even the possible states of the world are not known. Traditional finance theory does not apply in UU situations. Strategic thinking, deducing what other investors might know or not, and assessing whether they might be deterred from investing, for example due to fiduciary requirements, frequently point the way to profitability. Most big investment payouts come when money is combined with complementary skills, such as knowing how to develop real estate or new technologies. Those who lack these skills can look for "sidecar" investments that allow them to put their money alongside that of people they know to be both capable and honest. The reader is asked to consider a number of such investments.

Central concepts in decision analysis, game theory, and behavioral decision are deployed alongside real investment decisions to unearth successful investment strategies. These strategies are distilled into eight investment maxims. Learning to invest more wisely in a UU world may be the most promising way to significantly bolster your prosperity.
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COMMENTS ON PAPER

By Lawrence H. Summers
By Richard G. Robb

This paper analyzes how interacting financial development with initial income, macroeconomic volatility and policy variables, can improve our understanding of convergence and divergence across countries, and also restore the significance of correlations between growth and volatility and therefore between growth and macropolicy, even when controlling for country fixed effects or when eliminating countries with extreme policies or bad institutions.
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COMMENT ON PAPER

By Robert M. Solow

This paper argues that a number of "unorthodox" analyses of capitalism can be understood from the point of view of orthodox economic theory. Our argument is based on the assumptions of monopolistic competition and that utility derived from consuming an individual good is bounded. The model's predictions are consistent with some popular heterodox views, such as "In modern capitalist society, productivity is so high that many people are nearly saturated with goods;" "Productivity growth reduces the real consumption wage of workers;" and "The benefits from growth are appropriated by symbol manipulators." Furthermore, depending on relative levels of product diversity and physical productivity, globalization may harm poorer workers in LDCs, rather than unskilled workers in developed countries, as is usually predicted.
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COMMENT ON PAPER

By Robert M. Solow