All Categories

I am viscerally skeptical about expanding state power but recognize that technological advances do often require new rules: Automobiles required brake inspections and traffic police for instance.

Similarly, I argue in this just published Project Syndicate oped,  the digital economy poses new risks and requires new rules. The info-monopolists are not your great grandfather’s oil trusts. Market power can deprive us of more than the loss of the “little triangles” of consumer surplus as I think Zvi Griliches used to put it.

 

Opening of the new Google data center in Eemshaven

The question of how to encourage innovation while limiting the abuse of market power long precedes the advent of the digital age. And today, the need to strike the right balance is nowhere more apparent than in the case of dominant information-technology companies like Facebook and Google.
In a modern capitalist economy, we celebrate innovations that produce market power, but fear the risks of unchecked dominance. Nowhere are those risks more apparent than with today’s information-technology monopolies. (more…)

This article in many ways, is the “debt” counterpart to my 1993 Journal of Financial Economics piece and offers an even broader critique of the reflexive belief that more complete financial markets are always better.

I conclude thus:

Lemon problems do not stop the sale of well over a million used cars in the U.S. each year, but they do prevent the operation of a market in which buyers place sight-unseen bids for used cars offered by unknown sellers. In fact, anonymous markets for physical goods are restricted mainly to metals or agricultural commodities. Most goods—including new or secondhand cars, shoes and homes—are purchased from identifiable sellers.
Buyers also prefer to examine specific items—test-driving cars or trying on shoes, for instance—before they make a purchase.

Outside finance, revolutionary technological advances have not turned many goods or services into anonymously traded commodities. Rather, the advances have reduced the cost of communicating and using detailed information, mitigating information asymmetries, and helping buyers select items that match their preferences. And technology has reduced anonymity: in contrast to the street-hailing of taxis, users of ride-hailing apps can screen drivers based on their ratings. Similarly, consumers can review the ratings of plumbers on the web instead of randomly picking one from the telephone directory.

More…

(more…)

(Manifesto-like) Syllabus

This seminar examines the development of knowledge embodied in artifacts (including physical objects, organizations and practices) intended to transform “existing conditions into preferred ones.” We are particularly interested in knowledge produced by the many and for the many: thus, we are more interested in standardized techniques developed for the average tennis player than in coaching customized for a prodigy.

By traditional intellectual standards, studying practical knowledge may seem undignified and uninspiring. The ancient Greeks venerated contemplation, music and the other arts, abstract truths, and mathematical reasoning. Merchants and craftsmen (including, presumably, builders of large hollow horses) occupied the bottom rung of Plato’s idealized society; their knowledge and toil was but a means towards the realization of the good life by a small enlightened class. Modern society has raised science into the pantheon of the wisdom we venerate. And, while engineers, physicians, lawyers, entrepreneurs, managers, and accountants can secure higher incomes, many continue to regard their knowledge and its development as subordinate – a mere application of more profound scientific ideas at best, or simply unfounded superstition. Similarly, although Western universities started by offering practical medical and legal training, some in the upper reaches of the Academy now deride professional schools as verging on the teaching of trades that have no place in institutions of higher learning.

(more…)

Fair-lending laws turned consumers into anonymous credit scores—and a target for identity thieves.

In a longer working paper I further argue that reducing individuals to scores has also undergirded the vast growth of anonymous markets in securitized consumer and mortgage loans.

Photo: David Goldman/Associated Press

My working paper just posted on SSRN synthesizes ideas Ive been working on for my practical knowledge seminar, a case writing project on medical innovation and a forthcoming paper in the Journal of Applied Corporate Finance.

I argue that economics lacks an “engineering” counterpart to its “physics” side. That’s fine as long as you don’t rely just on the “science” of economics to make practical choices. But wouldn’t we be better off with an engineering side? (I grant social engineering is a scary phrase!)

Abstract:
Keynes thought it would be “splendid” if economists became more like dentists. They have instead become more like physical scientists who focus on propositions about invariant tendencies amenable to decisive verification. This predisposition, I argue, limits the utility of economics in evaluating concrete policy choices. I further suggest that emulating the more pluralistic and less decisive techniques used to develop and test new engineering and medical technologies would mitigate these limitations. Additionally, I offer an example of how a simulation model can help evaluate policies that affect the extension of credit.

My article, just accepted by Ekonomisk Debatt, will be published after translation by the Swedish Economics Association in May.

The argument is half-Hayekian in the sense it argues for an important role for the decentralized, private sector creation of the medium of exchange, which Hayek presumably would have approved of, but anchored in a government monopoly for creating base money that Hayek did not favor, but which dates back to antiquity.

Abstract:

The decentralized enterprise that sustains the dynamism of economies makes top-down monetary interventions, such as quantitative easing, that target aggregates such as overall inflation, futile. Moreover, economic stability and dynamism also require prudent, decentralized lending to decentralized borrowers. But, sustained monetary interventions aimed at aggregate inflation (or employment) targets induce imprudent credit extension, jeopardizing stability and dynamism.

 

https://ssrn.com/abstract=2924514

Amar Bhidé

Financial Times  August 16, 2016

Easy money is a dangerous cure for a debt hangover