A Profile of Entrepreneur Henry J. Kaiser

An engaging profile by Randall O'Toole, the antiplanner.

Tyler Durden's Rules for Creative People

As you might guess, this is a lighter post than normal. The blog Lateral Action lists 8 rules you can use to transform yourself into a more innovative person or to create more innovative content. The post is based on lines from the book/movie Fight Club. You don't have to be a fan of the movie to find the post interesting, so check it out and then get busy doing what you want with your life, and doing it better. (HT)

Innovation Booms and the Stock Market

Tom Nicholas, a professor of entrepreneurial management at HBS, has a timely article in the September issue of the AER entitled, "Does Innovation Cause Stock Market Runups? Evidence from the Great Crash." The abstract (AER):

This article examines the stock market's changing valuation of corporate patentable assets between 1910 and 1939. It shows that the value of knowledge capital increased significantly during the 1920s compared to the 1910s as investors responded to the quality of technological inventions. Innovation was an important driver of the late 1920s stock market runup and the Great Crash did not reflect a significant revaluation of knowledge capital relative to physical capital. Although substantial quantities of influential patents were accumulated during the post-crash recovery, high technology firms did not earn significant excess returns over low technology firms for most of the 1930s.

Paul Krugman Links

1. NYT announcement
2. The Nobel’s Press Release and very thorough Scientific Background (pdf)
3. His old MIT website with assorted articles (MIT)
4. The Unofficial Paul Krugman Archive
5. Krugman’s blog (NYT)
6. His old Slate columns (”The Dismal Science“)
7. Paul’s best Slate piece
8. Ed Glaeser’s thoughts (NYT)
9. Dani Rodrik’s thoughts
10. An older profile of Krugman by Nicholas Confessore (WM)
11. Menzie Chinn offers his thoughts (econbrowser)
12. Daniel Klein has a critical review of his blog writings (Econ Journal Watch)
13. Peter Boettke is not impressed (Austrian Economists)
14. Russ Roberts offers his least favorite Krugman quote (Cafe Hayek)
15. Justin Wolfers has a good post (Freakonomics)
16. If you need even more Tyler Cowen and Alex Tabarrock each offer plenty of links.

I am sure I am missing a lot. Are there many comments by economists that I am missing? I would have expected more of his colleagues and former students to offer their thoughts. Perhaps tomorrow.

Paul Krugman Wins Nobel Prize in Economics

Announcement details here. Paul Krugman’s academic writing reflected a convergence of theory and a considerable amount of luck. From the early days when John Von Neumann created game theory and John Nash improved upon his ideas, game theory moved quickly through the social sciences. This happened especially fast in economics. By the time Krugman entered graduate school international trade theory was on the cusp of becoming inundated with these models. Industrial organization had already made the leap. What this meant was that Krugman, and a few others were at a unique time in history. Krugman writes:

Within a few months, I had written up a basic monopolistic competition trade model — as it turned out, simultaneously and independently with similar models by Avinash Dixit and Victor Norman, on one side, and Kelvin Lancaster, on the other. … From 1978 to roughly the end of 1984 I focussed virtually all my research energies on the role of increasing returns and imperfect competition in international trade. … What had been a personal quest turned into a movement, as others followed the same path. Above all, Elhanan Helpman — a deep thinker whose integrity and self-discipline were useful counterparts to my own flakiness and disorganization — first made crucial contibutions himself, then talked me into collaborative work. Our magnum opus, Market Structure and Foreign Trade, served the purpose of making our ideas not only respectable but almost standard: iconoclasm to orthodoxy in seven years.

My point is not to diminish Krugman’s work but simply to point out that this could have easily been a joint prize. Krugman deserves credit for recognizing what few others did and taking advantage of the changes in theory and methods. Also, to his credit, Krugman presented an elegence in his work that few others have matched. Here’s Krugman in his own words again:

The point of my trade models was not particularly startling once one thought about it: economies of scale could be an independent cause of international trade, even in the absence of comparative advantage. This was a new insight to me, but had (as I soon discovered) been pointed out many times before by critics of conventional trade theory. The models I worked out left some loose ends hanging; in particular, they typically had many equilibria. Even so, to make the models tractable I had to make obviously unrealistic assumptions. And once I had made those assumptions, the models were trivially simple; writing them up left me no opportunity to display any high-powered technique. So one might have concluded that I was doing nothing very interesting (and that was what some of my colleagues were to tell me over the next few years). Yet what I saw — and for some reason saw almost immediately — was that all of these features were virtues, not vices, that they added up to a program that could lead to years of productive research.

I was, of course, only saying something that critics of conventional theory had been saying for decades. Yet my point was not part of the mainstream of international economics. Why? Because it had never been expressed in nice models. The new monopolistic competition models gave me a tool to open cleanly what had previously been regarded as a can of worms. More important, however, I suddenly realized the remarkable extent to which the methodology of economics creates blind spots. We just don’t see what we can’t formalize. And the biggest blind spot of all has involved increasing returns. So there, right at hand, was my mission: to look at things from a slightly different angle, and in so doing to reveal the obvious, things that had been right under our noses all the time.

I’m not sure that I would say his models are trivially simple, but they are cleaner and simpler and more clearly demonstrate his point than most economists are able to do. He has a knack for spelling out what is most obvious and crucial but previously overlooked. Aside from his work in new trade theory, Krugman is famous for his popular writings and his textbooks. In fact, I first became interested in economics after reading Peddling Prosperity. Many of his other writings, like Pop Internationalism are also excellent.

Around GMU his work on spatial economics and economic geography are especially popular. There is much to like about his academic work and I do not think any other nobel prize winner has had an unoffical page dedicated to their writing (The Unofficial Paul Krugman Archive). In short, if you are only familiar with his NY Times column and blog, then you are missing the most interesting parts.

The Venturesome Economy

That's the title of Amar Bhide's new book (Amazon). It is highly recommended by Peter Boettke (GMU). If you do not want to wade through the whole book, here are some slides about the topic. I've gone through the slides but not the book, so just read Peter's post if you need an endorsement. I will get to the book soon, since it looks promising. I like his discussion of non-destructive creation and it is a topic I mean to blog about soon.

On Housing Prices

Casey Mulligan has a very interesting post on how far housing prices must fall (S&D). He estimates we still have quite a ways to go, at least looking at the Case-Shiller price index:

If real housing prices had followed inflation through July 2008, they would have been 27% below their actual values in July 2008. In other words, as of July 2008 housing prices had 27% more to fall in order to reach the real value they had for several years prior to the “bubble.” To put it yet another way, as of July 2008, the house price decline was not yet even half way complete.

Mulligan looked at the 10 years prior to January, 2000 and figured out the rate of growth in home prices. He found that they basically tracked inflation. He did the same thing for the OFHEO index. I went ahead and did the same for single family existing home sales. The graph is below. The red line shows the baseline case, i.e. what would have happened if housing had continued to increase at its previous rate. Instead you can see what happened.

In October, 2005 actual home values were more than $55,000 higher than the baseline projections. The spread was similarly wide in July, 2006 and at a few other times. Interestingly, the prices are fairly close now and suggest that prices only need to fall about 5% to reach the baseline case. This differs from the Case-Shiller index for a couple of reasons. First, this number excludes condos and multi-unit dwellings and looks at the relatively more stable single family housing market. And second, this is a national number as opposed to targeting a number of the hardest hit metro areas, like San Diego and Miami. Thus this series is not as "frothy." Having said that, for most people this measure might be comforting since it doesn't look like prices will have to fall that much more, at least for a lot of homeowners.


I generally won't focus on current economic conditions on this blog, but recent events in the housing, financial, and credit markets do have important long-run implications for the future health of our economy and our ability to create new jobs and new innovations.

While Wall Street Burns

In my previous post I wondered whether Prosper might emerge as a much larger and more successful company and whether peer to peer lending in general might soon appear more attractive than some traditional Wall Street institutions. A while back Steve Landsburg wrote (The Atlantic):

Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they’ll be able to find each other.

Alex Tabarrock concurs. A few days ago CNN ran a story about how small business owners are increasingly turning to nontraditional sources of financing (CNN):

Dubbed “social” or “peer-to-peer” lending, LendingClub and rivals like Prosper.com pair individuals willing to lend cash with borrowers who sign up with the site. Lenders flip through profiles of potential borrowers, who release their credit reports, to see descriptions of how they plan to use - and repay - the borrowed funds. If lenders see a listing they like, they chip in to help fund it, committing as little as $25 or as much as several thousand.

They didn’t point out that LendingClub is not currently accepting new lenders since they are in talks with the SEC, but once they get through all that they will be open for business again. Prosper is up and running, as I said above, but do check out prospers.org, since some allege that Prosper understates borrowers' true default rates. Buyer beware and all that.

Another alternative is Zopa, which is more socially oriented and provides a fixed rate of return, like a cd, just with a slightly higher rate of return. One of the themes we'll be touching on in upcoming posts is how successful, dynamic economies are able to deal with crises and shocks and divert investment into more profitable uses.

Envisioning the Next Innovation

Paul Saffo, a futurist associated with Stanford, recently gave a talk about what comes next in the information industry. An excerpt from mediabistro (fishbowlNY):

"If you want to look for a short-term success, look for something that's been failing for 20 years," the futurist said. "If everyone agrees it's a bad idea, do it."

Saffo cited Amazon's Kindle as a good example of this. "We've been failing at ebooks for 20 years," he said. "The Kindle is the 128k Apple of ebooks. It's not the iPod of ebooks. That is coming. ... It might come from Apple. It wouldn't surprise me."

This is an important topic and I find it fascinating given the recent destruction in financial markets. In banking are we going to see companies like Prosper.com taking over when the smoke clears?

Fear, Supersized

Bill Gross caputures current market sentiment (Pimco):

We are to the point of fearing fear itself. America in all its resplendent free market capitalistic glory is on the auction block with few bidders. How this came to be is obvious in retrospect: too much exuberant leverage, not enough regulation; too strong a belief in asset-based prosperity, too little common sense that prices could go down as well as up; excessive “me first” greed, too little concern for the burden of future generations; a political morass unworthy of our Founding Fathers. You may have more to add to the list, but frankly there isn’t enough time. Historians can sit back and reflect, but at this very moment, America is for sale and there is fear and trembling in the auctioneer’s voice.