This approach ignores even the repo market, which has been important in the financial system for over 40 years, and, of course, it omits CDOs, credit default swaps and other, more recent innovations. Financial intermediaries do not produce tangible output that can be measured and counted. Instead, they provide intangible benefits that economists have never clearly articulated. The economics profession has a long way to go to catch up with modern finance. He earned his Ph. Karl E. Case and Robert J. Edward M. Chairman Ben S. See the discussion in Viral V. Money and income move together, but which causes which?
Milton Friedman argued that changes in the money supply caused changes in income, noting that the supply of money often rises before income rises. Keynesians such as James Tobin argued that changes in income caused changes in the amount of money. Money seems to move first, but causality, said Tobin and others, still goes the other way: people hold more money when they expect income to rise in the future. Which view is true? Keynesian econometricians had claimed that with sufficiently accurate theoretical assumptions about the structure of the economy, correlations among the macroeconomic variables could be used to measure the strengths of various structural connections in the economy.
Sims argued that there was no basis for thinking that these theoretical assumptions were sufficiently accurate. Lucas and his New Classical followers argued that in forming their expectations people take account of the rules implicitly followed by monetary and fiscal policymakers; and, unless those rules were integrated into the econometric model, every time the policymakers adopted a new policy i.
But he argued that such regime changes were rare and that most economic policy was concerned with the implementation of a particular policy regime. For that purpose, the large-scale macromodels could be helpful, since what was needed for forecasting was a model that captured the complex interrelationships among variables and not one that revealed the deeper structural connections. In the same article, Sims proposed an alternative to large-scale macroeconomic models, the vector autoregression or VAR. With subsequent developments by Sims and others, the VAR became a major tool of empirical macroeconomic analysis.
Just as computers do not access information on the Internet infinitely fast but rather, in bits per second , individual actors in an economy have only a finite ability to process information. This delay produces some sluggishness and randomness, and allows for more accurate forecasts than conventional models, in which people are assumed to be highly averse to change. Christopher Sims earned his B. He taught at Harvard from to , at the University of Minnesota from to , at Yale University from to , and at Princeton University from to the present. Stock and Mark W. Gordon Tullock, along with his colleague James M.
Buchanan, was a founder of the School of Public Choice. Among his contributions to public choice were his study of bureaucracy, his early insights on rent seeking, his study of political revolutions, his analysis of dictatorships, and his analysis of incentives and outcomes in foreign policy.
Tullock also contributed to the study of optimal organization of research, was a strong critic of common law, and did work on evolutionary biology. He was arguably one of the ten or so most influential economists of the last half of the twentieth century. In that path-breaking book, the authors assume that people seek their own interests in the political system and then consider the results of various rules and political structures.
One of the most masterful sections of The Calculus of Consent is the chapter in which the authors, using a model formulated by Tullock, consider what good decision rules would be for agreeing to have someone in government make a decision for the collective. But as the number of people required to agree rises, the decision costs rise. In the extreme, if unanimity is required, people can game the system and hold out for a disproportionate share of benefits before they give their consent.
That preferred rule would vary from person to person. But, they note, it would be highly improbable that the optimal decision rule would be one that requires a simple majority. The substantive contribution in the manuscript was centered on the hypothesis that, regardless of role, the individual bureaucrat responds to the rewards and punishments that he confronts. This straightforward, and now so simple, hypothesis turned the whole post-Weberian quasi-normative approach to bureaucracy on its head.
The economic theory of bureaucracy was born. As a Foreign Service officer with the U. In a later reminiscence, Tullock concluded:. A 90 per cent cut-back on our Foreign Service would save money without really damaging our international relations or stature. Tullock made many other contributions in considering incentives within the political system.
Particularly noteworthy was his work on political revolutions and on dictatorships. Consider, first, political revolutions. On the other hand, a ruthless head of government can individualize the costs by heavily punishing those who participate in a revolution. So anyone contemplating participating in a revolution will be comparing heavy individual costs with small benefits that are simply his pro rata share of the overall benefits.
Therefore, argued Tullock, for people to participate, they must expect some large benefits that are tied to their own participation, such as a job in the new government. This thinking carried over to his work on autocracy. In Autocracy, Tullock pointed out that in most societies at most times, governments were not democratically elected but were autocracies: they were dictatorships or kingdoms. For that reason, he argued, analysts should do more to understand them. Before his work, the usual measure of the deadweight loss from monopoly was the part of the loss in consumer surplus that did not increase producer surplus for the monopolist.
Harberger3 had estimated that for the U. These investments in monopoly are a loss to the economy. Tullock also pointed out that those who seek tariffs invest in getting those tariffs, and so the standard measure of the loss from tariffs understated the loss. His analysis, as the tariff example illustrates, applies more to firms seeking special privileges from government than to private attempts to monopolize via the free market because private attempts often lead, as if by an invisible hand, to increased competition.
So, for example, if the government requires the use of ethanol in gasoline, owners of land on which corn is grown will find that their land is worth more because of the regulatory requirement. Ethanol in the United States is produced from corn. They gain when the regulation is first imposed.
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But when they sell the land, the new owner pays a price equal to the present value of the stream of the net profits from the land. This means that the new owner will suffer a capital loss if the regulation is removed and will fight hard to keep the regulation in place, arguing, correctly, that he paid for those gains. That makes repealing the regulation more difficult than otherwise. Tullock notes that, therefore, we should try hard to avoid getting into these traps because they are hard to get out of.
Tullock was one of the few public choice economists to apply his tools to foreign policy. For example, he wrote of the U. It involved the use of military forces without the sanction of the Security Council and without any colorable claim of self-defense. Of course, it was not a first—we [the U.
In it, he considered why scientific discovery in both the hard sciences and economics works so well without any central planner, and he argued that centralized funding by government would slow progress. After arguing that applied science is generally more valuable than pure science, Tullock wrote:. Nor is there any real justification for the general tendency to consider pure research as somehow higher and better than applied research.
It is certainly more pleasant to engage in research in fields that strike you as interesting than to confine yourself to fields which are likely to be profitable, but there is no reason why the person choosing the more pleasant type of research should be considered more noble. He wrote:. As an extreme example, surely offering a reward of 1 billion for the first successful ICBM would have resulted in both a large saving of money for the government and much faster production of this weapon.
Tullock was born in Rockford, Illinois and was an undergrad at the University of Chicago from to His time there was interrupted when he was drafted into the U. During his time at Chicago, though, he completed a one-semester course in economics taught by Henry Simons. He was briefly with a law firm in before going into the Foreign Service, where he worked for nine years. The Calculus of Consent. Co-authored with James M. James M. The qualities of a natural economist. In Charles K. Rowley, Ed. Democracy and public choice.
Oxford and New York: Basil Blackwell, Gordon Tullock. Memories of an unexciting life. Unfinished and unpublished manuscript. Tucson, Quoted in Charles K. Rowley and Daniel Houser. George Mason University. Department of Economics. Paper No. December Arnold C. Division of labor combines specialization and the partition of a complex production task into several, or many, sub-tasks. Its importance in economics lies in the fact that a given number of workers can produce far more output using division of labor compared to the same number of workers each working alone.
Interestingly, this is true even if those working alone are expert artisans. The production increase has several causes. According to Adam Smith, these include increased dexterity from learning, innovations in tool design and use as the steps are defined more clearly, and savings in wasted motion changing from one task to another. Though the scientific understanding of the importance of division of labor is comparatively recent, the effects can be seen in most of human history.
It would seem that exchange can arise only from differences in taste or circumstance. But division of labor implies that this is not true. In fact, even a society of perfect clones would develop exchange, because specialization alone is enough to reward advances such as currency, accounting, and other features of market economies.
In the early s, David Ricardo developed a theory of comparative advantage as an explanation for the origins of trade. And this explanation has substantial power, particularly in a pre-industrial world. Assume, for example, that England is suited to produce wool, while Portugal is suited to produce wine. If each nation specializes, then total consumption in the world, and in each nation, is expanded. Interestingly, this is still true if one nation is better at producing both commodities: even the less productive nation benefits from specialization and trade.
In a world with industrial production based on division of labor, however, comparative advantage based on weather and soil conditions becomes secondary. Ricardo himself recognized this in his broader discussion of trade, as Meoqui points out. The reason is that division of labor produces a cost advantage where none existed before—an advantage based simply on specialization. Consequently, even in a world without comparative advantage, division of labor would create incentives for specialization and exchange.
The Neolithic Revolution, with its move to fixed agriculture and greater population densities, fostered specialization in both production of consumer goods and military protection. As Plato put it:. A State [arises] out of the needs of mankind; no one is self-sufficing, but all of us have many wants… Then, as we have many wants, and many persons are needed to supply them, one takes a helper… and another… [W]hen these partners and helpers are gathered together in one habitation the body of inhabitants is termed a State… And they exchange with one another, and one gives, and another receives, under the idea that the exchange will be for their good.
The Republic , Book II. This idea of the city-state, or polis, as a nexus of cooperation directed by the leaders of the city is a potent tool for the social theorist. It is easy to see that the extent of specialization was limited by the size of the city: a clan has one person who plays on a hollow log with sticks; a moderately sized city might have a string quartet; and a large city could support a symphony. The power of the individual human being is not sufficient for him to obtain the food he needs, and does not provide him with as much food as he requires to live.
Even if we assume an absolute minimum of food —that is, food enough for one day, a little wheat, for instance — that amount of food could be obtained only after much preparation such as grinding, kneading, and baking. Each of these three operations requires utensils and tools that can be provided only with the help of several crafts, such as the crafts of the blacksmith, the carpenter, and the potter. Assuming that a man could eat unprepared grain, an even greater number of operations would be necessary in order to obtain the grain: sowing and reaping, and threshing to separate it from the husks of the ear.
Each of these operations requires a number of tools and many more crafts than those just mentioned. It is beyond the power of one man alone to do all that, or even part of it, by himself. Thus, he cannot do without a combination of many powers from among his fellow beings, if he is to obtain food for himself and for them.
Through cooperation, the needs of a number of persons, many times greater than their own number , can be satisfied. This sociological interpretation of specialization as a consequence of direction, limited by the size of the city, later motivated scholars such as Emile Durkheim to recognize the central importance of division of labor for human flourishing. Such claims are simply mistaken, on several grounds see, for a discussion, Kennedy Smith described how decentralized market exchange fosters division of labor among cities or across political units, rather than just within them as previous thinkers had done.
Smith had two key insights: First, division of labor would be powerful even if all human beings were identical, because differences in productive capacity are learned. As Smith put it:. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. WoN, V. Second, the division of labor gives rise to market institutions and expands the extent of the market. Exchange relations relentlessly push against borders and expand the effective locus of cooperation.
The benefit to the individual is that first dozens, then hundreds, and ultimately millions, of other people stand ready to work for each of us, in ways that are constantly being expanded into new activities and new products. Smith gives an example—the pin factory—that has become one of the central archetypes of economic theory. As Munger notes, Smith divides pin-making into 18 operations. But that number is arbitrary: labor is divided into the number of operations that fit the extent of the market.
In a small market, perhaps three workers, each performing several different operations, could be employed. In a city or small country, as Smith saw, 18 different workers might be employed. In an international market, the optimal number of workers or their equivalent in automated steps would be even larger.
The interesting point is that there would be constant pressure on the factory to a expand the number of operations even more, and to automate them through the use of tools and other capital; and to b expand the size of the market served with consequently lower-cost pins so that the expanded output could be sold.
While the bases of trade and exchange can be differences in tastes or capacities, market institutions would develop even if such differences were negligible. The Smithian conception of the basis for trade and the rewards from developing market institutions is more general and more fundamental than the simple version implied by deterministic comparative advantage. Division of labor is a hopeful doctrine. Nearly any nation, regardless of its endowment of natural resources, can prosper simply by developing a specialization.
That specialization might be determined by comparative advantage, lying in climate or other factors, of course. But division of labor alone is sufficient to create trading opportunities and the beginnings of prosperity. By contrast, nations that refuse the opportunity to specialize, clinging to mercantilist notions of independence and economic self-sufficiency, doom themselves and their populations to needless poverty.
Buchanan, James, and Yong Yoon. Kennedy, Gavin. Khaldun, Ibn. Morales Meoqui, Jorge , Munger, Michael. Plato, n. The Republic. Translated by Benjamin Jowett. Roberts, Russell. Part II. Smith, Adam. Revised Edition. Bohn, Stigler, George.
There are several problems here. In general, raising a dollar of revenue from a tax on carbon content hurts the economy more than raising […]. The problem of the relations between the state and the individual was illustrated by a short Twitter exchange with a frequent contradictor of mine. Charles Karelis has the final word in our exchange. If you think utility is well-suited to analyzing life or death choices, you should include a utility analysis of life or death choices in your book.
The post Last Word from Karelis appeared first on Econlib. Firms that sell thousands of different items do not offer them at thousands of different prices, but rather slot them into a dozen or two price points. Then let the free market take over. No market mechanism can ever create the road network that connects everyone. The government must […]. Louis meeting of the famous House Unamerican Activities Committee.
That in itself I […].
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To do so, they track the popularity of the book, gauged by […]. The Universal Basic Income is only a tangential interest of mine. Liberty Fund, Inc. Toggle navigation. About OLL. About AdamSmithWorks. CEE The Concise Encyclopedia of Economics features authoritative editions of classics in economics, and related works in history, political theory, and philosophy, complete with definitions and explanations of economics terms and ideas.
Recent Posts. Here are the 10 latest posts from EconLog. EconLog October 7, Since publishing the piece in , we have perfected the terminology. It now reads: In this article, we divide all things into two groups: 1 dollars and 2 all non-dollar things that dollars are traded for. Such is the price of progress… Last week, Amazon joined this rush for the exit, sending me an email to let me know that my Amazon Prime streaming would soon be discontinued.
Do People Want to Be Free?
One of these essays, a lecture he gave at a Liberty Fund conference, makes an uplifting statement consistent with the classical-liberal and libertarian tradition italics in original : Man wants liberty to become the man he wants to become. Because of this, he claimed that socialism in terms of the range and scope of collectivized controls over individual liberty of actions … will survive and be extended. EconLog October 5, Mood Affiliation or Confirming Evidence? EconLog October 4, In various individual cases, does the benefit of the ends actually exceed the cost of the means?
EconLog October 3, What the Saudi oil shock tells us about monetary policy, by Scott Sumner When I do PowerPoint presentations on monetary policy , I often explain level targeting with an analogy from the oil industry. Thank you for taking the time to read through all this Sir. I look forward to hearing from you. EconLog October 2, Still, do you know what else is the height of folly? Dating such men. Falling in love with such men. Having unprotected sex with such men. Lee is admittedly skeptical of such self-help: The declining marriage rate is just one of the problems afflicting poor, less-educated women that may adversely affect their children.
Demographics are especially unfavorable for poor black women: [I]f every unmarried black man in the age range appropriate for marriage for a year-old black woman were to get married, 32 percent of these women would still be without husbands. Here is a rough sketch of my preferred story: All humans are somewhat impulsive, but the degree of impulsiveness varies. People with high impulsiveness, however, have increasingly acted on their impulses ever since.
Here are the 10 latest posts from EconTalk. EconTalk October 7, EconTalk September 30, EconTalk September 23, EconTalk September 16, EconTalk September 9, EconTalk September 2, David Deppner on Leadership, Confidence, and Humility Can a great leader or manager be humble in public? EconTalk August 26, EconTalk August 19, EconTalk August 12, EconTalk August 5, Here are the 10 latest posts from CEE.
CEE July 19, Thaler Richard H. CEE May 28, In a study he wrote: Only a minuscule fraction of the social returns from technological advances over the period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.
Selected Works. Paul M. Romer In , U. In a interview he stated: A lot of people see endogenous growth theory as a blanket seal of approval for all of their favourite government interventions, many of which are very wrong-headed. He was chief economist at the World Bank from to CEE March 13, Jean Tirole. The Theory of Industrial Organization. Co-authored with Jean-Charles Rochet. Autumn: Princeton University Press. CEE November 30, The Financial Crisis It was, according to accounts filtering out of the White House, an extraordinary scene.
The Guardian , September 26, The financial crisis of was a complex event that took most economists and market participants by surprise. The Housing Sector From roughly to the middle of , the housing market was characterized by the following: an environment of low interest rates, both in nominal and real inflation-adjusted terms. Low nominal rates create low monthly payments for borrowers. Low real rates raise the value of all durable assets, including housing. A standard requirement of at least ten percent was reduced to three percent and, in some cases, zero.
This resulted in a large increase in the share of home purchases made with down payments of five percent or less.
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Instead, they were buying them to speculate. Conclusion In terms of the fire metaphor suggested earlier, in hindsight, we can see that the markets for housing, sub-prime mortgages, mortgage-related securities, and inter-bank lending were all highly flammable just prior to the crisis. CEE September 18, CEE June 28, In a later reminiscence, Tullock concluded: A 90 per cent cut-back on our Foreign Service would save money without really damaging our international relations or stature. After arguing that applied science is generally more valuable than pure science, Tullock wrote: Nor is there any real justification for the general tendency to consider pure research as somehow higher and better than applied research.
He wrote: As an extreme example, surely offering a reward of 1 billion for the first successful ICBM would have resulted in both a large saving of money for the government and much faster production of this weapon. And Still I Rise. Henry L Gates. The Death of Rhythm and Blues.
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