Wednesday, October 12, 2016

Contract Theory and Adam Smith.

Luke 16:1-13. (Source)
A fascinating thing about "A Scorecard to Keep Track of Players and Their Agents", which I mentioned last time, is that it traces contract theory back to a 1976 paper by Michael Jensen and William Meckling, and, much more distantly, to Adam Smith's 1776 "Wealth of Nations" (the whole section is well-worth your time):
"The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company." (Emphasis added)
That quote is 240 years old. Note that Smith already uses the word "manager". "Stewards of a rich man" apparently alludes to an even earlier source: Luke 16:1-13. Concerns about managers/capitalists aren't recent by any means.

Monday, October 10, 2016

Nobel: Capitalist as a Contractual Role.

This year's so-called Nobel Prize in Economics went to Oliver Hart (UK) and Bengt Holmström (Finland), from Harvard University and the Massachusetts Institute of Technology, respectively, for their contributions to Contract Theory.

As a subfield of microeconomics, Contract Theory probably is of little interest to macroeconomists. Similarly, econo-aficionados -- normally obsessed with macroeconomic policy -- might be indifferent to that announcement.

I think that would be unfortunate: Marxists and leftists, in general, should be interested.

Wednesday, October 5, 2016

Romer’s Identification Problem in a Nutshell.

Unidentfied Economic Object. [A]
In his recent paper, Paul Romer mentioned several problems in macroeconomics. Some are clear enough and anyone can understand them: unmeasurability and unobservability of variables, for instance. I've written about that.

Others are more technical; the "identification problem", among them.

So, what is the "identification problem"?

David Ruccio explains using a simple supply and demand model. It's very didactic, so readers can follow easily (hell, even I did!), to get a general idea. It has a drawback, though: Prof. Ruccio explains the identification problem in a supply/demand setting, not in the specific situation Prof. Romer wrote about.

Based on Prof. Ruccio's explanation, I'll provide more concrete details using a "toy" model.