Free Markets – Page 42 – artdiamondblog.com

Remembrances of Galbraith (and Buckley and Demsetz and Drucker)

John Kenneth Galbraith passed away a couple of days ago, on Sat., April 29, 2006 at the age of 97. (see: "Economist, Writer Galbraith Dies at 97." Omaha World-Herald (Sun., April 30, 2006): 11A)

I remember at a Republican Convention in Miami (1968 I think) when one of the networks had the late Frank Reynolds sitting with Galbraith and William F. Buckley, Jr., to provide occasional commentary on the scene. On this occasion, Galbraith was going on and on about how all of the Republicans had arrived at the convention in their yachts. Buckley sat by, nodding, in uncharacteristic silence. Finally, with a few seconds until they needed to break away, Buckley slowly and deliberately drawled at Galbraith something like the following: ‘And John, when you visit your friends in Hyannis Port, I trust that you find the accommodations adequate?’ As they cut to commercial, you could hear Reynolds, and others in the background, convulsed in laughter.

Actually Buckley and Galbraith were friends, for several years skiing together in Europe. Apparently Galbraith was an indifferent and very slow skier, leading Buckley to observe that Galbraith looked as though he was skiing up the slope backwards. (I read this many years ago, but, alas, do not remember where.)

David Levy and I once wrote a paper in which we measured the writing quality of articles by many important economists. When we presented the paper to the meetings of the American Economic Association, Galbraith was the discussant of our paper. For his comments, he basically recycled an old paper he had written on writing economics, and showed no signs of having read our paper. But he did seem to enjoy our mentioning that by our measures, he turned out to be one of the best writers in the profession. My memory is that at one point, just before or just after the formal proceedings, he actually patted me on the back.

Galbraith wrote many books. One that I enjoyed, and learned from, was his account of the stock market crash of 1929.

Perhaps his most famous book was The New Industrial State, in which he argues that some of the larger firms in the United States form what he called the "technostructure." The technostructure firms were widely held, by many stock owners, few of whom had the incentive or power, to closely monitor whether the firms’ managers were serving the stock owners by maximizing profits. As a result, the technostructure firms’ managers were free to pursue other goals, such as their own power. (Galbraith was OK with the assumption that firms outside the technostructure were maximizing profits.)

Harold Demsetz tested this hypothesis by comparing the rate of profit of firms in and out of the technostructure, reasoning that if technostructure firms were not maximizing profits, we would expect their profits to be lower than those of other firms. He found that there was no difference between the rate of profits of the so-called ‘technostructure’ firms, and the non-technostructure firms. Demsetz’s conclusion was that there was no distinguishable technostructure, and no new industrial state.

I tell my classes that if we don’t throw entrepreneurs such as Michael Milken in prison, they can provide us with the means to keep CEOs pursuing shareholder value (profits) as their goal. The way it would work would be that if CEOs start pursuing something else, their firm’s stock price falls, and the firm becomes an attractive take-over target for someone like Milken.

I also point out that if firms maximize profits, a lot of rich people benefit, but that a lot of average people benefit too—Drucker emphasized that roughly half of the value of stock equity in the United States is held by worker pension funds.

I did not agree with Galbraith’s efforts to grow the government, but he was witty, and urbane, and intelligent. The intellectual scene was more interesting, and fun, with him than without him. He will be missed.

Some references to publications mentioned in, or supporting, the discussion above:

Demsetz, Harold. "Where Is the New Industrial State?" Economic Inquiry 12, no. 1 (1974): 1-12.

Diamond, Arthur M., Jr., and David M. Levy. "The Metrics of Style: Adam Smith Teaches Efficient Rhetoric." Economic Inquiry 32, no. 1 (1994): 138-45.

Drucker, Peter Ferdinand. The Unseen Revolution: How Pension Fund Socialism Came to America. 1st ed: Harpercollins, 1976.

Galbraith, John Kenneth. The Great Crash 1929. Houghton Mifflin Co., 1961.

Galbraith, John Kenneth. The New Industrial State. Houghton Mifflin, 1967.

Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. William Morrow & Co., 1992.

Source of book image: http://www.whatihaveread.net/biblio/book_1458.html

“Damn it Fidel! What are you going to do about this lousy, piece-of-**** island of yours?”

Source of image of book: http://www.amazon.com/gp/product/1586483242/qid=1145298612/sr=2-1/ref=pd_bbs_b_2_1/104-9985403-1047968?s=books&v=glance&n=283155

Fernando Cardosa is the former Brazilian President who is best known for having temporarily tamed Brazil’s runaway inflation. Although not a principled believer in the free market, Cardoso made some efforts to reduce the damage the Brazilian government was doing to the economy. The following startling passage is from a useful review of a new memoir by Cardoso:

. . . , Mr. Cardoso mentions a telling moment at a 1999 summit meeting in Havana. When the heads of state were alone at a luncheon, one said to Castro: "Damn it Fidel! What are you going to do about this lousy, piece-of-**** island of yours? We’re sick of apologizing for you all the time, Fidel. It’s getting embarrassing." The anecdote shows how disingenuous Latin governments can be when they remain silent about the Cuban dictatorship.

For the full review, see:

MARY ANASTASIA O’GRADY. "A Leader Who Got Real." The Wall Street Journal (Thurs., April 6, 2006): D8.

(Note: ellipsis added.)

Here is the full reference to Cardoso’s memoir:

Cardoso, Fernando Henrique. The Accidental President of Brazil: A Memoir. PublicAffairs, 2006. [with Brian Winter; 291 pages; $26.95]

State Colleges and Universities “suffer from all the inefficiency and poor decision-making of Soviet-style factories”

In its public meetings, panelists from Wall Street and elsewhere in the business world have criticized academia as failing to meet the educational needs of working adults, stem a slide in the literacy of college graduates and rein in rising costs.
During a February meeting in San Diego, Trace Urdan, a senior research analyst for the investment banking firm Robert W. Baird & Company, said state colleges and universities “amount to state-run enterprises and suffer from all the inefficiency and poor decision-making of Soviet-style factories.”

For the full story, see:
SAM DILLON. “Panel Considers Revamping College Aid and Accrediting.” The New York Times (Weds., April 12, 2006): A14.

Common Measures Aid Transparent Transactions

Source of book image: http://www.amazon.com/gp/product/customer-reviews/0743216768/ref=cm_cr_dp_2_1/104-9985403-1047968?%5Fencoding=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155
The Measure of All Things is an interesting book for several reasons. It shows how hard it is to stay focused on noble pursuits in the face of revolution, war, disease, and peasant ignorance. It raises questions about where common standards of measurement should and do come from; and makes useful points about the value of common standards of measurement for free trade. It tells us how hard it was to do science 200 years ago, and tells us of the devotion of those who tried.
Here is a useful passage on why common standards of measurement matter for the free market:

(p. 137) Prieur believed that uniform measures would make France a great nation, smoothly administered from the center and united through trade. The metric system would transform France into “a vast market, each part exchanging its surplus.” It would make exchanges “direct, healthy, and rapid,” diminishing the “frictions” which impeded the wheels of commerce. These frictions included anything that masked the true price of an item, such as the variable measures of the Ancien Regime. The price of an item, Prieur argued, necessarily depended on many factors: its scarcity, the work necessary to produce it, the quality of the product. But in the final analysis, price was whatever people agreed it should be. This meant that when people agreed on a price they needed to know what they were getting, not be baffled by secret shifts in the quantity being exchanged. Those who claimed that differences in measures aided commerce were just talking about their personal profits. “The French Republic,” he wrote, “can no longer tolerate men who earn their living by mystery.” Worse, those who profited from the diversity of measures, said Prieur, corrupted those who tried to conduct honest and transparent exchanges by “complicating commerce, spoiling good faith, and sowing error and fraud among the nations.” Until commerce was carried out with complete probity, the common people would doubt the advantages of free trade. Only if price were the sole variable in exchange would these exchanges be based on clear understanding between parties.

Alder, Ken. The Measure of All Things: The Seven-Year Odyssey and Hidden Error That Transformed the World. Paperback Reprint ed: Free Press, 2003.

Teachers’ Unions Fight Innovation, Customization, and Variety

(p. A27) Washington – A Wisconsin court rejected a high-profile lawsuit by the state’s largest teachers’ union last month seeking to close a public charter school that offers all its courses online on the ground that it violated state law by depending on parents rather than on certified teachers to educate children. The case is part of a national trend that goes well beyond virtual schooling: teachers’ unions are turning to the courts to fight virtually any deviation from uniformity in public schools.

. . .

There is a universal American desire for customization and variety in goods and services, and education must respond to that demand, whether the unions like it or not.
. . .

This debate, like the ones over many other education issues, is fundamentally about who gets to have power. Yet the power the teachers’ unions now wield will be fleeting if public schools do not become more responsive to parents.
An industry cannot survive by rushing to court every time a new idea threatens even a small slice of its market share. Instead, maintaining, and even broadening, support for public schools means embracing more diversity in how we provide public education and who provides it.

For the full commentary, see:
Andrew J. Rotherham. “Virtual Schools, Real Innovation.” The New York Times (Friday, April 7, 2006): A27.
(Note: ellipses added.)

World Bank Fights Fraud in Antipoverty Projects

The World Bank president, Paul D. Wolfowitz, laid out a broad strategy yesterday to help developing countries combat rampant corruption, as well as to halt fraud in antipoverty projects supported by billions of dollars in World Bank money.
In a speech in Jakarta, Indonesia, Mr. Wolfowitz described for the first time his plans to make fighting corruption a pervasive issue in the bank’s operations. The new efforts will range from intensified monitoring of projects in the field to an increased focus on reforming institutions that can hold governments accountable.
Mr. Wolfowitz also seems to be trying to change the culture of the bank. In remarks after the speech, he said he wanted bank managers to understand that they would be rewarded “as much for saying no to a bad loan as for getting a good one out the door.”

For the full story, see:
CELIA W. DUGGER. “World Bank Chief Outlines a War on Fraud.” The New York Times (Weds., April 12, 2006): A7.

Jhontelle Johnson on public schools: “you can’t make me go”

Fransoir William. Source of image: http://www.nytimes.com/2006/04/06/education/06voucher.html?pagewanted=1&ei=5094&en=d2a47406ed1f9127&hp&ex=1144382400&partner=homepage

(p. A1) WASHINGTON, April 5 – As a student at Shaw Junior High School here, Amie Fuwa strained to shut out the distractions of friends cutting up. She struggled through math, and used photocopies or the library when textbooks were scarce.
Now Amie, 14, a child of immigrants from Nigeria and the Dominican Republic, attends Archbishop Carroll High School, a Catholic school near a verdant hill of churches nicknamed the Little Vatican. When algebra confounds Amie, her teacher stays with her after school to help, and a mentor keeps her on course.
”It’s a lot of people behind my back now,” Amie said.
Before, she said, she ”felt like it didn’t really matter to different people I know, like my teachers, if I failed.”
Amie is one of about 1,700 low-income, mostly minority students in Washington who at taxpayer expense are attending 58 private and parochial schools through the nation’s first federal voucher program, now in its second year.
Last year, parents appeared lukewarm toward the program, which was put in place by Congressional Republicans as a five-year pilot program, But this year, it is attracting more participation, illustrating how school-choice programs are winning over minority parents, traditionally a Democratic constituency.
Washington’s African-American mayor, Anthony A. Williams, joined Republicans in supporting the program, prompted in part by a concession from Congress that pumped more money into public and charter schools. In doing so, Mr. Williams ig- (p. A16) nored the ire of fellow Democrats, labor unions and advocates of public schools.
. . .
Like many other voucher students, Breanna Walton, 8, rises before dawn for the long bus ride from Northeast Washington, ”amongst the crime and drugs and all that,” in the words of her mother, April Cole Walton, to Rock Creek International, near Georgetown University. There, she learns Spanish with the children of lawyers and diplomats.
Ms. Walton said that her neighborhood school ”has broken down,” and that she would have done just about anything to keep Breanna from going there. ”Every child here should be able to say I’m going to set my sights high,” she said. ”I refuse to let my child be cheated.”
Patricia William, a single mother, said that at first she liked her son Fransoir’s public school, John Quincy Adams Elementary School, a tall sprawling building in the Adams Morgan neighborhood. Teachers seemed good, but overwhelmed. It was other parents, not teachers, Ms. William said, who told her that Fransoir was hyperactive. ”I was not getting quality information from them on time,” she said. ”For some reason, it was not working.”
Fransoir is one of 62 students with vouchers attending Sacred Heart Elementary, a Catholic school of 210 students, where he learns prayers along with five-digit multiplication and long division. He takes medication for his hyperactivity. Last year, he teamed up with another child to research the sinking of the Titanic. This year, he is interested in reptiles. Ms. William said her son today has nothing in common with the boy who once lay on the floor, turning in circles like a clock wound too tight. Now she is learning from him, about more than just math or reading or a sinking ship.
”All the effort he’s making every night makes me want to sit with him and study,” said Ms. William, a high-school dropout. ”I’m learning academically, but also about making an effort.”
. . .
. . . the pressure of competition is inescapable. In one sixth-grade classroom, two of six students said they would probably go to charter schools next year, unless Adams could get its seventh grade started.
”I’ll probably go to Washington Latin,” said Jhontelle Johnson, setting her sights on a new charter school opening in August. If not, she said, ”I’d probably be home-schooled.”
A teacher’s aide, Sheonna Griffin, looked askance. ”You don’t like public schools?” she asked the child.
Jhontelle turned back, her young eyes flashing. ”You can’t make me go,” she said.

For the full story, see:
DIANA JEAN SCHEMO. “Federal Program on Vouchers Draws Strong Minority Support.” The New York Times (Thurs., April 6, 2006): A1 & A16.

Fransoir William. Source of image: http://www.nytimes.com/2006/04/06/education/06voucher.html?pagewanted=2&ei=5094&en=d2a47406ed1f9127&hp&ex=1144382400&partner=homepage

Labor Market Flexibility Increases Employment and Prosperity

“France is definitely behind,” says William Keylor, professor of International Relations and history at Boston University. “If France were to create a more-flexible labor market it would eventually increase productivity and prosperity, but the short-term transition would be difficult and people just aren’t thinking long term.”
There have been labor changes across continental Europe recently. Denmark’s measures to liberalize hiring and firing have helped the country cut its unemployment rate in half from about 10% in the early 1990s to under 5%. Spain, too, has introduced short-term employment contracts which have helped cut its unemployment rate by more than half from 20% a decade ago.
But elsewhere, attempts at change have met with staunch opposition, often resulting in watered-down measures. Italy passed changes to its labor laws in 2004, introducing an extension of temporary-work contracts that were introduced in 1997 and were credited with helping cut Italy’s overall unemployment rate to 7.1% from 12% when the contracts began. Yet many economists say Italy, which recorded zero growth last year, hasn’t gone far enough.
In Germany, where unemployment stands at 11%, a coalition government headed by conservative leader Angela Merkel has promised to reduce unemployment by introducing similar measures to those hotly debated in France. The government had to settle on compromise measures that can extend a current probation period for workers to 24 months, from the current six. But companies don’t have the right to terminate contracts within those two years without giving just cause. Other, more difficult, provisions, are still on hold.
The new measures that will be introduced in Parliament as early as today are targeted at “disadvantaged” youths, which refer to people between 18 and 25 who have left school without any qualifications and who are unemployed. The provisions include increasing financial incentives to employers to hire people under 26 who face the most difficulties.
It would apply to some 160,000 young people currently hired under government-subsidized job contracts, according to an interview with Employment Minister Jean-Louis Borloo in an interview with Le Monde newspaper. The cost to the government would be around €150 million ($180 million) in the second half of 2006, Mr. Borloo was quoted as saying.
But economists said the change of tack was a bad signal. “The real problem is that the results obtained by opponents of the new law…show that it is very difficult to introduce reforms in France,” Dominique Barbet, economist at BNP Paribas, wrote in a research note. “This will give opponents of reform confidence for future actions.”

For the full story, see:
ALESSANDRA GALLONI. “Bowing to Protesters, Chirac Abandons Youth-Labor Law; Reversal Highlights Europe’s Difficulties With Painful Reforms.” The Wall Street Journal (Tues., April 11, 2006): A3 & A10.
(Note: the title and version of the article quoted here are from the online version. The title and content of the version in the printed paper was a little different in a couple of places.)

Studies Show Economic Freedom Boosts Economic Growth

A trio of European economists have just published a meta-analysis on the effects of economic freedom (EF) on economic growth. After many pages, here is their bottom-line conclusion:

(p. 182) Most studies reviewed in this paper have serious drawbacks, including lacking senstitivity analysis and poor specifications of the growth model used. However, studies that have applied some kind of sensitivity analysis and sensible specfications generally find support for a positive relationship between changes in EF and growth. This suggests that liberalization will indeed boost economic growth.

For the full article, see:
De Haan, Jakob, Susanna Lundström, and Jan-Egbert Sturm. “Market-Oriented Institutions and Policies and Economic Growth: A Critical Survey.” Journal of Economic Surveys 20, no. 2 (2006): 157-91.

Private Enterprise “computer-chip makers have better hand-cleaning standards than most hospitals”

With rising alarm over hospital infections, which cause 90,000 deaths annually, a growing number of hospitals are adopting aggressive hand-hygiene surveillance and monitoring programs, and in some cases imposing penalties for doctors, nurses, and other health-care workers who don’t follow the rules.
. . .
Despite strict guidelines issued by the CDC to stop the spread of bacteria on contaminated hands, and wide adoption of alcohol-based hand-rub dispensers in patient rooms and hospital corridors to make it easier for harried health-care workers to disinfect between patients, compliance rates remain mired at 40% to 50% nationwide, studies show.
The IHI program recommends a far more activist approach that holds hospital administrators and staffers accountable for failure.
“It no longer is tolerable to accept noncompliance rates of more than 50% when we are dealing with critically ill patients,” says Don Goldmann, a senior vice president of IHI and a professor of pediatrics at Harvard Medical School, who notes that computer-chip makers have better hand-cleaning standards than most hospitals. While the IHI program emphasizes education and positive feedback, “repeated violations in health-care, or any industry, need to have consequences,” Dr. Goldmann says.

For the full story, see:
LAURA LANDRO. “THE INFORMED PATIENT; Hospitals Get Aggressive About Hand Washing; Staff Surveillance Programs, New Penalties Aim to Boost Sagging Compliance Rates.” The Wall Street Journal (Weds., April 5, 2006): D3.