Category Archives: Economic Methodology

Do Patents Help or Hurt Investment and Innovation?

PatentOne of the most controversial topics amongst libertarians/conservatives is whether patents increase or decrease innovation. As is common in economics, it is not an easy answer and has different solutions based on different industries.

The argument everyone has heard in favor of patents is that it protects the inventors/firms profits and therefore increases incentive to invest in R&D. This argument makes intuitive sense. If a firm/inventor spends a lot of time and money working on an invention only to have it imitated the day it hits the market, they are less likely to spend the same amount of time and effort working on another invention.

The argument made against patents is that they decrease innovation because they decrease competition. The argument says that acquiring patents incurs additional costs and promotes wasteful attempts to invent around patents. Moreover, patents could delay spillover effects in sequential innovation. This also makes intuitive sense. So, which argument is correct?

In general, it depends on the industry.

Some of the most innovative industries happen to also have some of the weakest patenting laws. The software, computer and semiconductor industries have all had weak patent protection and relatively fast imitation of products. Of course, one could argue that if they had stronger patent laws the innovation would have been even more rapid. However, the data doesn’t agree with this claim. James Bessen and Eric Maskin find that when there has been an increase in patenting laws in these industries, R&D investment decreases [1]. This is not totally surprising. If there is no risk for imitation, there is less incentive to make a new innovation as quickly as possible. They do not argue for an optimal level of patenting laws, as we will see the authors of the next paper do.

The typical example for the necessity of patenting laws is the pharmaceutical industry. This is because the costs of putting a new drug in the market are staggering. Not only that, it takes many years for the FDA to approve the drug (If the FDA was eliminated this might be an entirely different discussion). In this industry, the first argument I presented is more useful, to an extent. In his paper, Yi Quan finds that in the pharmaceutical industry there is evidence for patenting laws increasing innovation, and that there is an optimal level [2]. However, he also finds that this is only true for certain countries. In countries with lower education levels and national income there is no positive relationship between patenting laws and innovation. This is because these counties largely rely on more developed countries for certain innovations. The most important result (at least for me), is that he finds a positive relationship in the U.S. After a certain level, however, strengthening patent laws will decrease innovation.

The last result has been more common in my research, that there is an optimal level of patenting laws. Too strong of laws decreases incentive to imitate or make sequential innovations because it increases the odds of a lawsuit and other costs that reduce R&D spending. So my personal opinion is that in most industries, weak patenting laws are beneficial. However, I would not make this claim for all industries.

Thus, the discussion about patents should not be a carte blanche generalization for all industries. If someone asks you what your opinion on patents are, the most appropriate response should be “Patents for what industry?”

– JW

 

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[1] Bessen, Maskin “Sequential Innovation, Patents and Imitation”, The Rand Journal of Economics Vol. 40, No. 4 (Winter 2009)

[2] Quan “Do National Patent Laws Stimulate Domestic Innovation in a Global Patenting Environment? A Cross Country Analysis of Pharmaceutical Patent Protection , 1978-2002” The Review of Economics and Statistics Vol. 89 No. 83 (Aug. 2007)

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Discussing Globalism and Open Borders

Adam Smith PortraitI am in favor of free trade between countries and also open borders with regard to labor. Almost all schools of economic thought are in accordance with this theory of the free mobility of labor. Monetarists, Austrians, and even Keynesians are all in agreement in this economic point of view. In a nutshell, the theory states open borders will lead to increased economic activity and increase the standard of living.

I was in a recent discussion with a person who was a fan of Adam Smith, and was claiming that Smith was against open borders with regard to trade and labor. He thought that open borders to trade and labor, and commodity backed money, would lead to “mutually assured economic destruction”.  I have not read as much Adam Smith as I should have, but since this discussion I have been motivated read a little more of his work. According to my recent research, I discovered that the person I was debating has Smith completely backwards.

I was surprised to hear someone claiming that Smith was against open borders in the first place. So I read Smith’s views on borders, and one quote sums up his view very well, “The core of free trade, is the free circulation of labor.”  Clearly this implies that Smith opposed any mercantilistic restrictions with regards to not only trade, but the movement of labor as well. It makes sense that he would be in favor of open borders, every good economist I have ever read or spoken with is in favor of it.  Furthermore, all economists get particularly annoyed when they hear people talk about why tariffs are good for protecting our companies, and that we can’t let immigrants steal our jobs etc. etc.

I had no idea what Marx thought of immigration at the time of this discussion, but he sent me a link of something that indicated that Marx was in favor of open immigration to reduce national identity. This sounded like something Marx might say, but my research did not agree with this assessment. Basically, Marx was against any immigration thinking it was a ploy of the bourgeoisie to bring in cheap labor to drive down the wages and further exploit the labor. It also makes sense that Marx would be against the free movement of labor – He is one of the worst economists in the history economic thought.

Disclaimer: When economists talk about open borders to trade and labor they are not endorsing letting anyone in the country at anytime for any reason. Rather, they are endorsing making it easier for people to enter a country for jobs if they are demanded.

 

– JW

 

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A Brief Defense of Economic Models

Economic ModelingIn this write up my goal is to convince some Austrians that mathematical models aren’t as fallacious as they presume. Before I get into my arguments I must first make this point, and it is something that needs to be kept in mind as the readers works through this brief write up. Mathematics, insofar as it is utilized in economic theory, does not predict human action in a deterministic fashion, rather, it captures the laws of human action such that predictions can be made given the constraints of relevant conditions under examination within the theory.

To sum up the Austrian view of models, one could argue that they believe models use false assumptions and lead to fallacious results. On the Austrian view, models cannot capture human action. I am not bold enough to claim that mathematical models can perfectly capture human action, but I do think models are highly useful. Consider the standard model of supply and demand. It gives us proper results, is extremely intuitive, and it is a wonderful teaching tool. Austrians, on the other hand, believe that the assumed continuity of the supply and demand curves are false. As far as I can tell, this is their primary objection to using this model. According to them, because supply and demand are not continuous, it is much more unlikely to reach equilibrium. I would like to point out that adherents of this model do not assume that the supply and demand ever actually reach equilibrium, but rather, prices are always adjusting towards equilibrium. This is a part of this particular model’s usefulness.

But I digress.

Consider this quote out of one of the leading graduate school micro theory books:

“Imagine that you are trying to explain a particular phenomenon with one of two competing theories.  Neither fits the data perfectly, but the first does a somewhat better job according to the standard statistical measures. At the same time, the theory is built on some hypotheses about behavior by individuals that are entirely ad hoc, whereas the second is based on a model of behavior that appeals to your intuition about how people act in this sort of situation. I assert trying to decide which model does a better job of “explaining” is not simply a matter of looking at which fits better statistically. The second model should gain credence because of its greater validity, which brings to bear, in an informal sense, other data” (Kreps, A Course in Microeconomic Theory, pg 8)

Does this quote seem to fit the Austrian argument that Chicago school economists are stat chasers and do not care about the validity of assumptions? Quite the contrary, actually. It seems to me that Chicago School economists are concerned about human behavior/theory first, and stats second. I do not see why any economist should have a problem with this method of economics. As long as the economist will admit some of the draw backs his assumptions might have, why should we completely throw models out the window? Note that when models are introduced through scholarly journals the author will almost always point out some of its downfalls, but explain why it is still useful.

Another reason why I think models are important was touched on in my second paragraph. Models are helpful learning tools because they possess intuitive insights into real world phenomena. Consider supply and demand again. If I were to try and explain to someone why rent controls create housing shortages, it is to my explanatory advantage to draw supply and demand curves, and then show the different implications of keeping rent lower than the market clearing price. It is much easier for the layman to see the consequences as a picture, rather than sorting through all the material in their head. The same goes for the economic analysis of tariffs and the minimum wage. I have a hard time explaining why tariffs are bad even to a relatively knowledgeable audience, but as soon as I draw it out for them it clicks.

The last reason why I believe models are important is because even models that are falsified still help us gain knowledge. This is because learning what assumptions lead to the false conclusions now gives us insight into why these assumptions won’t work for future theories. As long as the economist is trying to encompass human behavior as much as possible, and it is fairly explanatory and predictive, why should anyone reject it? Models can have good explanatory power as to why things happen and to what will happen.

Finally, I would just like to point out that this is barely scratching the surface of how much thought goes into what makes a good economic model.  To simply reject these ideas based off of the use of models alone, is in my view, preposterous

 

– JW

 

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Economic Analysis of the Law

Economics and the LawThe law of supply is a fundamental law in economics. It is used in the majority of economic theories either implicitly or explicitly. There are many factors that go into how supply is calculated, but one of them is input prices. Basically, this says as input prices go up/down, suppliers will produce less/more, and therefore the supply curve will shift.

Let’s use this theory when considering civil laws. First, I will use a simple example like littering. Littering in my home state results in a $500 fine. The fine is set at this level not because littering actually merits a $500 fine, but rather, it is unlikely to get caught littering so the price must be high enough to deter littering. There are some mathematics behind how they come up with $500 that I will not get into, but that is the general theory. Clearly, if there was no such fine, littering would increase due to the law of supply explained above; the price of littering would be less so therefore, there will be more “supply”.

Now, lets extrapolate this example to larger crimes. What is the price of murder?  It could be a death sentence, or to put a monetary number on it, if someone making $40,000 a year gets caught murdering someone 20 years before retirement, that will cost him $800,000 (20*40K). This is not including the chance of getting a pay raise, the cost of his leisure, his price on his right to vote etc etc.

I said all of that to reference a point of view I find to be quite ridiculous. Recently, I was in a discussion with someone that argued because murders take place even though laws prohibiting murders exist, the laws prohibiting murder are unnecessary. The idea is the law does not deter the action so the law is useless.

This argument is simply absurd. Laws prohibiting murder exact a cost that is extremely high for those contemplating such action. However, without the law the cost drops to zero. To claim that murders won’t increase, as my opponent claimed,  is to defy the laws of basic economics.  Clearly, the marginal benefit of murdering someone will be greater than the marginal cost if the cost of murdering someone is nil. However, if the marginal cost is $1,000,000+ it is much more difficult for marginal benefit to be greater than marginal cost. Hence, increasing the price will deter people from committing murder.

Another economic reason why these kinds of laws are good for society is based on the division of labor. We allow other people to enforce justice on our behalf. When criminal activity ensues, and harm is realized on ourselves or a loved one, it is human nature to demand justice. If we were expected to enact justice every time a crime was committed against our person, property, or loved one we would have to stop our productive lives to pursue justice against the perpetrator. The lack of division of labor in this regard would lead to significant economic inefficiency.

This argument has nothing to do with governmental laws, governmentally provided police forces, or governmentally provided national defense vs. private laws, privately provided police force, or privately provided national defense.  My argument is merely pointing out that any civil society requires these laws. Understood in this sense, I am appealing to how Bastiat understood the law; laws are instituted because they are meant to protect what preceded the legal institution in the first place, namely, person and property.

 

– JW

 

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An Analytical View of the Chilean Miracle

chile-miracleThe dynamics of the economic marketplace in many South American countries has been due mainly to political instability based on the effort of South American leaders to centralize government’s economic and political power at the expense of individual liberty. Economic mechanisms are sometimes used to subsume the individual into the state, and grow executive power. However, neo-liberal market reforms instituted in Chile after the coup that ousted Allende, slowly eroded executive power during a tacit shift towards individual freedom. This in turn increased economic production that eventually lead to the peaceful ousting of Pinochet’s authoritarian dictatorship, and a thriving economy. The failure of other Latin American democracies in South America has been due to the political insecurity of the executive to relinquish total economic control.

Freedom isn’t only the right to be politically free, via the rule of law and democratic elections, but also economically free, via voluntary transactions in a market driven economy. The free market principles of market reform in South America are based on the idea of Adam Smith’s “invisible hand”, the notion that the allocation of scarce resources with multiple uses is best organized by free people in voluntary, mutually beneficial transactions, as opposed to government coordination of economic arrangements. This spontaneous order, according to Dr. Milton Friedman, can also remove some of the political constraints by government over the individual. According to Friedman, “By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power, rather than reinforcement.” (Friedman 15) The more economic control the government has over the individual, the more one will look to the government rather than themselves or others, to solve their problems, directly correlating to increased political power for the state.

Immediately following the global economic instability of the Great Depression beginning in 1930, dictators and presidents have been using economic control to gain and maintain political power. For instance, in the 1930s, Brazil’s Getulio Vargas backed by the military, instituted the “Estavo Novo” or “new state” and declared himself dictator. His government interventions into the economic realm were modeled after Italian fascism of the same time period. He instituted import substitution and corporatist policies that “…combined strong government involvement in economic activities with the organization of workers into government controlled unions.” (Vanden and Provost 229). Peron, in Argentina followed a similar model to that of Vargas in Brazil, “In power, Peron’s strategy was similar to that of Vargas… his rule took on nationalistic tones and policies of economic protectionism were implemented. The government took a strong hold of the economy…” (Vanden and Provost 229). These two populist leaders in Latin America derived their power by controlling individual’s economic situation by limiting competition for both input and output, while dissipating the costs among the population as a whole.

This corporatist/fascist mentality is largely associated with the political “right” and perceived to be on the opposite pole of the political spectrum than communism. However, this conclusion disregards altogether the relation of the individual to the state in both systems and his subjugation thereof; both fascism and communism are different degrees of statism, as both clearly institute various degrees of dirigisme. In professor Peter Drucker’s study of totalitarianism, he saw fascism as the logical ideological progression of socialism, “Fascism is the stage reached after communism has proved an illusion, and it has proved as much an illusion in Stalinist Russia as in pre-Hitler Germany.” (Hayek 80) Moreover, after his research on the origins of fascism and it’s relation to communism, largely from first-hand accounts, led prominent economist F.A. Hayek to conclude, “While to many who have watched the transition from socialism to fascism at close quarters the connection between the two systems has become increasingly obvious…” (Hayek 81-82). Furthermore, prominent 21st century economist Dr. Thomas Sowell adds, “…there is remarkably little difference between Communists and Fascists, except for rhetoric, and there is far more in common between fascists and the moderate left…” (Intellectuals 99).

The intervention into the economy by government is primarily out of political expediency; ensuring political longevity and increasing the concentration of power afforded to the state, specifically the executive branch. Dirigiste economies are inherently flawed and tend to fail irrespective of where state control is focused (socialism/fascism), and thus provides the political capital needed to employ such a blatant political power grab. For example, in Argentina during the military regime of the late 70s and early 80s the military junta, despite economic counsel citing the economic instability was due to an interventionist state and the ISI strategy, advised the junta that, “loosening of free market forces would not only create the conditions for renewed economic growth but also discipline the social actors…” The junta’s inability or “persistent refusals” to relinquish “their state-oriented expectations and behaviors… led to economic disaster.” (Vanden and Provost 435). The state, rather than implementing economic freedom that could threaten their political power, chose the status quo at the economic peril of the people.

The junta’s inability to relinquish control over the economy eventually did them in. This dissatisfaction with the economic instability perpetuated by the state eventually paved the way for Carlos Menem’s democratic election in 1989, and the political capital needed for market reform, albeit partial. Despite growing inflation and economic instability that had been growing for decades, Menem was able to quell the inflation by his “convertibility law”, which pegged the Argentine peso to the U.S. dollar, stabilizing the money supply and bringing down inflation by using their foreign exchange reserves as a commodity (Schamis 71). In addition to a stable currency, Menem promulgated market reforms, which “included trade-liberalization, deregulation, and privatization.” (Schamis, Transition 72). In Short, the parity of the Argentine peso and the U.S. dollar, proved to be a Trojan horse and eventually became its demise. “Bank money” and ensuing credit expansion due to lax reserve requirements eventually lead to an economic bust in 2001-2002 (Schamis, Transition 73).

Menem’s partial market reforms were initially successful, and a statist political power grab ensued as he attempted to capitalize on his economic success with increased political power (Schamis 72). Thus, leading to centralized state power corrupting the entire economy, particularly in Menem’s case, running up massive federal deficits in order to sustain Menem’s “strategy for achieving constitutional reform and winning reelection.”  And eventually lead to the economic collapse in 2001-2002 (Schamis, Transition 72). A few years later the Kirchner’s, beginning with Nestor and then later his wife Christina, implemented pragmatic policies to stabilize the economy. From there, following a well established pattern in South America, the political power grab ensued. Christina’s political and economic overreach—far more egregious and further “left” than her husbands before her—advocated for more state control of the economy and a nationalization that Professor Schamis describes as “more Chavez-like than anything else” (Schamis, Decay 72). Schamis describes further the goal of such economic and political power grabs by the state in broader terms:

“Social policy through government discretion in a system marked by concentrated executive authority is fundamentally a tool to give rulers more resources for their patronage—that is, to control social groups and diminish the autonomy of civil society. The idea that some rights have to be violated for others to be advanced is thus perverse; it is just about abusing power, which plants the seeds of an undemocratic political order.” (Decay, 74)

Friedman is Still RightNo matter where on the political spectrum one may be, violations of political and economic rights are inevitable in a system where government is concentrated in an all-powerful executive; as individual rights are manipulated by the state to erode the civil society as means to end. In the case of Chile, the situation is somewhat symmetrical to Argentina, yet in many ways asymmetrical. The key difference being more pragmatic and realistic macroeconomic advice under the junta by the “Chicago boys”, a group of Chilean economists that had studied under the tutelage of Milton Friedman at Chicago University (Stephens). The market reforms success came in spite of a ruthless dictator and an economy in shambles, as Bret Stephens explains, “Inflation topped out at an annual rate of 1000%, foreign currency reserves depleted, and per capita GDP was roughly that of Peru…”

The cause of the economic catastrophe was inherent in Allende’s statist economic policy that was rife with expropriations; often by force, nationalization, wage and price controls and rationing of consumer goods by local boards called the “Unions of Supply and Price Controls” know as JAP (Lira). The latter was instituted due to the inflation and lack of consumer goods as an economic consequence of the former. Lira describes how rations were distributed if an individual was openly opposed the state, “these people perceived as “unfriendly” to Allende… received insufficient rations for their families, or no rations at all.” (Lira). The socialist policies of Allende worked to stifle political freedom just as much as economic freedom. The complete decimation of the economy by the Marxist economic policies of Allende lead ultimately to a military coup led by Augusto Pinochet and a period of 17 years of dictatorial rule.

Once in office, Pinochet’s ultimate goal was to stamp out socialism, not just programmatically, but by force. The statist, authoritarian junta persecuted anyone associated with the socialist or communist parties; many were killed, tortured, imprisoned or exiled at the hands of junta (Vanden, Provost 466). Like Allende and others before him, as well as other leaders In South American politics during his time, Pinochet, “commander-in-chief of the army, centralized power in his person…” (Vanden, Provost 466). The transition from Marxism to Pinochet and the Chicago boys didn’t occur simultaneously, rather the “continuing economic decline forced him to look for some new policy alternatives.” (Stephens). It wasn’t until March 1975 that the Chicago boy’s policies had been implemented.

The market reforms instituted under Chile were congruent to that of Argentinean President Carlos Menem, and were not at all entirely “laissez-faire” or free market. Moreover, the reforms pursued were not to the extent espoused by Milton Friedman, as Jonathan Marshall explains in an 1983 article, “Freidman’s own protégés abandoned laissez-faire economics at certain critical junctures, and these departures, not any maniacal monetarism, produced Chile’s suffering.” (Doherty) This article written in the in early 80’s when Chile was in the midst of a slow economy, most likely due to a restriction and correction of the monetary policy (Doherty). One deviation was pegging the Chilean peso to U.S. dollars in the early 80’s, subsequently overvaluing the peso and hurting exports (like Menem’s convertibility law). Another deviation was Pinochet, like Peron and Vargas before him, oversaw a system of corporatism that protected state favored business’ from the competition of the free market in the form of government credit and bailouts (Doherty).

However, these limited market reforms, in spite of corporatism and devaluation of the peso were reasonable steps in the right direction. Two of which made this possible, monetary stabilization (Martinez) and the other, was giving the means of production (private property) back to the people (Vanden, Provost 466). Private property rights are essential to any world economy and a backbone of neo-liberal market reforms. Economist Dr. Thomas Sowell explains, “For economic activities that take some time, property rights are a prerequisite, so that those who farm or invest in business can feel assured that the fruits of their activities will be theirs.” (Facts and Fallacies 218). Many believe wrongly that property rights only benefit the wealthy, but Sowell delves further and explains that even those without property have a huge stake in private property rights, “if they are to be employed in an economy made prosperous by the presence of property rights.” (Facts and Fallacies 218). Moreover, in the absence of such rights, as seen under the Allende regime, production drastically decreases or ceases altogether.

Like Milton Friedman, who once proclaimed back in 1962, while discussing individual freedom in economic arraignments, he explicitly states that it is a vehicle to political freedom, …economic freedom is also and indispensable means toward the achievement of political freedom.” (Friedman 8). Not only did the reforms help Chile, Friedman’s assertion proved to be substantive. The eventual macroeconomic stability in the late 80’s, among other factors, was a large part of the eventual democratic transition in 1990 (Martinez). When Pinochet finally stepped down in 1990, GDP had risen by 40% (in 2005 dollars); by comparison, Peru and Argentina during the same time period, stagnated (Stephens). As of 2010, and a result of their market reforms Chile has become South Americans richest people, with the lowest levels of corruption, lowest infant mortality rate and lowest number of people living below the poverty line (Stephens).

In conclusion, not only are economic freedoms separate from political freedom, they are both components of a greater whole: individual liberty. The only mechanism that protects both the worker and the consumer is competition in a free market. As we have seen in South America, leaders use economic arraignments and coercion to increase their power at the expense of political and economic liberty; both fascism and socialism employ this tactic in similar fashion to achieve the same result. Chile is a unique case in which a military junta, a top down organization, promoted an economic policy that was bottom up. The success of their economic structure in comparison to the Marxist policies before is undeniable. The political atrocities committed by Pinochet are deplorable, yet the neo-liberal market reforms remain today, despite two moderate socialist presidents from 2000-2010, a clear vindication of the Chilean market reform’s success (Vanden, Prevost 467-468).

 

– Will Ricciardella

 

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Austrians, Mathematics, and Economics

MathematicsThe purpose of this post is to address many of the statements/arguments made by Austrians (in the tradition of Mises) about math, or rather, their position on mathematical use in economics.

One statement I have been hearing lately is along these lines, “Austrians are not against all math, just SOME math” or, “Austrians are not against math, just mathematical predictions” etc etc. I find these claims to be rather telling of the person arguing on behalf of the Austrian position. These statements tell me right away they do not even know or understand the methodological position of their own school of thought. On their view, these 5 quotes need to be interpreted as only being against some math and/or mathematical predictions. Here are the relevant quotations:

“The only economic problems that matter, defy any mathematical approach” – Ludwig Von Mises

“Now, the mathematical economist does not contribute anything to the elucidation of the market process”  – Ludwig Von Mises

“The equations formulated by mathematical economics remain a useless piece of mental gymnastics and would remain so even if they were to express much more than they really do” – Ludwig Von Mises

(These next two are my favorite)

“The mathematical method must be rejected not only on the account of its bareness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. Its syllogisms are not only sterile: they divert the mind from the study of real problems and distort the relations between various phenomena” – Ludwig Von Mises

“Mathematics cannot and does not enter into measuring ideas or values that determine human action.  There are no constants in these. There is no equality in market transactions. Therefore, mathematics does not apply. The use of mathematics requires constants. Mathematics cannot be used in economic theory” – Percy L. Greaves.

All of these quotes can be found in various articles on mises.org.

I am truly baffled as to how someone claiming to be an adherent of the Austrian School could read these, or any Austrian literature, and conclude that Austrians are only against the use of some math. I have read a lot of Austrian literature, and I personally have never read anything that would support that claim. Of course, quotations cannot be “proof” of anything, but I do think they provide rather strong evidence in favor of my argument. Moreover, the Percy Greaves quotation is in response to the question, “is economics completely divorced from mathematics?” Clearly, from his response he thinks it is.

Another statement I hear from Austrians is that Neo-Classicals do not give them any mathematical propositions they should accept. This seems to be a rather silly statement, and in many ways, entirely meaningless. Austrians should accept all mathematical propositions that are true, from 1 + 1 = 2 to the propositions in set theory or algebraic topology etc.

John NashHowever, to get specific I would like to point out two mathematical fields that have vast applications in economics. First is game theory. Game theory is a branch of mathematics first developed by Emile Borel, and then popularized by the works of Von Neumann, Morgenstern, Nash etc. There is a plethora of economic questions game theory answers. One example of such a question is – how do oligopolies decide on how much to produce given the production of the other firms? Game theory provides the answer to this question.

Second, is functional analysis. In general, functional analysis is the study of infinite dimensional vector spaces. This field answers the question – how can a copper mining company extract Q tons of copper from a mine over T years and maximize its profit? To find this function is one thing, and to prove it is the maximum of all functions is another. I would like to ask an Austrian how to solve this problem without the use of mathematics? In my view, it simply cannot be done.

Mathematics is vitally important to the study of economics, and to denounce it the way influential Austrian scholars have is exactly why I am not an Austrian economist.

 

– JW

 

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Do Sports Stadiums Boost the Economy?

Basic EconomicsHave you ever heard that building a new sports stadium will bring tax revenue to your city/state and increase economic activity?

To me, this seems to be one of the biggest misconceptions among the general populous. The argument is that building a new stadium will employ construction workers and people at the stadium, increase economic activity around the stadium, and increase tourism etc. However, as a paper by John Siegfried and Andrew Zimbalist points out:

“Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development (Baade and Dye, 1990; Baim, 1992; Rosentraub, 1994; Baade, 1996; Noll and Zimbalist, 1997; Waldon, 1997; Coates and Humphreys, 1999).”

A study conducted by Baade found no significant difference in personal income growth from 1958 to 1987 between 36 metropolitan areas that hosted a team in one of the four premier professional sports leagues (MLB, NHL, NFL, NBA) and 12 otherwise comparable areas that did not.

Similarly, Waldon found that having a major sports team actually decreased economic activity in the 46 cities he examined from 1990-1994. In fact, he found that increased high school graduation rates and more spending on police increased economic growth. Both Waldon and Baade controlled their study for other economic factors.

Moreover, time series studies confirm the results of cross-sectional studies. Baade and Sanderson found that there is no increase in economic activity in 10 cities that acquired new sports teams between 1958 and 1993.

Just one more example of empirical data proving government spending is useless.

 

– JW

 

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