SPRING 2010
VOLUME LV      NUMBER 1

NOTE: Due to a printing error the Fall 2009 issue of The American Economist was incorrectly labeled as Vol. 54, No. 2, although it should have been Vol. 53, No. 2. To avoid further confusion, it was decided to number Spring 2010 issue as Vol. 55, No. 1. Fall 2010 issue will therefore be Vol. 55, No. 2.

table of contents    abstracts

TABLE OF CONTENTS

Articles

Edifying Editing
R. Preston McAfee

Unlearning and Discovery
Charles F. Manski

The Reasonable Effectiveness of Mathematics in Economics
Sergio M. Focardi and Frank J. Fabozzi

Memorializing John K. Galbraith: A Review of His Major Works, 1908-2006
Lall Ramrattan and Michael Szenberg

Citing Reprinted Material Ofer H. Azar

Economics, Ethics, and the Dilemma in the Prisoner's Dilemma
Daniel G. Arce

Economics: Good Choice of Major for Future CEOs
Patricia M. Flynn and Michael A. Quinn

An Introduction to the Economic Method
William C. Perkins

Using the Simpsons to Improve Economic Instruction Through Policy Analysis
Mark T. Gillis and Joshua Hall

The Effect of Competition on the Evaluation of Lotteries
Tal Shavit, Shosh Shahrabani, and Uri Benzion

Evidence on Forecasting Inflation under Asymmetric Loss
Hamid Baghestani and Bassam Abu Al-Foul

Economic Transformations in Chile: The Formation of the Chicago Boys
Valerie Brender

Teaching Economic Principles: Algebra, Graph or Both?
David Zetland, Carlo Russo, and Navin Yavapolkul

Krugman Versus Friedman: Monetary Policy, 1929-1933, A Note
Robert F. Stauffer

Book Reviews

The Economics of the Great Depression: A Twenty-First Century Look Back at the Economics of the Interwar Years
Cameron M. Weber

The Panic of 1907: Lessons Learned from the Market's Perfect Storm
David A. McClough


ABSTRACTS

Edifying Editing
R. Preston McAfee
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Unlearning and Discovery
Charles F. Manski
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The Reasonable Effectiveness of Mathematics in Economics
Sergio M. Focardi and Frank J. Fabozzi
Economic science is generally considered less viable than the physical sciences. Sophisticated mathematical models of the economy have been developed but their accuracy is questionable to the point that the present economic crisis is often blamed on an unwarranted faith in faulty mathematical models. In this paper, we claim that the mathematical handling of economics has actually been reasonably successful and that models are not the cause behind the present crisis. The science of economics does not study immutable laws of nature but the complex human artefacts that are our economies and our financial markets, artefacts that are designed to be largely uncertain. We could make our economies and our markets less subject to uncertainty, and mathematical models more faithful to empirical data by introducing more rules and collecting more data. Collectively, we have decided not to do so and therefore models can only be moderately accurate. Still, our mathematical models offer a valuable design tool to engineer our economic systems. But the mathematics of economics and finance cannot be that of physics. The mathematics of economics and finance is the mathematics of learning and complexity, similar to the mathematics used in studying biological or ecological systems.
Keywords: General equilibrium theories, Mathematical economics, Econometrics, Econophysics, Derivatives
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Memorializing John K. Galbraith: A Review of His Major Works, 1908–2006
Lall Ramrattan and Michael Szenberg
This paper attempts to address the essential legacy of Kenneth Galbraith (1908–2006) spread over a broad range of subjects. Galbraith is a forerunner of the most popular, imaginative and idea creating economic writers of the last century. His economic eyes were the first to discern the historic and institutional forces behind the countervailing powers of big business and big unions, the culmination of techno structure in the land-capital dominance of the evolution of factors of production, the pairing of buyers and sellers for market clearance in disequilibrium, and as Milton Friedman stated, the only person who has made a serious attempt to justify price and wage controls.
Keywords: Institutional Economics, Technostructure, Countervailing Power, Wage-Price Control, Economic Planning
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Citing Reprinted Material
Ofer H. Azar
Journal articles are sometimes later reprinted as chapters of edited books. The question whether citations of this material should mention the book or the journal has significant implications. I describe several advantages of citing the journal: it allows the readers to locate the material more easily and to handle it more conveniently (when it is available electronically); it gives a better signal about how important and updated the material is; and it gives the journal proper credit, which is important because journals are ranked based on citations. Finally, several reasons for citing the book are also discussed.
Keywords: Citing, Edited books, Collective volumes, Reprinted articles, Academic writing
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Economics, Ethics, and the Dilemma in the Prisoner's Dilemma
Daniel G. Arce
This paper contrasts four distinct versions of the Prisoner's Dilemma (the commons, public goods, biological altruism, and biological selfishness) in terms of their ethical content for economic decision making. An argument is made for the restoration of Tucker's third player – as given in the original specification of the game – in order to judge whether a resolution is desirable in economic and business situations that reduce to the Prisoner's Dilemma. Finally, the use of tit-for-tat as a ‘solution' to the Prisoner's Dilemma is compared with the practice of business ethics.
Keywords: Game Theory, Prisoner's dilemma, Business ethics, Altruism, Tit-for-tat
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Economics: Good Choice of Major for Future CEOs
Patricia M. Flynn and Michael A. Quinn
It is often suggested that economics is a good major for individuals interested in being business leaders. Despite this widespread assertion, little research has been conducted on this topic. Using the Standard and Poor (S&P) 500 companies, this paper examines the validity of such a claim. We find evidence that economics is a good choice of major for those aspiring to become a CEO. Economics ranked third with 9% of the CEOs of the S&P 500 companies in 2004 being undergraduate economics majors, behind business administration and engineering majors, each of which accounted for 20% of the CEOs. When adjusting for size of the pool of graduates, those with undergraduate degrees in economics are shown to have had a greater likelihood of being an S&P 500 CEO than any other major. That is, the share of graduates who were economics majors who were CEOs in 2004 was greater than that for any other major, including business administration and engineering. The findings also show that a higher percentage of CEOs who were economics majors subsequently completed a graduate degree – often an MBA – than did their counterparts with business administration and engineering degrees. The paper demonstrates that while women now comprise over half of all bachelor's and master's degrees awarded, they remain a minority in terms of undergraduate degrees awarded in economics and in MBA degrees conferred. Economics programs may try to appeal to more women students as a stepping stone to becoming a CEO, especially as women continue to account for less than 2 percent of the S&P 500 CEOs.
Keywords: undergraduate major, CEO, economics degrees, gender mix of students
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An Introduction to the Economic Method
William C. Perkins
A sample of leading introductory economics textbooks reveals that most devote little space to the method of analysis used by mainstream economists. A thorough introductory treatment of the subject must consist of more than a brief description of the scientific method. Introductory students must gain an understanding of the important elements of a model, the need to simplify, the difference between induction and deduction and the relationship between real world facts, a model, economic policy and policy goals. This paper offers some ideas on how to accomplish this objective and presents a schematic diagram that can be used to frame the discussion.
Keywords: Induction, Deduction, Economic theory, Positive economics, Normative economics
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Using the Simpsons to Improve Economic Instruction Through Policy Analysis
Mark T. Gillis and Joshua Hall
The analysis of public policy issues in the classroom can be a powerful tool to help students learn because it encourages students to actively apply classroom material. The television show The Simpsons provides several episodes that revolve around policy issues amenable to examination. Using The Simpsons to provide students with material for analysis has two advantages over traditional sources such as newspapers or magazines. First, a long-running and popular television show effectively engages students in a way traditional sources cannot. Second, the context of an animated television show can help students separate positive economic analysis from normative economic analysis.
Keywords: active learning, popular culture
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The Effect of Competition on the Evaluation of Lotteries
Tal Shavit, Shosh Shahrabani, and Uri Benzion
Many studies have examined the bid price (Willingness to Pay or WTP) and the Ask price (Willingness to Accept or WTA) for ordinary real products, such as coffee mugs, candy bars, and pens, or for lotteries. This study analyzes the determinants of bid-and-ask prices in lotteries. Using a second-price auction, we elicit participants' WTP and WTA for lotteries. Participants are divided into groups according to their risk attitude and win-loving behavior. Our results indicate that greater risk-seeking and higher win-loving increase the WTP, while higher risk-seeking and lower win-loving increase the WTA. Therefore, experimental studies should separate participants into different risk-seeking and winloving groups to explain WTP and WTA disparities for risky assets. Moreover win-loving behavior should be taken into consideration in the decision-making process with respect to asset pricing.
Keywords: Lotteries, Second-Price-Auction, Risk Attitude, Financial Assets, WTP, WTA, Competitiveness
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Evidence on Forecasting Inflation under Asymmetric Loss
Hamid Baghestani and Bassam Abu Al-Foul
This study extends previous work on the asymmetric information hypothesis by comparing the Federal Reserve and private inflation forecasts in terms of directional accuracy for 1983–2002. In support of this hypothesis, the Federal Reserve forecasts show superiority in terms of both predictive content and directional accuracy. However, both sets of forecasts are far more accurate in predicting upward moves than they are in predicting downward moves. In an environment where maintaining price stability is a top priority, we interpret such evidence as preference for over-prediction under asymmetric loss and argue that the bias in the inflation forecasts is rational.
Keywords: Directional accuracy, Rational bias, Monetary policy, Greenbook, Survey of Professional Forecasters
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Economic Transformations in Chile: The Formation of the Chicago Boys
Valerie Brender
Who were the Chicago Boys and what was their path into Pinochet's dictatorship? Speculation abounds about the motives of these Chilean born, U.S. educated economists who came to play a pivotal role in Pinochet's regime. This paper will examine the education of the Chicago Boys at the University of Chicago and their subsequent rise into Pinochet's government. The Chicago Boys' historical path suggests that their influence in Chilean politics cannot be reduced to U.S. political motivations or ideology, but rather must take into consideration the transformation of foreign aid policies and the economic environment of the time.
Keywords: Chile, University of Chicago, Pinochet, Monetarism, Economic history
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Teaching Economic Principles: Algebra, Graph or Both?
David Zetland, Carlo Russo, and Navin Yavapolkul
We find that student performance on questions posed in the standard heterogeneous combination of algebraic direct demand and graphic inverse demand is significantly worse than their performance on questions posed in homogeneous combinations. Since this performance deficit persists with advanced students, it seems that economists' canonical presentation of demand may hinder, rather than help, learning. We recommend that Principles students begin with the homogenous, direct combination of algebra and graph before turning to the standard direct-inverse combination. This modification would create benefits on the extensive margin - reducing attrition from confusion - and intensive margin - increasing comprehension for all students.
Keywords: Teaching methodology, Inverse demand, Graphs, Algebra, Undergraduate retention
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Krugman Versus Friedman: Monetary Policy, 1929-1933, A Note
Robert F. Stauffer
In a retrospective on Milton Friedman, Paul Krugman is critical of Friedman's remarks on monetary base changes in the early years of the Great Depression. Krugman emphasizes that the monetary base did increase by about one billion dollars from 1929–1933, thereby implying the Fed was pursuing an expansionary policy. The purpose of this comment is to clarify monetary base analysis in this period. More specifically, two common misconceptions in regard to the monetary base are discussed: first, that changes in the base are a reliable indicator of the stance of Fed policy, and secondly that the Federal Reserve exercises absolute control over changes in the base.
Keywords: Monetary base, Monetary policy, Great Depression, Friedman and Schwartz, Bank failures
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The Economics of the Great Depression: A Twenty-First Century Look Back at the Economics of the Interwar Years
Cameron M. Weber
more...   

The Panic of 1907: Lessons Learned from the Market's Perfect Storm
David A. McClough
more...