New Economics Papers
on Business, Economic and Financial History
Issue of 2012‒09‒22
23 papers chosen by

  1. A Warrant for Pain: Caveat Emptor vs. the Duty of Care in American Medicine, c. 1970-2010 By Avner Offer
  2. The New Deal and the Origins of the Modern American Real Estate Loan Contract By Jonathan Rose; Kenneth A. Snowden
  3. iPEHD – The ifo Prussian Economic History Database By Becker, Sascha O.; Cinnirella, Francesco; Hornung, Erik; Woessmann, Ludger
  4. The Economy of Obligation: Incomplete Contracts and the Cost of the Welfare State By Avner Offer
  5. Self-Interest, Sympathy and the Invisible Hand: From Adam Smith to Market Liberalism By Avner Offer
  6. American Incomes 1774-1860 By Peter H. Lindert; Jeffrey G. Williamson
  7. Some Reflections on the Recent Financial Crisis By Gary B. Gorton
  8. The Euro Crisis: Some Reflexions on Institutional Reform. By Tirole, Jean
  9. Market Access and Information Technology Adoption: Historical Evidence from the Telephone in Bavaria By Florian Ploeckl
  10. How persistent is armed conflict? By James D. Fearon and David D. Laitin; David D. Laitin
  11. Russian Inequality on the Eve of Revolution By Steven Nafziger; Peter H. Lindert
  12. Bubbles, Financial Crises, and Systemic Risk By Markus K. Brunnermeier; Martin Oehmke
  13. One Hundred Years From Today: A. C. Pigou's Wealth and Welfare By Michael McLure
  14. The 1960 Tsunami in Hawaii: Long Term Consequences of a Coastal Disaster By Lynham, J; Noy, I; Page, J
  15. An Investigation of Editorial Favoritism in the AER By Philip R. P. Coelho; James McClure
  16. Sociedad cooperativa y socio cooperativo: propuesta de sus funciones objetivo By Carmen Marcuello; Pablo Nachar-Calderón
  17. The finance-growth nexus revisited: From origins to a modern theoretical landscape By Stolbov, Mikhail
  18. UWA Economics Honours By Kenneth W Clements
  19. The Impact of Supply Constraints on House Prices in England By Christian A. L. Hilber; Wouter Vermeulen
  20. The Elusive Arthur Pigou By Karen Knight; Michael McLure
  21. The use of mathematics in economics and its effect on a scholar's academic career By Espinosa, Miguel; Rondon, Carlos; Romero, Mauricio
  22. How is non-knowledge represented in economic theory? By Ekaterina Svetlova; Henk van Elst
  23. Toward the Entrepreneurial Society By Jean Bonnet; Marcus Dejardin; Antonia Madrid-Guijarro

  1. By: Avner Offer (All Souls College, University of Oxford)
    Abstract: Bad ethics can make for bad economic outcomes. Bad ethics are defined hedonically as the infliction of pain on others for private advantage. The infliction of pain is often justified by ‘Just World Theories’, which state that everyone gets what they deserve. Market liberalism (and its theoretical underpinning in neoclassical economics) is one theory of this kind. As an example, the micro and macro underperformance of the American health system c. 1970-2010 is explained in terms of the shift in policy norms from the fiduciary norm "first do no harm" to the neo-liberal market norm of "let the buyer beware" (caveat emptor) since the 1970s.
    Date: 2012–07–20
  2. By: Jonathan Rose; Kenneth A. Snowden
    Abstract: The introduction of the direct reduction (fully-amortized) loan contract to the U.S. residential mortgage market is an important instance of financial innovation. We describe the adoption of this contract within the building and loan (B&L) industry beginning in the 1880s and culminating in the 1930s. A long chain of complementary innovations at B&Ls gradually reduced the costs of adoption, leading to moderate use by the 1920s. The poor performance of traditional contracts during the crisis of the 1930s then radically altered the adoption calculus. At this point a new system of federal savings and loan charters incorporated many of the innovations that had been adopted within the small segment of the B&L industry that had introduced direct reduction lending by the 1920s. The B&L transition in mortgage contracts occurred primarily in the conventional loan market because B&Ls, unlike other lenders, generally avoided the use of the new FHA insurance program.
    JEL: G21 N21 N22 O33
    Date: 2012–09
  3. By: Becker, Sascha O.; Cinnirella, Francesco; Hornung, Erik; Woessmann, Ludger
    Abstract: This paper provides a documentation of the ifo Prussian Economic History Database (iPEHD), a county-level database covering a rich collection of variables for 19th-century Prussia. The Royal Prussian Statistical Office collected these data in several censuses over the years 1816-1901, with much county-level information surviving in archives. These data provide a unique source for micro- regional empirical research in economic history, enabling analyses of the importance of such factors as education, religion, fertility, and many others for Prussian economic development in the 19th century. The service of iPEHD is to provide the data in a digitized and structured way.
    Keywords: 19th century; county; database; economic history; Prussia
    JEL: N13 N33
    Date: 2012–09
  4. By: Avner Offer (All Souls College, University of Oxford)
    Abstract: Western governments typically pay out some 30 percent of GDP for social purposes. This is financed by taxation on a pay-as-you-go (PAYGO) basis. How efficient are these transfers, and can market or other mechanisms do it better? The problem arises since no individual stands alone. During the life cycle there are several periods of unavoidable dependency, in which there is no earning and little to bargain with: motherhood, infancy, childhood, education, illness, disability, unemployment, old age. The problem is how to transfer resources from ‘producers’ to ‘dependants’ over the life cycle. The market solution is for individuals to accumulate financial assets and to transfer them over the life cycle by means of long-term contracts with financial intermediaries. But law, economics, psychology, political science, and history, all suggest that long-term contracts are not reliable. People are myopic. Financial intermediaries exact high rents, and market entitlements are volatile. Equity markets do not have sufficient capacity to support life-cycle transfers. Governments convert private life-cycle transfers into intergenerational cross-sectional ones, financed by PAYGO. The resource base is much larger than financial markets, and is made up of the whole of the tax base. Costs are low, transfer levels are not rigid, are fixed by political consent, and can be adjusted. The national income resource base is stable. The constraints are (1) the demand for security (2) taxable capacity (3) integrity and competence of government (4) potential capture by finance. Because of these constraints, although government can do it better, it cannot do it alone, and the whole repertoire of transfer is required.
    Date: 2012–08–15
  5. By: Avner Offer (All Souls College, University of Oxford)
    Abstract: Adam Smith rejected Mandeville’s invisible-hand doctrine of ‘private vices, publick benefits’. In The Theory of Moral Sentiments his model of the ‘impartial spectator’ is driven by not by sympathy for other people, but by their approbation. Approbation needs to be authenticated, and in Smith’s model authentication relies on innate virtue, which is unrealistic. An alternative model of ‘regard’ is applied, which makes use of signalling and is more pragmatic. Modern versions of the invisible hand in rational choice theory and neo-liberalism are shown to be radical departures from the ethical legacy of Enlightenment and utilitarian economics, and are inconsistent with Adam Smith’s own position.
    Date: 2012–08–14
  6. By: Peter H. Lindert; Jeffrey G. Williamson
    Abstract: Building what we call social tables, this paper quantifies the level and inequality of American incomes from 1774 to 1860. In 1774 the American colonies had average incomes exceeding those of the Mother Country, even when slave households are included in the aggregate. Between 1774 and 1790, this income advantage over Britain was lost, due to the severe dislocation caused by the fight for Independence. Then between 1790 and 1860 US income per capita grew even faster than previous scholars have estimated. We also find that the South was initially much richer than the North on the eve of Revolution, but then suffered a severe reversal of fortune, so that by 1840 its white population was already poorer than free Northerners. In terms of inequality, our estimates suggest that American colonists had much more equal incomes than did households in England and Wales around 1774. Indeed, New England and the Middle Colonies appear to have been more egalitarian than anywhere else in the measureable world. Income inequality rose dramatically between 1774 and 1860, especially in the South. The paper uses an open-source style, since our data processing is posted on (click on the folder “American incomes 1774-1870”). Detailed defense of the 1774 and 1800 benchmarks can be found in our previous NBER working paper (17211, July 2011), although the estimates reported here are revised. The 1860 estimates are completely new.
    JEL: N11 N91 O47 O51
    Date: 2012–09
  7. By: Gary B. Gorton
    Abstract: Economic growth involves metamorphosis of the financial system. Forms of banks and bank money change. These changes, if not addressed, leave the banking system vulnerable to crisis. There is no greater challenge in economics than to understand and prevent financial crises. The financial crisis of 2007-2008 provides the opportunity to reassess our understanding of crises. All financial crises are at root bank runs, because bank debt—of all forms—is vulnerable to sudden exit by bank debt holders. The current crisis raises issues for crisis theory. And, empirically, studying crises is challenging because of small samples and incomplete data.
    JEL: E02 E3 E30 E32 E44 G01 G1 G2 G21
    Date: 2012–09
  8. By: Tirole, Jean
    Abstract: The debate on the Euro crisis understandably has had a strong short term focus. Avoiding short‐term disaster has been tantamount and the long term sustainability issue sometimes neglected; yet, the institutional failure of the Eurozone forces us to reconsider current arrangements in order to restore credibility and sustainability. The article discusses various paths for the reform of the overall governance, from fiscal management to banking regulation, through the recent proposals to mutualize and repackage part of the Sovereign debts into a supranational one or to introduce joint‐and‐several liability.
    JEL: E62 F34 H63
    Date: 2012
  9. By: Florian Ploeckl
    Abstract: Information technology, like the telephone, influences market access; this paper answers the question about a reverse effect, does market access affect information technology, in particular its adoption? Using the introduction of the telephone in Bavaria, I demonstrate with a rank, order and stock effects diffusion model how market access affects the diffusion of local telephone exchanges over towns as well as the rate of adoption of telelphone lines within towns. The results of a duration analysis show that market access speeds up the diffusion, a spatial correlation specification demonstrates that this is not just a geographic effect. The rate of adoption within towns is also affected by the adoption of lines in other towns, the results indicate that about 4% of all lines are due to the ability to call outside your local exchange network. Market access is therefore shown to impact the adoption of technology.
    Keywords: Information technology adoption, Market access, Spatial diffusion, Bavaria, Telephone
    JEL: L92 N73 N93 O33
    Date: 2012
  10. By: James D. Fearon and David D. Laitin; David D. Laitin
    Abstract: We assess the degree of persistence in armed conflict in particular places over the last two centuries, asking in addition if conflict-ridden places have durable features – social, demographic or geographical – that explain persistence, or whether armed conflict at one time has a causal effect on propensity for armed conflict at later times. For all types of war in the Correlates of War data, we code the territories on which the armed conflict occurred. The data reveal significant levels of persistence in territories that experienced extra-state (imperial and colonial) and non-state wars in an earlier era. Exogenous features such as geography and pre-1800 demography are important in explaining where conflicts persist. However there remains significant persistence controlling for geographic and demographic features. In particular, extra-state wars before 1945 are strongly related to civil war after 1945. This persistence does not appear to arise from the long-run enmity of particular groups that fight repeatedly over centuries. We conjecture that imperial and colonial wars may have been more likely in territories where there were more and/or more developed pre-colonial state structures, and that either the persistence of these structures or changes in them brought about by the violent encounters raised civil war risks after 1945.
    Date: 2012
  11. By: Steven Nafziger; Peter H. Lindert
    Abstract: Just how unequal were the incomes of different classes of Russians on the eve of Revolution, relative to other countries, to Russia’s earlier history, and to Russia’s income distribution today? Careful weighing of an eclectic data set provides provisional answers. We provide detailed income estimates for economic and social classes in each of the 50 provinces of European Russia. In 1904, on the eve of military defeat and the 1905 Revolution, Russian income inequality was middling by the standards of that era, and less severe than inequality has become today in such countries as China, the United States, and Russia itself. We also note how the interplay of some distinctive fiscal and relative-price features of Imperial Russia might have shaped the now-revealed level of inequality.
    JEL: N30 N33 O15
    Date: 2012–09
  12. By: Markus K. Brunnermeier; Martin Oehmke
    Abstract: This chapter surveys the literature on bubbles, financial crises, and systemic risk. The first part of the chapter provides a brief historical account of bubbles and financial crisis. The second part of the chapter gives a structured overview of the literature on financial bubbles. The third part of the chapter discusses the literatures on financial crises and systemic risk, with particular emphasis on amplification and propagation mechanisms during financial crises, and the measurement of systemic risk. Finally, we point toward some questions for future research.
    JEL: G00 G01 G20
    Date: 2012–09
  13. By: Michael McLure (Business School, University of Western Australia)
    Abstract: This paper marks the centenary of A. C. Pigou’s Wealth and Welfare, published by Macmillan in 1912. Consideration is given to the content and contributions of Wealth and Welfare and: its relationship to Pigou’s earlier articles; its relationship to Pigou’s subsequent work on wealth and welfare; its reception within the broader economic community; and its relationship to Marshall’s approach to economics. In contrast to the conclusion of a recent study, it is suggested in this paper that Pigou’s general approach to wealth and welfare was complementary to, and not contrary to, the work of Marshall. Wealth and Welfare is a book that makes important and enduring contributions to economics, but it does so while remaining firmly within the Marshallian tradition.
    Date: 2012
  14. By: Lynham, J; Noy, I; Page, J
    Abstract: Research on the economic and human toll of natural disasters focuses on the short-term, often ignoring the important long-term impacts of these catastrophic events. The main reason for the lack of empirical research on the long-term is the inherent and unavoidable difficulty in identifying any long-term impacts and attributing them to the disaster. On the 23rd of May 1960, a devastating tsunami struck the city of Hilo on the island of Hawaii. Remarkably, there was no significant injury or damage elsewhere in the Hawaiian Islands. This tsunami provides a unique natural experiment as the tsunami was unexpected, and the other Hawaiian Islands, which were not hit by the tsunami, provide an ideal control group that enables us to precisely identify the counter-factual. We use a newly developed synthetic control methodology formalized in Abadie et al. (2010) to measure the long-term impacts of the tsunami. We find that while wages did not decline noticeably, population and employment trends shifted. Fifteen years after the event, unemployment was still 32% higher and population was still 9% lower than it would have been had the tsunami not occurred. We also find a corresponding decrease in the number of employers and sugar production in the county.
    Keywords: coastal disasters, disaster impact, Hilo, tsunami, Hawaii, synthetic control,
    Date: 2012–08–22
  15. By: Philip R. P. Coelho (Department of Economics, Ball State University); James McClure (Department of Economics, Ball State University)
    Abstract: This paper adds to the literature on the credibility of academic research by examining the hypothesis that the selection procedures of academic journals in economics favor submissions that frequently cite editorial insiders. We use procedures, a sample size, and methods that offset some of the limitations that accompanied previous investigations. Using the expanded sample and controls we find that citations to insiders in articles in the American Economic Review increased the frequency of citations in non-AER journals. The evidence is robust; our findings contradict those in previous research. Given our metric, sample, and procedures, we find no significant support for the hypothesis of editorial favoritism.
    JEL: A10 A14 B40
    Date: 2012–08
  16. By: Carmen Marcuello (Universidad de Zaragoza); Pablo Nachar-Calderón (Universidad de Zaragoza)
    Abstract: El análisis económico de las organizaciones se encuentra sometido al criterio neoclásico, asociado a las características de la empresa capitalista. En el caso de las sociedades cooperativas, se han identificado una serie de desventajas, producto de su estructura de propiedad y control, así como su enfoque basado en la cooperación. El objetivo de este trabajo es examinar los modelos de comportamiento de la sociedad cooperativa y de sus socios cooperativos, planteando las funciones objetivo de ambas figuras, esto considerando argumentos asociados a microeconomía, teoría de juegos y teoría de bienes comunes. Las conclusiones sugieren que el planteamiento expuesto permite explicar las razones por las que las sociedades cooperativas permanecen en el panorama económico, complementando lo expuesto en la literatura con respecto a su surgimiento y desaparición. Así mismo, se destaca su capacidad de asumir objetivos mas amplios a los económicos, participando dentro de la economía de mercado con criterios de funcionamiento relacionados a las organizaciones de Economía Social.
    Keywords: Sociedad Cooperativa, Individuos Cooperativos, Función Objetivo, Economía Social, Teoría de Bienes Comunes, Teoría de Juegos Cooperativos
    JEL: M21
    Date: 2012–02
  17. By: Stolbov, Mikhail
    Abstract: The paper is a survey of theoretical and empirical approaches applied to analyze the impact of financial system on economic growth. The key issues of the modern theories of the finance-growth nexus are discussed and the theories are classified on the basis of the methodology they rely on. The paper extends earlier overviews of the topic, tracking and seeking to explain an inherent logic of this research program, its evolution, and some issues not covered in other surveys such as the finance-growth nexus in resource rich economies. The challenges this research program is facing are also identified. --
    Keywords: financial system,financial development,financial repression,economic growth
    JEL: E44 O11 O16
    Date: 2012
  18. By: Kenneth W Clements (Business School, University of Western Australia)
    Date: 2012
  19. By: Christian A. L. Hilber; Wouter Vermeulen
    Abstract: We explore the impact of different types of supply constraints on house prices in England by exploiting a unique panel dataset of 353 local planning authorities ranging from 1974 to 2008. Using exogenous variation from a policy reform, vote shares and historical density to identify the endogenous constraints-measures, we find that: i) Regulatory constraints have a substantive positive long-run impact on the house price-earnings elasticity; ii) The effect of constraints due to scarcity of developable land is largely confined to highly urbanised areas; iii) Uneven topography has a quantitatively less meaningful impact; and iv) The effects of supply constraints are greater during boom than bust periods.
    Keywords: House prices, housing supply, supply constraints, land use regulation
    JEL: G12 R11 R21 R31 R52
    Date: 2012–09
  20. By: Karen Knight (Business School, University of Western Australia); Michael McLure (Business School, University of Western Australia)
    Date: 2012
  21. By: Espinosa, Miguel; Rondon, Carlos; Romero, Mauricio
    Abstract: There has been so much debate on the increasing use of formal mathematical methods in Economics. Although there are some studies tackling these issues, those use either a little amount of papers, a small amount of scholars or cover a short period of time. We try to overcome these challenges constructing a database characterizing the main socio demographic and academic output of a survey of 438 scholars divided into three groups: Economics Nobel Prize winners; scholars awarded with at least one of six prestigious recognitions in Economics; and academic faculty randomly selected from the top twenty Economics departments worldwide. Our results provide concrete measures of mathematization in Economics by giving statistical evidence on the increasing trend of number of equations and econometric outputs per article. We also show that for each of these variables there have been four structural breaks and three of them have been increasing ones. Furthermore, we found that the training and use of mathematics has a positive correlation with the probability of winning a Nobel Prize in certain cases. It also appears that being an empirical researcher as measured by the average number of econometrics outputs per paper has a negative correlation with someone's academic career success.
    Keywords: Nobel Prize, Mathematics, Economics, Reputation
    JEL: N01 B3 C14 C81
    Date: 2012–09
  22. By: Ekaterina Svetlova (Karlshochschule International University); Henk van Elst (Karlshochschule International University)
    Abstract: In this article, we address the question of how non-knowledge about future events that influence economic agents' decisions in choice settings has been formally represented in economic theory up to date. To position our discussion within the ongoing debate on uncertainty, we provide a brief review of historical developments in economic theory and decision theory on the description of economic agents' choice behaviour under conditions of uncertainty, understood as either (i) ambiguity, or (ii) unawareness. Accordingly, we identify and discuss two approaches to the formalisation of non-knowledge: one based on decision-making in the context of a state space representing the exogenous world, as in Savage's axiomatisation and some successor concepts (ambiguity as situations with unknown probabilities), and one based on decision-making over a set of menus of potential future opportunities, providing the possibility of derivation of agents' subjective state spaces (unawareness as situation with imperfect subjective knowledge of all future events possible). We also discuss impeding challenges of the formalisation of non-knowledge.
    Date: 2012–09
  23. By: Jean Bonnet (University of Caen Basse-Normandie - CREM UMR CNRS 6211, France); Marcus Dejardin (Université Catholique de Louvain, IMMAQ CIRTES - FUNDP - University of Namur, CERPE); Antonia Madrid-Guijarro (Technical University of Cartagena, Financial Economics and Accounting Department, Spain)
    Abstract: Not only growth but better growth is required to address the tremendous challenges that European economies are facing. More entrepreneurs and more entrepreneurial firms -new and innovative firms- can contribute. A variety of factors may be considered to promote entrepreneurship among young people, and innovative activities among firms. Education is certainly one of the most relevant. The need to create a more favourable social climate for new businesses requires not only changing the state of mind but also improving globally the skills of entrepreneurs. It is also important to identify the most favourable context for the creation and development of sustainable, innovative companies, especially during economic crisis. This paper has been prepared to introduce and present original contributions from scholars in economics, management and sociology, that are collected in a book entitled The Shift to the Entrepreneurial Society: A Built Economy in Education, Sustainability and Regulation, to be published by Edward Elgar Publishing in July 2012.
    Keywords: entrepreneurship, socioeconomic challenges, education, sustainability, regulation
    JEL: L26 M13 I25 O10
    Date: 2012–06

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