Do free-market economists practice what they teach?

Conclusion There is then a fundamental inconsistency between theory and application for political economists who both rely on standard microeconomics for their support of the free market and scorn government intervention. Theory matters in free-market critiques of public policy. It matters, however, not only in determining the content of those critiques, but also, from a methodological standpoint, in the sense of whether the world-view presupposed by theory is one that leaves room for any meaningful critique to take place at all. It should not be news that the authorities in charge of public policy are ignorant. Surprisingly, if we start from the presumptions of perfect-knowledge economics we would be logically led to conclude that those authorities indeed never make mistakes, or if they do that it must have been planned that way all along. Fortunately, political economists working in the Austrian tradition are, as they have been since B?hm-Bawerk’s and Mises’s devastating critiques of Marxian economics and socialism, free from having to maintain this curious point of view. He also studied with Professor Sennholz at Grove City College.     

Jane Jacobs on Henry George: Progress or Poverty?

Henry George and Jane Jacobs each have devoted followers today who remain mainly outside the intellectual mainstream, both are iconic American intellectuals largely sympathetic to and quite knowledgeable about how markets work, and they each challenged the prevailing economic orthodoxies of their day. Much has been written, pro and con, on George's single tax and on Jacobs's battles with urban planners, and while I don't directly address either here, what I say does have implications for those controversies. In particular, I show how and why their views on the nature of economic progress, and of cities in that progress, fundamentally differ. I trace the difference to George's essentially classical approach to economics in contrast to Jacobs's subjectivist approach, which more radically transcends the economics of her time.     

What causes business cycles? Analysis of the Japanese industrial production data

We explore what causes business cycles by analyzing the Japanese industrial production data. The methods used are spectral analysis and factor analysis. Using the random matrix theory, we show that two largest eigenvalues are significant. Taking advantage of the information revealed by disaggregated data, we identify the first dominant factor as the aggregate demand, and the second factor as inventory adjustment. They cannot be reasonably interpreted as technological shocks. We also demonstrate that in terms of two dominant factors, shipments lead production by four months. Furthermore, out-of-sample test demonstrates that the model holds up even under the 2008–2009 recession. Because a fall of output during 2008–2009 was caused by an exogenous drop in exports, it provides another justification for identifying the first dominant factor as the aggregate demand. All the findings suggest that the major cause of business cycles is real demand shocks.     

Correlated performance of firms in a transaction network

The correlation of firms’ performance on a transaction network is studied by analyzing financial and transaction data. Statistically significant correlation coefficients are obtained as evidence for the firm interactions. The firm interactions are taken into account in the basic equation of firm activity. Forty percent of residuals are explained by considering the firm interactions. The overall structure of the transaction network, i.e., the connectivity of industry sectors, is analyzed.     

Tariffs, Time Preference, and the Current Account under Weakly Nonseparable Preferences

Incorporating weakly nonseparable preferences into the familiar time–preference model, the author emphasizes a role of steady–state welfare changes in determining the effect of permanent tariffs on the current account. The effect consists of a welfare effect, due to steady–state welfare changes, which is negative (positive) when preferences toward imports are more (less) wealth–enhanced than toward exports; and a substitution effect, which occurs only with initial distortion. Even without initial distortion, a marginal tariff has a first–order welfare effect on the current account. Its sign does not depend on whether impatience is increasing or decreasing in wealth.     

Evaluating Temporary Certified Emission Reductions in Reforestation and Afforestation Programs

This article investigates the efficiency of the temporary certified emission reductions (tCERs) system that attempts to internalize the carbon sequestration function of the forest under the Clean Development Mechanism of the Kyoto Protocol. We find that the regulations creating tCERs partially internalize the carbon sequestration function of the forest. The amount of carbon re-released into the atmosphere, due to timber harvest, and sequestered, after the project period, is not internalized in the private landowner’s decision, which induces shorter rotation intervals than socially optimal. Furthermore, the carbon sequestered during the project is over-credited because credits are counted based on accumulated carbon instead of marginally sequestered carbon, which induces longer rotations intervals. Simulation results for the Philippines and Tanzania show that the difference in social welfare between the tCERs system and a socially optimal policy is only about 2% because of the countervailing effect of the inefficiencies on rotation interval choices.