The Limits of Bayesian Inference

by Gene Callahan

Dan Klein’s Knowledge and Coordination has something interesting to say about Bayesian inference, although he never explicitly addresses that topic. Consider the following:

Here, we have the distinction between responding to the realization of events within a framework of recognized variables and relationships and the discovery of a fresh opportunity to embrace a new and better framework or interpretation. This element of epiphany, of finding fortune by interpreting the world differently, is the subtle and vital element in human decision making. Yet, it is absent from equilibrium model building. In equilibrium stories, agents never have a “light bulb” moment… (p. 13)

Kirzner’s alertness is the individual’s re-interpretation of that world [of a world of already-interpreted "facts"]. (p. 14)

“Equilibrium” is meaningful only in reference to a specified model… (p. 28)

Bayesian inference, similar to equilibrium theorizing, works within a fixed frame of interpretation: it “is meaningful only in reference to a specified model.” It cannot extend across instances when a new interpretive framework takes the place of the old.

The Infrastructure Death Rattle

by Mario Rizzo

The incessant discussion and demand for job-creating infrastructure spending on the part of the news media, Democratic politicians, and some unreconstructed Keynesian economists is both frustrating and pathetic. It is frustrating because how many times can people repeat the same thing without listening to the objections? It is pathetic because the level of understanding is akin to pre-Newtonian physics.

Kirznerian Baseball

by Gene Callahan

The Mets recently hired Paul DePodesta, one of the key developer’s of the “Moneyball” approach to finding and hiring baseball talent in Oakland. DePodesta describes what Moneyball really is here:

DePodesta, who left Oakland to serve as the Los Angeles Dodgers’ general manager for two seasons before becoming an executive with the San Diego Padres, said that Lewis’s 2003 book — which remains a bible for statistics-minded fans — was a caricature. Statistics are important, he said, but the Moneyball philosophy is more an approach to evaluating talent, not a constrictive road map.

“In my mind, Moneyball really has absolutely nothing to do with on-base percentage; for that matter, it doesn’t really have anything to do with statistics,” he said Tuesday on a conference call with reporters. “Rather, Moneyball is really about a constant investigation of stagnant systems to see if you can find value where it isn’t readily apparent.”

Executive Compensation as Lottery Prize

by Chidem Kurdas

Last week the WSJ published a list of the past decade’s best-paid chief executives. You might nod approvingly at some names but gag at others. In the former group is Steve Jobs of Apple, whose company’s share value grew by about 11-fold in the period from 2000 to 2009. In the latter category is Richard Fuld, the last chief executive of Lehman Brothers, whose $457 million compensation during the decade is hard to swallow given what happened to Lehman. 

It is notable that these compensation figures consist almost entirely of the value of company shares the executives received via stock options or as restricted stock. It is stock awards that account for the big numbers, starting with the $1.84 billion that won Larry Ellison of Oracle the top spot in the ranking. Cash salaries by comparison are miniscule.

The obvious argument in favor of stock options is that they  give executives incentive to work at boosting share value—thereby serving the owners of the company. But do they really have to be given such large blocks of stock? Smaller amounts of stock are likely sufficient incentive.

Understanding Markets: Point/Counter-Point

by Thomas McQuade and Chidem Kurdas

Though it should be obvious to all that markets are of immense benefit to humanity, any appreciation of these institutions is almost always hedged with a perceived need to constrain and regulate—in short, to subject them to conscious outside control.  The reasoning is understandable: the unconstrained pursuit of self-interest can only lead to chaos.

But the preference for constraint through centralized direction betrays a profound misunderstanding of the way markets work.   

Can we explain that claim any better than the volumes already written on the topic?  We find that, when we discuss the issue, we agree on the basics, but differ in emphasis and details—and details matter.  Here is part of our discussion, in point/counter-point format.

Cafeteria Marvels

 by Mario Rizzo  

The market is a “marvel.” What does that mean? According to Marcus Tullius Cicero, the Roman orator and senator, a marvel is something contrary to or surpassing common understanding.  

In that sense, the market is a true marvel – so much so that it even surpasses the understanding of many economists.  

Richard Thaler (a University of Chicago Business School professor) and Cass Sunstein (a Harvard law professor and Obamian regulatory czar) have illustrated the benign qualities of paternalism with a curious example of cafeteria food placement. (An interesting and important exchange between Glen Whitman and Richard Thaler – among others – is now taking place at Cato Unbound.)

Bring Back the Robber Barons

by Jerry O’Driscoll 

That is the title of yesterday’s “Wonderland” column by Daniel Henninger in the Wall Street Journal.   

Henninger distinguishes between market entrepreneurs and political entrepreneurs.  Market entrepreneurs innovate and create new products.  Political entrepreneurs make money by gaming the political system. “We need vision, vitality and commercial moxie. The government is draining it away.” 

Bravo!  

The real cost of TARP and stimulus is the diversion of resources and talent from creating value into transferring money from one pocket to another.  The stimulus bill was a cover for a massive income transfer from the productive to the unproductive classes in society. TARP transferred money from profitable firms and hardworking Americans to profligate bankers.  

Market entrepreneurs create products that generate the revenue needed to reproduce themselves and then grow.  The political variety creates dependency and the need for new tax revenues to sustain unproductive activities.  Markets create wealth and governments transfer it for a fee.

Rising in Phoenix: Entrepreneurial responses to housing and health-care problems

by Sandy Ikeda

The New York Times, in “Amid Housing Bust, Phoenix Begins a New Frenzy”, reports that “Real estate got just about everyone into trouble in Phoenix, and the thinking seems to be that real estate is going to get everyone out.”

If the property looks promising, Mr. Jarvis puts in a bid on behalf of any of his dozens of clients eager to become landlords. When he wins, he offers to let the family stay in the house and rent for much less than their mortgage payment.

Phoenix is also where “supermarket health clinics”and urgent-care centers for the uninsured have proliferated.  Some have been able to adjust quickly to a souring economy.

Health clinics located inside grocery stores typically offer less-comprehensive medical service than urgent-care centers such as NextCare and Maricopa Urgent Care…  NextCare, which has 17 clinics in the Phoenix area, has responded to the downturn with a series of moves aimed at reaching more patients.

Read more about it in this story from AZCentral.

Can we model creativity?

by Roger Koppl

The issue of creativity has arisen in a fun discussion on Schumpeter over at The Austrian Economists. I have often heard people say that we cannot model creativity. I suppose that must be true in some sense, and yet there is much we can say about “creativity” and social institutions. Early in the Wealth of Nations Adam Smith gives us a good account of what creativity is, namely, the “combining together the powers of the most distant and dissimilar objects.” As my old friend Dick Langlois taught me years ago, creativity is recombination. I think we can have an economic theory of recombination. Indeed, the elements are out there.

Kirznerian Alertness and Neuroscience

by Roger Koppl

Jake Young of Pure Pedantry has a nice post using the neuroscience of preconscious processing to address the issue of Kirznerian alertness.  He was responding to Sandy’s post, “Stumbling on Profit Opportunities.”  Jake gives a negative reply to Sandy’s conjecture that preconscious processing, whereby we leap away from a snake before processing that it was a snake, might be an example of Kirznerian entrepreneurship.

I think it’s a mistake to look for “the” neuroscience correlate to entrepreneurial alertness.  The praxeological categories of “entrepreneurship,” “alertness,” and “discovery” were constructed for use in social science, not neuroscience.  It would be a surprise if there were precisely one process identified in neuroscience that covers all and only cases of entrepreneurial alertness in social science.  More likely, several processes that are considered distinct and unrelated in neuroscience would all be examples of entrepreneurial alertness and discovery.  And the neurological processes generally corresponding to entrepreneurial discovery might sometimes be activated when there is no entrepreneurial discovery.  Why should social science and neuroscience carve up the world in the same way?